Conceptualising Corporate Responsibilities
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Conceptualizing Corporate Responsibilities
Agency, Reciprocity and the Constitutive Role of Law
Julien Topal
Thesis submitted for assessment with a view to obtaining the degree of Doctor of Political and Social Sciences of the European University Institute Florence, December 2013
European University Institute Department of Political and Social Sciences
Conceptualizing Corporate Responsibilities Agency, Reciprocity and the Constitutive Role of Law
Julien Topal
Thesis submitted for assessment with a view to obtaining the degree of Doctor of Political and Social Sciences of the European University Institute Examining Board Prof. Dennis Patterson, European University Institute, Law (Supervisor) Prof. Rainer Baubock, European University Institute, SPS Prof. Leif Wenar, King’s College London Prof. Georges Pavlakos, Antwerp University
© Julien Topal, 2013 No part of this thesis may be copied, reproduced or transmitted without prior permission of the author iii
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To Jason Voor Opa
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Abstract While the discourse surrounding corporate responsibilities is ubiquitous these days, justificatory accounts of corporate responsibilities, i.e. normative accounts of the grounds upon which responsibilities are to be articulated are not part of the discussion. The lack of justificatory accounts is particularly stark with respect to potential responsibilities of corporate agents concerning the socio-‐economic rights of poor population in ‘burdened’ societies. As corporations have garnered public power through the constitutive force of the investment regime, no satisfactory account of correlative responsibilities is articulated. This thesis argues that this lack is caused by an existent disciplinary parallelism that foregoes engagement with the structural issue of corporate responsibilities as viewed under an institutional lens: Where liberal justice theory assumes away corporate agency for its institutional bias, Corporate Social Responsibility (CSR) and Business and Human Rights (BHR) mirror justice theory by assuming the corporate agent to be merely a private, economic agent. This thesis argues that this parallelism allows for a troubling lacuna in normative proposals that satisfactorily deal with the responsibilities corporate agents ought to be ascribed as public powers. In as much, this thesis problematizes the question of responsibilities corporate agents hold in light of their role in the creation, perpetuation and potential abatement of poverty. Since this is a question that concerns the side of the duty-‐ bearer, the thesis focuses on an understanding of the agency of the corporation and the normative implications to be drawn from such an understanding. Arguing the lack of satisfactory justificatory accounts of corporate responsibilities that provide for guidance on corporate investment in burdened society, this thesis ends by developing a Basic Structure Model (BSM) as a viable tool to fill the lacuna in satisfactory normative proposals. In as much, the BSM can serve as a normative benchmark against which corporate engagement in burdened societies can be evaluated and reform can be effectuated.
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Acknowledgement List of Acronyms
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CHAPTER 1 INTRODUCTORY REMARKS
1 1 7 14 19 25
CHAPTER 2 INVESTMENT LAW, JUSTICE AND CORPORATE PUBLIC POWER
29 29 30
2.2.1. Introducing the investment regime into political theory
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2.2.2. The Constitutive Role of Law 2.3. The Regime of International Investment as a Subject of Justice
32 35
2.3.1. Relevance I: Scope and Depth 2.3.2. Relevance II: Re-‐balancing powers
36 41
2.4. ‘Enshrining Rights’: The Practice of Investment Arbitration 2.4.1. The Scope of Investment/Property 2.4.2 No Discrimination under ‘Like’ Circumstances 2.4.3. Expropriation: From No Compensation to Regulatory Takings 2.4.4. Fair and Equitable Treatment: ‘Bad Faith’ and ‘Legitimate Expectations’ 2.4.5. From Contracts to BITs; Stabilizing Regulatory Frameworks
45 45 48 49 52 56
2.5. Uncertainty in Arbitration
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2.6. Drawing Implications: Shadows, Chills and Corporate Public Power
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2.7. Concluding Remarks
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CHAPTER 3 LEGITIMIZING THE INVESTMENT REGIME
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3.1. Introduction
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3.2. A Backlash to the Regime
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3.3.Legitimacy Through Consent 3.3.1. The Normativity of Consent 3.3.2. Historical Shifts in Investment Governance 3.3.3. Why Sign?
71 71 73 76
3.4. Exit As Ensuring Voluntary Participation
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3.5. The Legitimacy Function of Output 3.5.1. From BIT to FDI, From Growth to Economic Development
86 88
1.1.What Informs the Thesis? 1.2. The Theoretical Context of the Project 1.3. A Strategic Approach 1.4. Outline of the Argument by Chapter 1.5. Limitations
2.1. Introduction 2.2. Two Points on the Theoretical Framework
3.5.2. Rule of Law-legitimacy 3.6. Concluding Remarks
95 105
CHAPTER 4 JUSTICE THEORY: BIASES AND LIMITATIONS
107
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4.1. Introduction 4.2. Recap and explication: Reciprocity, Corporate Public Power and State Agency
107 108
4.2.1. Reciprocity
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4.2.2. Corporate Public Power
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4.2.3. (The) State (Agency) 4.3. Consequences for Theory: Institutionalism, Ideal and Non-‐ideal Theorizing
117 122
4.3.1. Consequence 1: Corporate Public Power and the Limits to ‘Pure’ Institutionalism 123 4.3.2. Consequence 2: The Liberal State/Limits to Domestic Institution Building. 4.4. Concluding Remarks
135 144
CHAPTER 5 CONCEPTUALIZING CORPORATE RESPONSIBILITIES: TWO MODELS 147 5.1. Introduction 147 5.2.Two Models 148 5.3. CSR: Expectations and the ‘Ought’ of Responsibilities 150 5.4. Variations on a Theme: 2 Dominant Readings of CSR 155 5.4.1. Responsibility and Profit-Making: A Business Case for CSR
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5.4.2. CSR and development: a noble ethos
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5.5. The UN Guiding Principles: On Direct and (Largely) Negative Responsibilities
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5.5.1. Background: Two Influences Coloring the Guiding Principles
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5.5.2. Building Blocks: ‘Protect, Respect, Remedy’ Framework
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5.5.3. Moral Import: Justification and the Scope of Responsibilities 5.6. Contours of a moral approach to corporate Human Rights duties 5.7. Concluding Remarks
174 181 184
CHAPTER 6 THE BASIC STRUCTURE MODEL: JUSTIFICATION AND GUIDANCE
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6.1. Introduction
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6.2. The Grounds of Corporate Responsibilities
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6.2.1. 3 Justificatory Accounts
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6.2.2. Towards a Novel Model: Justificatory Premises 6.3. Expectations of a Model
197 202
6.3.1. Expectation I: What the Model Needs to Provide
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6.3.2. Expectation II: Balancing Corporate and State Responsibilities
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6.3.3. Expectation III: What Responsibilities? Type and Scope 6.4. The Basic Structure Model for Corporate Responsibilities 6.5. ‘Fairness in Contract’
212 216 224
6.6. Concluding Remarks
228
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CHAPTER 7 CONCLUDING REMARKS
231 231 234 237 239 240
7.1. In Sum 7.2. The Potential Imprint of the Thesis 7.3. Limits and Challenges Bibliography of Cited Arbitral Cases Bibliography
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Acknowledgements The process of writing a PhD can feel lonesome at times. Upon deeper reflection, however, one quickly realizes there were in fact many people on the path with you, that many lasting friendships were forged and that gracious support was received from many. I am thankful to all. I have to firstly express my gratitude to Christine Chwaszcza for pushing me to stay off the trodden path and remain true to my original ideas, no matter how underdeveloped. Consequently, I sincerely thank my supervisor Dennis Patterson for his immediate confidence in my work and in me. Dennis gave me the liberty to draw my own plan and fight my own battles, while always remaining present to offer support when requested. I am also deeply thankful to the examiners of this dissertation, Rainer Baubock, Leif Wenar and Georges Pavlakos for their belief in the value of this dissertation and their poignant comments and suggestions. While at the EUI, I have had the opportunity to visit Berkeley University for a semester. The professional and warm support of Linda Gilbert at the EUI secretariat deserves special mention for enabling my stay at Berkeley. I also thank my sponsor at Berkeley, David Vogel, and the Institute for Governmental Studies at Berkeley for providing me with this opportunity. I further thank Kiren Chaudhry, Joshua Cohen and Rob Howse for discussing early drafts of my dissertation with me. I am also grateful for the kind support Rob Howse offered me to be able to work at the NYU Law Library during my many months spent in New York. I am very thankful for the opportunity to have met so many wonderful people during my years at the EUI. A special mention goes to David Willumsen, Guilherme Vasconcelos Vilaca, Jens Wegener, Marat Markert, Francesca Berlincioni, Visnja Vukov, Angelos Chrysogellos, Gosia Staniaszek, Josef Hien and Elin Hellquist, who all in their own way enriched my life as a PhD researcher and as a person. I thank my friends at home in the Netherlands too for always warmly welcoming me in to their home, when I was but a sporadic visitor in my home country. I thank my family for always supporting and encouraging me and for oftentimes housing me or a box or two with my books... Most importantly, I thank my wife, Jason-‐Louise Graham. Not only did you become my home and my family, you have also been supportive of this crazy project since the day I sent in my application to the EUI. I cannot describe in words how much your confidence in me and the practical support you have given mean to me. The simple fact is that this dissertation would not have been without you.
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List of Acronyms BHR BIT BOP BSM CSR CSV ECT FET CESCR ICSID
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IIA IISD IMS ODA LDC MAI MFN NT OECD
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SCC UNCITRAL UNCTAD
Business and Human Rights Bilateral Investment Treaty Bottom-‐of-‐the-‐Pyramid Basic Structure Model Corporate Social Responsibility Creating Shared Value Energy Charter Treaty Fair and Equitable Treatment Covenant of Economic, Social and Cultural Rights International Centre for Settlement of Investment Disputes International Investment Agreements International Institute of Sustainable Development International Minimum Standard Official Development Aid Least Developed Country Multilateral Agreement on Investment Most-‐Favored Nation National Treatment Organisation for Economic Co-‐Operation and Development Stockholm Chamber of Commerce United Nations Commission International Trade Law United Nations Conference on Trade and Development
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Chapter 1 Introductory Remarks “Fairness, in the law pertaining to foreign investment, is important not merely because it is a moral requisite, but because in its absence a major source of development capital would dry up, magnifying and perpetuating the unfairness of the existing inequalities between rich and poor” (Thomas Franck, quoted in Kapstein 2006, 174)
1.1.What Informs the Thesis? The discourse of corporate responsibilities is ubiquitous these days. Justificatory accounts of corporate responsibilities, i.e. the normative grounds upon which responsibilities are articulated, on the other hand, are not. The lack of justificatory accounts is particularly stark with respect to potential responsibilities of corporate agents concerning the socio-‐economic rights of people living in ‘burdened’ societies. A troubling lacuna thus exist in theory and practice, particularly in light of the increased presence of corporations in countries faced by both extreme and endemic poverty as well as weak governance structures 1and limited statehood.1 This thesis 1 The thesis holds on to a rather indistinctive usage of the notion of ‘the poor.’ This is not for lack of interest in the complex and diverse poverty-problematic but purely to remain focused on the side of duty bearers. Generally, the arguments in this thesis are closely related to the problems confronted by sub-Saharan African countries (to the extent that these are similar). This region still faces the highest amount of people (48.5%) living off of less than $1.25. Also, while such extreme poverty worldwide has been on the decline, only in this region has the number of people living under the $1.25 threshold increased. (See:
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presents an argument for such a justificatory account and subsequently proposes a ‘model’ that can translate the normative implications of this account into a set of principles that ought to become an integral part of corporate investment strategies in burdened societies. The argument developed in the thesis can therefore be best described as articulating a political philosophy of corporate responsibilities that attempts to close the gap in the parallel research fields of Corporate Social Responsibility (CSR) and Business and Human Rights (BHR) on the one hand and Global Justice theory on the other. It is commonly accepted that with power comes responsibility. So too concerning the powers of corporate agents. There is, however, a striking mismatch between the grounds of corporate power and the subsequent understanding of their responsibilities. While under economic liberalization corporate agents accrued powers premised on economic rights and freedoms, the subsequently formulated correlative responsibilities have been of a negative, ‘no harm’ kind. This mismatch is seemingly the result of an interesting co-‐occurrence of two historical developments pertaining to corporate responsibilities: While considerations of the relation between corporate agency and poverty move from the political scene during the 1980ies (Sagafi-‐Nejad and Dunning 2008), corporate abuse and complicity in state crimes gain increasing publicity (DeWinter 2001; Naomi 2000). Intuitively, the budding neoliberal, Washington Consensus and the debt crisis undermining the international political force of the postcolonial countermovement, combined with the further global spread of corporations through investment and supply chain building from the late 1970’s onward, explain both the silencing of the developmental concerns of corporate impact on poor communities and the increased opportunity for corporate involvement in human rights violations. When throughout the 1990’s high profile companies such as Nike and Shell surface in public debate for exploitative labor practices and complicity in murder respectively, a wave of new initiatives to demand accountability of corporations operating in developing countries began to unfold.
Two avenues of contestation and normative reflection have taken center
stage: The legal debate on corporate accountability and human rights, and the http://povertydata.worldbank.org/poverty/home/). The ‘weakness’ of state governance and investment type (equity) most susceptible to the argument developed here, also coincide most with the sub-Saharan region. However, this should not be read as to say that there is a 1:1 fit.
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debate on CSR as a tool for regulation. The legal debate has been preoccupied largely with finding inroads into legal systems to hold corporations accountable that either committed or were complicit in human rights violations. Particularly, the US Alien Tort Claim Act (ATCA) has become an important tool for such attempts. The structuring of contemporary transnationally operating corporate agents along a ‘network-‐based operating model – which loosely connects a mother company to legally separate subsidiaries across different countries – arm’s length purchasing, limited liability (Ruggie 2007) and their lack of subjectivity under international law, has allowed them to largely escape prosecution.
Secondly, a semi-‐legal discourse on CSR and private (self)regulation has
developed largely in reaction to NGO pressures and monitoring. These pressures have initially led corporate agents to, through largely voluntary initiatives, close regulatory gaps in weak governance states regarding their supply chains. CSR has developed in the last two decades into a governance tool, setting social norms, or ‘soft law’ that interlocks with traditional (international) public and private law or provides for regulatory structures where none were before (Callies and Renner 2009; Teubner 2011; Dunning and Lundan 2011). The governance function of CSR and the involvement of corporate agents in the provision of public services such as health care, water supply or security, have become such an intrinsic element of global governance that it has raised concerns over the legitimacy of such corporate ‘political’ powers in its own rights (Palazzo and Scherer 2008 and 2011). There is no denying that these approaches play an important role within the context of the corporate–poverty nexus but the above initiatives and the concomitant research paradigms they trigger share a strong focus on the negative type of responsibilities of corporate agents. CSR and, certainly, human rights law have been predominantly focused on the harms that corporate agents evoke on individuals, either through abusive labor practices or complicity in human rights abuse and environmental law violations. The claim that corporate agents hold responsibilities of a socio-‐economic nature is more complex than ‘negative’ harm-‐ based responsibilities, already in terms of its conceptualization. Where a respect for local laws, human rights and basic standards of decency (possibly thus through self-‐ regulatory systems) carry a long way in understanding ‘negative’ CSR, socio-‐ economic questions do not easily fit such program. Particularly undermining such discourse is the liberal article of faith of a ‘division of labor’ between the state and
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corporate agent in securing public goods and welfare. Corporate agents are no more than private, economic agents whose investments contribute to the economy of a state through the creation of jobs, infrastructure, capital accumulation, and tax revenues. Stating that the reflection on corporate responsibilities toward socio-‐ economic issues has remained underdeveloped is not to imply that links between corporate agency and poverty abatement for instance has not been widely discussed. Particularly the role investment can play in developing nations to improve economic conditions have been on the agenda of the main multilateral and national policy bodies. Kofi Annan prefaced the World Investment Report (WIR) of 2003 with the words “[w]ith its enormous potential to create jobs, raise productivity enhance exports and transfer technology, foreign direct investment is a vital factor in the long-‐term economic development of the world’s developing countries” (UNCTAD 2003, preface). The gathered heads of state at Monterrey were in consensus about the subject: ‘Private international capital flows, particularly foreign direct investment, along with international financial stability, are vital complements to national and international development efforts. Foreign direct investment contributes toward financing sustained economic growth over the long term” (United Nations 2003, Chapter 2B, §20). Of course, the livelihood as such of the UNCTAD has been the stimulation of FDI, particularly into developing countries. As the UNCTAD drew up in their latest WIR (UNCTAD 2012b): “more and more governments have come to realize the crucial role of private investment, including foreign direct investment (FDI), in fueling economic growth and development” (Ibid., 98). With an FDI inflow into Sub-‐Saharan Africa totaling a near all-‐time peak of 37 billion dollars – still largely in natural resource extraction but increasingly so in other services – comparable to the total amount of Official Development Aid (ODA) into the same region, the importance and weight of investment is clear. To that extent, the ‘ideology,’ so strongly impressed upon our collective memory for the success of the (open) market-‐oriented Asian Tigers (Wade 1992 and 2000), that directly links investment and development is still thriving. But as an outcome of underwhelming results, the developmental, state management dimension of FDI has increasingly become a topic on the agenda. Captured in terms of sustainability the ‘right’ kind of investment and the balancing of investments and development by the state (see UNCTAD 2003 and 2012b) This shift is further
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supported by the calls upon corporate agents to join, and they have joined in large numbers, UN initiatives such as the Global Compact, and to formulate Codes of Conduct as well as show allegiance to global programs such as the Millennium Development Goals; all of which targeting world poverty. Undeniably, thus, there is recognition of the fact that capacity and impact triggers corporate responsibilities. However, corporate agents are mostly considered part of the anti-‐poverty agenda only in terms of their economic agency. This can be retraced in the conceptualizations of corporate responsibility either in instrumental terms (a business case) or in terms of a Noblesse Oblige (Crouch 2010), which is to imply that responsibilities are accepted but what those responsibilities entail – the content and scope – is left undefined as basically a matter of discretion on the side of the corporate agent. These approaches however fall short of providing an integrative understanding of the responsibilities powerful corporate agents should be ascribed as part of a structural approach to poverty abatement (Blowfield 2007; Jenkins 2005; Prieto-‐Carrón et al. 2006). This lack of integration of the CSR agenda has led it “to ignore some of the more important developmental issues related to ‘corporate power and policy influence, the negative effects of labor flexibilization and economic liberalization, unsustainable investment and consumption patterns, and perverse fiscal and pricing practices’” (Ibid., 983). As will become clear existing discourses on corporate responsibilities have held on to ‘minimalist’ interpretations of corporate agency that fail to address the normative grounding of corporate responsibilities. Driving the parallel structure on both sides is the liberal doctrine that categorically distinguishes between the public and the private, making “the content of the private sphere disappear by defining it out of existence as a political domain” (Cutler 2003, 133). Within CSR most probably for its ongoing debate with neoclassical economic thinking, the corporate agent remains largely understood as a private, economic agent, constituted and entitled to generate profits while abiding by the legal rules and ethical norms of society (Friedman 1962). The most stringent interpretation of CSR adheres to a basic idea of neoclassical economic theory that the greatest public good can be gained through the unfettered private pursuit of profit. The theories that premise this conceptual framework, such as the theory of the firm (Jensen and Meckling 1976), rely, however, on the presumption of a functional state governance
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system of police, regulatory and administrative powers, for the enforcement of legal rules and contracts, and the curtailment of negative externalities (Sundaram and Inkpen 2004). The absence of such an effective system in weak governance states has lead many CSR theorists off the strict neoclassical path by introducing societal responsibilities beyond the law. These accounts have not ventured far, remaining very close to the premise of the corporation as a private, economic agent. Even the Business and Human Rights (BHR) movement as most prominently expressed in the UN Guiding Principles, while an important elaboration on the normative realm of transnational corporate agency, has not removed itself from this article of faith.
Liberal (global) justice theory has mirrored the normative study of the
corporation in this respect. Where CSR and BHR have excluded the institutional realm from their analysis of corporate agency, justice theory has excluded the corporate agent from its institutional accounts. Ever since Rawls (1971) proposed, the ‘Institutional Division of Labor’ to define a strict distinction between the public and private as a matter of methodology, liberal theory has refrained from questioning non-‐state agents within their theories of justice. In this case, however, no assumptions are made about the empirical status of the regulatory capacity of the state but the core institutional structures either of the state or state-‐based international institutions are singled-‐out as the primary and singular subject of justice for the sake of ideal-‐typical analysis. The site of justice, the place where social justice is to be found, is the set of institutions that together form the basic structure of society. This structure regulates the interactions of all non-‐state agents and society such that justice will be ensured. While this does not per se imply that corporate agency falls outside the scope of general moral reflection (Pogge 2007), it has meant that in the budding debates on world poverty, the corporate agent has been systematically absent. As state authority, jurisdictional integrity and regulatory capacity are subsumed within globalizing processes typical of the post-‐Westphalian constellation (Kobrin 2001; Cutler 2001 and 2003; Scherer, Palazzo and Baumann 2006; Kobrin 2009; K. Macdonald and Macdonald 2010; Scherer and Palazzo 2011), the ideal typical assumptions concerning the state and state-‐based institutions, providing an effective regulatory backdrop for corporate agency and a blueprint for moral improvement come increasingly under pressure. Where societies had been ‘burdened’ burdened
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already by weak governance and limited statehood, the new global order premised on the institutionalization of open market liberalism has had a particularly large impact (Patterson and Afilalo 2008). As the authors to a recent UNRISD report note “[s]tate capacity in key areas of governance has declined especially in developing countries undergoing structural adjustment. This has affected […] also policy space or the capacity of developing country governments to resort to a range of policy instruments and approaches. Furthermore, regulatory authority has increasingly been assumed by non-‐state actors […]” (Utting, Buchholz and Marques 2010, 242).
A strict distinction between the public and the private seems untenable
under these conditions as it will result in a limited and limiting understanding of the normative intricacies surrounding the corporate agents economic activities in burdened societies. Political philosophy has provided little guidance in understanding exactly what the normative challenges are and it has left the debate on corporate responsibilities to managerial studies of CSR or professional business ethics. There exists thus a lacuna of ethical proposals in this area, most particularly in the linking of ethical theorizing and empirical research on the global law and economics of corporate agency. Therefore, any informative ethical proposal has first to set out interpreting the agency of corporations as such and the role they play within global governance. The thesis argues for an understanding of the corporate agent as an agent of justice. More specifically, it argues that the corporate agent bears obligations of justice in the face of poverty. The hope is to articulate, based on a justificatory account grounding the attribution of responsibilities, a model that can serve as a normative benchmark against which corporate engagement in burdened societies can be evaluated and reform can be effectuated. 1.2. The Theoretical Context of the Project Despite the concerns with corporate abuses and talk of the potential positive contribution of corporations to ending world poverty, there is a dearth of normative reflection on the exact justificatory grounds for corporate involvement in poverty abatement. Political philosophy, and justice theory in particular, is highly suitable for articulating such concerns. It has however not taken on this challenge as it effectively assumed away considerations of corporate agency under the veil of institutional reform.
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In the early 2000s, Onora O’Neill (2001; 2004) challenged the ingrained institutionalism of justice theory by arguing that corporate agents ought to be considered, under appropriate circumstances, agents of justice. Although her argument was elegantly crafted and above all challenged the field of justice theory, barely any debate ensued its publication. Besides a reply by David Held (2002) after O’Neill’s first paper – which argued that while O’Neill’s claim was correct in substance its normative guidance was misconceived, thereby rehashing the accustomed line of argument that institutions ought to be and can only be the route towards a just (global) society – defenders of liberal institutionalism have not engaged the subject again.2 O’Neill’s main claim was modest but of consequence. Sympathetic to the cosmopolitan creed of justice theory, O’Neill charges these theories by adhering to a mistaken form of realism that favors the state and state-‐based international institutions as the only agents of justice without exceptions. Since the fulfillment of individual rights is at the core of his/her philosophical position, a cosmopolitan, to be truly realistic about fulfilling the demands of justice to eradicate poverty, is to empirically inquire into the question ‘who has to do what for whom.’ Such an inquiry, however, could under certain conditions point at non-‐state actors, and particularly, transnationally operating corporations as agents of justice. O’Neill’s argument combines two broad claims: Firstly, she claims that states oftentimes are not effective in living up to human rights obligations since they are either unwilling rogue states or more benign but heavily burdened states. In such cases, international (state-‐based) institutions are asked to pick up the slack (Beitz 2011) and to close the governance gaps that disable these states in living up to their commitments. However, these institutions are themselves underdeveloped. In light hereof, requiring either these rogue or weak states or the underdeveloped international institutions to carry all obligations for justice is both an over-‐estimation of their will and/or capacities, as well as a dangerous affront to the rights of the vulnerable. In her 2001 article therefore O’Neill makes the argument that under well-‐ordered societies the primacy for justice enhancement is rightly positioned with the state, with corporate agents merely functioning as secondary agents meeting “the demands of primary agents, most evidently by conforming to any legal 2 O’Neill gained some sympathizers throughout the years. Important contributions in line with her argument come from Kuper (2004) and Wettstein (2009b).
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requirement they establish” (2001, 189). In a society lacking such order, however, the distinction between primary and secondary agents blurs since there is no framework in place for a secondary agent to conform to. It is this claim that Held argues against. Secondly, and answering Held’s critical stance, the singular focus on the need to strengthen the institutions of burdened states and the restructuring of international organizations might generally speaking be correct. It would, however, necessarily turn the fulfillment of the most basic human rights of the vulnerable in many contexts into a long-‐term project. For these two reasons O’Neill concludes that where there are no official institutions to allocate obligations as primary agents, ‘non-‐state actors’ need not, indeed ought not, hold back on meeting their basic obligations’ (O’Neill 2004, 252-‐3, my italics). In case the “fundamental obligations that in other circumstances are secured by compliance with state requirements […]” (ibid, 258) remain unfulfilled, unconventional agents ought to be ascribed duties of justice too. As O’Neill concludes, “[i]f we are to be seriously realistic, we need to think about the full range of agents and agencies that can carry obligations, and can if they choose to contribute to securing wider respect for certain rights” (ibid, 256). The unfulfilled status then of the most basic demands of humanity as an effect of weak governance, combined with the extensive capabilities on the side of the corporate agent trigger duties of justice for the corporate agent.3 O’Neill’s account of corporate agents of justice then combines two guiding maxims to establish whether a corporation ought to be considered an agent of justice. The first can be stated as follows: When within a burdened society serious human rights deficits exist, non-‐state actors can be required to act as agents of justice. The second reads: When corporations are present and have the capability to alleviate suffering, they ought to do so. O’Neill’s argument, while substantial in its challenge to institutionalism, is limited in terms of its structural implications. Corporations are considered agents of justice to the extent that “they act on behalf of justice and not the more substantive claim that TNCs are genuine moral agents” (Arnold 2013, 127). This quote well-‐ captures the context and capability dependency of the idea that corporate agents can be agents of justice in O’Neill’s perspective. As secondary agents corporations can only be considered primary duty bearers when they have the capability to 3 O’Neill’s choice of words is somewhat unfortunate in the last quote, writing that ‘if they choose to contribute.’ This phrase should however be read as expressing the ‘ought implies can’ dictum: corporate agents carry a duty if (and only if?) they can, when they choose.
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provide assistance under conditions of acuteness of suffering in weak states. In this account, thus, there is no mentioning of the structural features of the corporations role with regards to the impoverished and weakly governed country. While O’Neill notes that she is not making a novel claim, it did challenge the ‘institutional division of labor’ between institutions and agents central to liberal political philosophy. So far little has been made of her challenge. This thesis is in the spirit of O’Neill’s challenge and seeks to systematize it. A good starting point for answering the question why O’Neill’s argument stirred little debate is with the dominant institutional-‐bias in contemporary liberal political theory. One of the most lasting contributions to political philosophy by Rawls is the introduction of the ‘basic structure’ as the subject of justice. It has provided the field with a concept on which it could converge and upon which disagreements could be fought out. The debate within global justice as a result thereof has largely focused on the potential existence of a basic structure beyond the nation-‐state. This is the so-‐called question of the scope of justice (Abizadeh 2007). With regards to the debate on the scope of justice, which cannot be explored here, this thesis underwrites the conclusions by T. Macdonald and Ronzoni that “there is increasing acceptance of the idea that global institutions require justification just as much as domestic ones” (2012, 521). In other words, a debate that sprung up with Beitz (1979) and Pogge (1989) over 30 years ago has slowly come to a conclusion. Beitz and Pogge both saw reasons within Rawls’ Theory of Justice to necessarily extend the principles of justice globally. One crucial reason concerned the moral arbitrariness of place of birth: If natural talents and socio-‐ economic class ought to be discounted within a theory of justice, why should not also nationality? This extension upon Rawls can be said to have set out one line of debate centering on the moral value of nationality. Where liberals claimed that egalitarianism demanded cosmopolitan principles of justice, more communitarian inclined theorists were of the opinion that nationality and/or the nation-‐state only could trigger extensive duties of particularly distributive justice. The second line of argument, and the one still reverberating today, concerned the extension of the scope of justice beyond national borders based on an empirical claim that a global basic structure was now in place. While Rawls had set the confines for his theory by postulating a closed society so as to derive principles of justice applicable to a
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definite set of institutions, the cosmopolitan critic argued that such a postulate has become unconvincing in light of globalization. Because the global basic institutional structure directly influences the life-‐chances of people, this structure is subject to the same stringently constraining justice-‐demands. This debate on the basic structure has itself branched out into two directions: One branch debates justice as an issue of the allocation of goods globally. The second branch focuses on the associative ‘political justice.‘ It is the latter that has triggered debate until most recently and that draws our attention. The main protagonists within the debate on political justice that argue for a restrictive understanding of its application to only the nation-‐state have been Blake (2001), Nagel (2005) and Sangiovanni (2007).4 Even among these authors, however, no one categorically rejects the potential application of principles of justice beyond borders. Nagel provides the most entrenched argument, limiting justification to the simultaneous existence of coercive structures and self-‐rule. His position, however, has been convincingly shown to be problematic by multiple critical reactions, most notably Cohen and Sabel (2006) and Julius (2006). The latter for instance has cleverly shown, tracking the steps of Nagel’s argument, that Nagel’s analysis does not warrant his conclusion, or at least that it unconvincingly makes justice a question of either an absolute ‘yes’ or an absolute ‘no’ instead of appreciating the fact that justice-‐generative relations (Cohen and Sabel 2006) can exist outside of the confines of the state, albeit possibly in different or watered down ways. These commentaries have shifted the debate to questions on the type of justice demands that are triggered beyond state borders. In this context “there is still wide disagreement about whether the specific normative standards for building and justifying institutions should be identical, or even roughly equivalent, in [the domestic and global] political domains (T. Macdonald and Ronzoni 2012). To that extent “[d]eveloping a better understanding of what is distinctive about the problems raised by the global political order, and which conceptual and methodological 4 I refrain from commenting on the specifics of these works. See Cohen and Sabel (2006) and Julius (2006) explicitly on Nagel’s argument. Abizadeh (2007) provides for an intricate account of how statist that premise their argument on the Rawls’ theory are confusing the different interpretations possible of the justice-generative criteria of cooperation, coercion and pervasive impact present in Rawls’ work. Oftentimes singling out one as a best fit to their intentions, when pressed they resort to the use of argumentative tools present only under the alternative justice-generative relations. Risse (2006) has argued that while the state can be understood to be of a peculiar nature pace the far-reaching associative duties as an effect of its rigorous impact on its participants, this does not imply that no watered down associative duties under global institutions can emerge. Such a gradualist approach can much better make sense of the clearly gradual differences in coercive force or the political immediacy of a regulatory framework.
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approaches are best suited to address them, thus represents one of the most pressing challenges in this theoretical field” (ibid.). There are two notable theoretical developments that help face these challenges, both of which play a constructive role in this thesis. The first is the introduction of the concept of public power as a concept in normative theory. Particularly the work of T. Macdonald (2008a)5 has paved the path to consider not coercive impacts but the exercise of public power, the form of power that directly engages the public good and welfare, as a premise for justice-‐considerations. Secondly, a most promising way forward from a methodological perspective has been the Practice Dependent Approach (PDA). Other than the scope debate so far has offered, PDA does not seek out ‘reasons’ for global re-‐distribution (or argue against it) as “the existence of transnational duties of justice does not necessarily hinge on the plausibility of arguments about the analogy between domestic and the global context in general” (Brandi 2011, 198) but is an effect of the structure of a practice. Within PDA the critical interpretation of the socio-‐economic power constellations that govern social interaction instead of the questions of redistribution becomes the focus of attention. In short, the PDA is an empirically informed, interpretative methodology that sets up the question what “principles should govern the exercise of political power for it to be justified?” (Valentini 2009, 335) The attraction, therefore, of PDA as an inroad into the old debate is that it can “show how demanding principles of justice can be extended to international practices beyond the state” (Banai, Ronzoni and Schemmel 2011, 55) as it provides the resources to analyze distributional patterns of power – an inherently relative, positional, concept – within a specific context without depending on hefty substantive claims. Justice demands can emerge “whenever [injustice] is the result of power asymmetries, gives rise to duties to ‘distribute’ or ‘balance’ power (more or less) equally and thereby generate distributive duties of justice” (Brandi 2011, 193). Although the PDA offers an important novel methodology so far it has not lead to a questioning the site of justice. 6 This is somewhat odd come to think that it is accepted that beyond the state borders justice consideration can be triggered under 5 I will refrain from commenting on ‘public power’ here for it is more of a term of art than a full-blown theoretical construct or a promise of a methodological outline. A clear description of the theoretical value at this point of the thesis is therefore not helpful and would in any case already demand too much substantive comment. 6 The question of the site of justice specifies whereto (which ‘objects’) principles of justice apply
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comparable, watered-‐down or unique practices of power distribution. Why would normative guidance not need to integrate the corporate agent within its analysis of existent injustices? At this point, O’Neill’s observation on the limited capabilities of both weak states and international institutions becomes relevant for a systematic questioning of the institutionalist bias that is also at work within the PDA. Claims of a need to develop extensive new institutional measures to achieve justice are misguided because of the fact that many of the injustices exactly follow from governance gaps on multiple levels of governance. If this is so, there is a need to problematize the site of justice and here the concept of public power applied to the corporate agent (T. Macdonald 2008a; K. Macdonald and T. Macdonald 2010) can provide the needed inroads. The point to make here is that while the scope of justice has been front and center of scholarly engagement, the site on the other hand has remained unexplored, particularly, and surprisingly, within global justice theory.7 This thesis seeks to correct for this forgetfulness and develops a structural argument on corporate responsibilities that connects specific institutional conditions (such as provided by the investment regime) with stringent responsibilities. Utilizing the PDA as a preferred methodology, the account of the investment regime developed in Chapter 2 and 3 will provide an argument that so-‐called governance gaps are not merely to be understood as existent ‘chance’ phenomena but can actually be the effect of an institutional arrangement. In as much corporations benefit from such constituted gaps, the question of corporate responsibilities needs to be articulate within the same context of institutional arrangements. The account developed here is to create ‘space’ for the consideration of corporate justice-‐based responsibilities, not to deny the primacy of institutionalism. It merely answers to pragmatic considerations of justice theory providing guidance on the realistic utopian. This thesis sees the idea of corporate duties of justice as an effect of current conditions of globalization and pragmatic understanding of how to 7 G.A. Cohen (1997) famously challenged Rawls account of the site of justice (see Chapter 4). However, Cohen’s challenge remained within the parameters of the idealized setting of Rawls theory, including the assumption of the closed society. Under these conditions, while pressing the Rawlsian framework for further clarification, the attempt by Cohen has largely failed. Liam Murphy (1998) picked up on Cohen’s argument and articulated the opposition between him and Cohen to Rawls as one of monism versus dualism. Murphy has made, as far as I can tell, the sole attempt to question the site of justice beyond borders. He however did so through a highly stylized ideal theoretical argument, which, for its adherence to the unconvincing dichotomy between monism and dualism, had little traction (See Pogge 2000 for a critique both on Cohen and Murphy, particularly on the extension to global justice).
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limit suffering. Purely institutionalist approaches cannot cope with the unfavorable but demanding circumstances of injustice that might well be considered definitive of the global order. In light hereof, a strict division of labor should be denied. 1.3. A Strategic Approach Throughout the following chapters a political philosophy of corporate responsibilities towards the poor is developed. As shown above, as of yet little space has been granted to such a philosophy within the current debate on global justice, which thereby has excluded one of the main driving forces of the global order from its normative assessment.8 What is needed is a strategy to create such space, to ‘open up’ political philosophy as it were from within its own structures to the idea that corporate agents are potentially agents of justice in a structural manner. This thesis however diverges from the commonly used argumentative approaches of justice theory. Instead of engaging general theory, tracing received accounts to specify where in these theoretical characterizations argumentative deficits appear, a problem or practice-‐based approach is taken. In as much, a particular problematic issue that they ought to provide an answer to is utilized as a challenge to currently accepted normative theory. Effectively, the structure of this the argument will follow will be as follows: A practical case is analyzed and interpreted as articulating a morally relevant puzzle for normative theory. Following this puzzle the state of the art (here both within justice theory and CSR/BHR) will be shown as not standing up to or at least remaining inconclusive with respect to the challenge. Lastly, drawing upon the core elements of the foregoing, a constructive argument will be articulated that shows how the existing lacuna in our theorizing can be filled. Here I will shortly outline the chosen strategy that I intend to be successful in doing just that.
The first step within this strategy is to introduce the evolving investment
regime, i.e. the set of norms and rules articulated mostly through bilateral and regional investment treaties, contracts, domestic law, and elements of the WTO-‐ 8 Pogge (2007) has argued on the issue of corporate responsibilities that “[i]t is more realistic – though admittedly still rather unrealistic – to seek substantial progress on the poverty front through institutional reforms that make the global order less burdensome on the global poor (Pogge 2007, 28). He does however add that this is not meant “to discourage efforts to work out what claims poor people have, in virtue of their social and economic human rights, directly against individual and collective agents” (ibid, 29). While Pogge’s claim can be contested on its own merits – as Howse and Teitel (2010) show, what Pogge considers minor tweaks to the institutional order actually requires rather radical changes to international law – it can be said to miss the general point. The main point is we are confronted with pertinent issues the solution to which is little served by starting off with an institutional division of labor.
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realm, as a basis to argue for corporate consideration under a lens of justice.9 As the investment regime is explicitly set up to provide protection of and limits to state regulation of the corporate agent, it is an ideal case to investigate. As will be shown, the investment regime is an obvious candidate as a subject of justice because it constitutes a cooperative regime under reciprocal commitments, coercing the participants to abide to its rules. Different from the comparable trade regime, the investment regime ‘penetrates’ into the core of the sovereign state instead of remaining at its borders, for it effectively overturns the realm of domestic regulatory policies and property rights. This truly transnational effect of the investment regime consists in the fact that it introduces a third agent as a direct beneficiary of the regime that operates within the borders of the host state. Through the substantive principles of the treaties specifying corporate rights and state regulatory limitations and the direct access of corporate agents to international tribunals, it is argued that the investment regime constitutes corporate public power and thereby rebalances the corporate-‐state relation. The investment regime by its nature thus has direct constitutive implications for the agency of corporations.
The study of the investment regime will be instrumental to opening up
debate on the site of justice. I will not do so from a theoretical perspective (as G. A. Cohen 1997 has done), as this has remained unsuccessful (Scheffler 2006), but by providing an empirically informed challenge to pure institutionalist understandings of the site. If this strategy can be executed successfully, an opening has been made in the problematic parallel structure currently confronting the issue of corporate responsibilities. Investment law namely would expose the intricacies of a liberal fetish for institutions as the only site of justice and introduce the corporate agent as a relevant object too. This challenge in its own right certainly needs to be tested by the potential of institutionalist’ solutions to the normative challenges set by the regime. This potential will be shown to be limited in terms of the relevant guidance institutional theory provides, directly implying too that the challenge of the investment regime to institutionalism is also a challenge to ideal theory, and its commonly understood 9 To my surprise the investment regime has not been explored as of yet by any political philosopher. The only philosopher I am aware of that actually took up the issue of investment and, at least to some extent, its legal ramifications is Kapstein (2006). His argument however mostly concerns the collective action-based fear of a ‘race to the bottom’ in terms of labor standards and tax benefits.
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(flawed) relation to non-‐ideal theory. If arguments on the distributive consequences and ‘sticky’ nature (particularly of the ‘serial’ form of multilateralism and the (very) small hopes for fair ‘conference’ multilateralism (Salacuse 2010))10 of the investment regime as it is today are credible, the ideal theoretical argumentation based solely on institutional reform may well face an unbridgeable gap. As O’Neill noted, “practical reasoning that assumes that ‘ideal’ predicates are satisfied will not reach conclusions safely and soundly for cases where they are not satisfied” (O’Neill 1996, 41). This brings up a second related comment. The account of justice developed in this thesis engages ‘problems’ in the sense that its aim is to contribute to the potential amelioration of current injustices by providing an understanding of specific relevant institutionalized, or at least normalized, relations that endow corporate agents with a range of powers. We therefore do not ask the question whether there is a global basic structure nor are we interested in a pure conceptual grasp of what it exactly is that constitutes demands of justice (like, say, ‘coercion’ as the sole basis for justice claims (Valentini 2011)). While such ‘normative deductive’ approaches (Pierik and Werner 2010) provide for rigorous analytics in argument they are fraught with questions of applicability and translatability under current globalized circumstances as they do not engage the empirical specific of their field of application. Focusing on concrete problems of injustice on the other hand inevitably comes with complexity, ambiguity and any account of them will be guilty of some analytic ‘flexibility.’ However, as the case of the investment regime shows, for a normative account to be guiding on potential reforms to a practice, it needs to confront these non-‐ideal conditions. The ideal of a perfectly just investment regime, to the extent comprehensible, can be inspirational to continue to work towards but it does not provide helpful guidance for decision-‐making faced with the intricacies of reality. This sentiment is well expressed by T. Macdondald in her positioning towards Rawls. The latter advocated “more abstract forms of normative reasoning” as “the philosopher should look to ‘the indefinite future.’” Macdonald oppositely notes that instead “[t]he contextualist philosopher, more modestly, looks to the foreseeable future, since the practical problems that lie beyond this horizon are unknowable, while the problems within it are all too readily accessible” (2008a, 8). The 10 The ‘serial’ nature of the investment regime is meant to capture the development of the regime through a series of independent bilateral agreements into a regime that operates functionally like a multilateral arrangement.
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contribution of moral theory under this reading is not, therefore, the provision of ex ante specified universal principles but the theorizing of possible normative models and instruments to untangle and improve upon moral complexities. This thesis too subscribes to the modest position of the contextual philosopher. The last chapter, in light hereof will provide for such a heuristic of normative guidance by constructing a Basic Structure Model of corporate responsibilities. Investigating the issue of corporate responsibilities towards the poor, as a starting point, the project “treats the obligation to relieve deprivation and suffering as of overriding concern” (Miller 2008, 501) as there is an obvious way in which life below subsistence level creates an injustice under the moral values enshrined in today’s international community. Any serious account of justice however does need an understanding of the relationship of interdependence and institutional linkage (J. Cohen and Sabel 2006) in order to understand who carries obligations to correct for the existing injustices.11 Herewith we come to the third point to make concerning the approach adhered to in this thesis. As we pointed out already within in the section on the theoretical context of the thesis, the PDA provides for a most promising methodology to undertake the challenge of this thesis, by providing for a tool to draw out the ‘justice-‐generative relations’ operative within the investment regime. Sangiovanni has most succinctly summarized the general idea behind the PDA: “The content, scope, and justification of a conception of justice depends on the structure and form of the practices that the conception is intended to govern” (Sangiovanni 2008, 138). Through a 3-‐stage interpretative method,12 PDA generates a set of principles based on the practice it ought to regulate. As a consequence of this focus on practices the PDA is well placed to articulate “problems that concern the fundamental terms of global rule-‐governed social interaction and cooperation beyond the establishment of a global minimum and just interaction between states”
11 To be sure then, my claim concerning the investment regime is not that it generates poverty in its own right and therefore stands in need of reform. The claim is that the regime has generated the unfair conditions in which a public form of corporate power has emerged, without catering to the reciprocal provision of development towards the burdened society. This imbalance constitutes an injustice for participation in a shared scheme generates duties of reciprocation towards those co-contributors (Rawls, 2001; Sangiovanni 2007). 12 Two of the early proponents of PDA, James (2005a) and Sangiovanni (2007) apply the interpretative approach as developed by Dworkin (1986) to built up a normative understanding of a practice that expressed the ‘point’ and internal values present in the practice. This rendering has triggered worries of a status-quo propensity of the approach (Valentini 2009). At this point we are not concerned with these debates.
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(Banai, Ronzoni and Schemmel 2011) because it can be applied to specific transnational practices without having to make a claim on full-‐blown global justice.
There is, however, one caveat to the PDA: As a methodology it does not itself
distinguish in favor or against an ideal or non-‐ideal approach. James (2005a; 2005b) for instance complements the interpretative stages with an ideal-‐theoretical Original Position (OP)-‐procedure to develop normative principles to govern trade. In line with the above commentary on the preference of non-‐ideal over ideal theory in this thesis, such approach to PDA will not be taken here. While I do not make a claim on the applicability of ideal PDA to trade, it is hard to foresee how the OP procedure would work out when the empirical-‐interpretative steps of PDA lay bare a convincing non-‐reducibility of corporate agency to institutional modifications within the investment regime. A problematic task would be at hand of representing corporate agents as equal participants behind the ‘veil of ignorance’ next to home and host states. At the same time, no example or rudimentary outline of what a non-‐ideal application of the methodology of PDA would look like is existent. This is not overly troubling, however, as the application of the initial interpretative steps of the method (of outlining the general practice as such and articulating the main values expressed within the practice as we find it) provide for enough rudimentary methodological guidance to be useful in capturing the main normative, i.e. justice-‐ generative, relations. While the thesis upholds that there is a plurality of grounds of justice,13 the investment regime is read as a cooperative regime that is premised on ‘indirect’ and ‘asymmetric’ reciprocity between the participants. The empirical-‐interpretative account throughout Chapter 2 and 3 will show that this regime in practice upsets the power-‐balance between state -‐and corporate agents particularly of relevance within the context of burdened societies. Crucially so, the regime enables the exercise of corporate public power, which in a very direct sense interrupts the normative relation between state and citizen as the host state’s socio-‐economic regulatory and management capacities become at least partially dependent on the agency of the corporation. In this can we can speak of an ‘overlap’ of the investment practice and state practice that creates socio-‐economic governance gaps as a consequence not of mere lacking state governance but more pertinently as a consequence of an evolving global institutional order the rules and norms of which override those of the state. 13 The PDA upholds the Rawlsian insight that each regulatory practice needs its own regulatory principles.
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There is therefore some skepticism at play regarding the ability of PDA to articulate just practices solely “according to their own, internal and practice-‐dependent principles of justice” (Banai, Ronzoni and Schemmel 2011, 56). Instead the thesis will problematize the existing overlapping practices of investment and the state as constitutive of justificatory demands on corporate agents. The Basic Structure Model that needs to articulate normative guidance under non-‐ideal conditions should be theorized as a translation of the reciprocity-‐requirements of a fair cooperative practice of investment. 1.4. Outline of the Argument by Chapter This thesis accounts for the justificatory grounds of corporate agency and models the reasonable expectations that rest on corporations operating in burdened societies. Since this final argument is dependent on incremental steps, 5 chapters will be dedicated to spell it out. Chapters 2 and 3 utilize an interpretative PDA-‐method to articulate a challenge to the current accounts at hand by presenting the investment regime as a) justice-‐generative, cooperative practice that can be morally interpreted through a ‘reciprocity-‐lens,’ b) as a legal regime that constitutes a public form of corporate power, and c) as doing so in an illegitimate manner. To be more specific: Chapter 2 introduces the international law of investment. Until recently considered an exotic subfield of international law, of interest to insiders and of minor practical consequence, the international law of investment has rapidly evolved since the mid-‐ 1990’s and by now constitutes a governance regime with almost global reach. In other words, international investment law has become a practice the norms and rules, which motivate and constrain the actions of its participants. 14 As a regime, international investment law is a convincing case of a subject of justice comparable to trade. Yet the investment regime is, upon closer inspection, of a different kind: It is not a proper, conference-‐based, multilateral regime but is best considered as a resultant of ‘serial multilateralism,’ i.e. the result of a history of an increasing amount of single treaties that through their internal make-‐up have interlocked together into an effective unity. Secondly, the investment regime is unique because whereas it is a treaty regime based largely on state-‐to-‐state agreements, its 14 The notion of ‘regime’ is derived from Krasner (1982) and Salacuse (2010) and is meant to denote the fact that the norms of rules of investment law are guiding the behavior of relevant actors within its purview.
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(primary) beneficiary is the corporate agent. While the reciprocal rationale of BITs consists of investment protection and liberalized state regulation, on the one hand, in exchange for growth through FDI, on the other, the language of the treaties are, besides the preamble, fully garnered to the benefit of the corporation. Chapter 2 examines the distributive effects of this skewed organization of the investment regime. For the two levels at which the corporate agent is benefited – firstly by the standards of protection and liberalization contained in the treaty and secondly by the right to initiate international arbitration – grant the corporate agent freedom from and power over the regulatory institution of the state in which it invests. What the treaty regime does, through a process aptly conceptualized as constitutionalization (Schneiderman 2008), is to provide the corporate agent the interpretative power to initiate claims based upon broadly framed standards in reaction to state policy considered harmful. Hereby it cases a novel ‘shadow of law,’ rebalancing the comparative powers of state and corporate agent. The history of direct challenges in front of international tribunals or pre-‐legislative ‘consultation’ under the shadow of investment law can trigger a ‘chill’ of particularly socio-‐ economic and environmental regulation in exactly those places where such regulation for the progressive realization of citizen’s rights would be most pertinent. This ‘negative’ public power of the corporate agent to limit state agency has to be understood in the reciprocal context that qualifies the regime. Can such a constitutive effect of the investment regime be legitimized? This is a question answered by Chapter 3. In chapter 3, legitimacy questions are formulated as to understand whether the regime can be deemed defensible, despite certain questionable effects. Alternatively and inversely, this strategy is also a test whether the investment regime is a morally relevant case from the perspective of justice. The chapter argues that the regime premises an unjustifiable practice that favors corporate rights and freedoms over the developmental goals of developing countries. Three legitimizing strategies – consent, output and exit – will be presented to test the status of the regime. Under contractual theories of justice (Gauthier 1986) ‘consent’ is the obvious candidate for legitimizing any agreement and since the investment regime is of largely a bilateral make-‐up it seems to be a certainty that the regime can be legitimized on these grounds. However, a historically informed account on the evolution of the regime that looks into a) the bargaining and informational
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asymmetries at the moment of mass accession and b) the semi-‐autonomous development of the regime, shows that neither a ‘thin’ nor a ‘thick’ understanding of ‘consent’ can convincingly provide for legitimacy. The second strategy then is to look into the ‘output’ function of the regime. As mentioned above, the reciprocal nature of the regime is subscribed to in most of the contemporary BITs. ‘Output’ legitimacy would thus reflect the ‘mutual advantage’ provided by the regime. Unfortunately empirical proof of ‘output’ and advantages to host states is hard to come by. Firstly, output in terms of the positive effect of BITs on increased investment, growth and let alone development has not been proven. Secondly, there is no convincing evidence that the international legal regime of investment leads to rule of law improvements within weak governance states, which has been proposed as an alternative advantage to host states of the regime. There is however proof of the opposite: As the investment regime allows foreign investors protection under international law and direct access to international tribunals, there is no incentive for them to positively engage rule of law development on the ground in host states. Co-‐opting the existing elite might indeed be the better bet. Lastly, ‘exit’ provides for a legitimizing tool, as it would underwrite the voluntariness of accession to the treaty regime. Here too however the regime comes up short as exit from either BITs or the dispute mechanisms that set out the rules under which the ad hoc tribunals are shaped is neither simple nor instantaneous. Since the chapters 2 and 3 together also articulate the challenge that the thesis sets to global justice theory and the CSR discourse, they also reflect potential solutions to the legitimacy gaps of the regime. Not aiming to conclusively deal with the current solutions on offer to combat the legitimacy ‘backlash’ to the regime (these approaches are considered necessary but insufficient parts of any solution) they are considered unsatisfactory. This is so for the combination of two facts in particular: First, the investment regime embodies an ideology of open markets and liberalized trade – an ideology far from defeated. Second, as a serial form of multilateralism the regime is much more ‘sticky’ institutionally than its conference based counterparts. As the notion of the constitutionalization of investor’ rights suggest only a radical but unlikely overthrow of the whole system could possibly provide for a convincing correction. Sustainability clauses or human rights integration into the treaty regime will not be able to sufficiently change it.
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Chapters 4 and 5 looks into the question how current approaches that relate to the corporate agent and world poverty face the challenge of the investment regime. These chapters will further deepen the understanding of a problematic ‘grey area’ left open within current research that is a consequence of the disciplinary parallelism of the two discourses of justice theory and CSR/BHR. In other words, they are shown to be mutually constitutive of a lacuna of ethical proposals dealing with the role of corporate agency as they underplay the importance of an analysis of the institutional underpinnings of corporate responsibilities. Chapter 4 opens up with a further specification of the philosophical challenge to be drawn from the first set of chapters, reading the challenge of the investment regime as a question on the site of justice. As accounted for in chapter 3, the distributive consequences of the investment regime, i.e. the constitution of corporate public power, and the ‘reciprocity gap’ in place, provide for a case of background injustice. The challenge that confronts justice theory at this point is that while the normatively problematic issues regarding the regime are relatively clear, the solutions are not. Traditional liberal accounts would interpret corporate public power as an issue to be resolved through institutional tweaks but such tweaking is hard to imagine for a variety of reasons, implying a tricky challenge to institutional justice theory. The lacuna in contemporary philosophical reflection on justice with respect to non-‐state agents is an effect of them being ‘assumed’ away under ideal theory. Chapter 4 thus commences by specifying the normative challenge faced by liberal political philosophy in terms of a further exploration of the concepts of reciprocity in practices, corporate public power and differential Statecraft. Subsequently, the challenge is brought to bear on two crucial premises of liberal political philosophy. Under the headings ‘Consequence 1’ and ‘Consequence 2’ two liberal presumptions, of institutionalism and the liberal state model, are tested and while they are not categorically undermined, they are shown to be problematic from a position of normative guidance. Firstly, ‘pure’ institutionalism as part of non-‐ideal theory is shown to rest on flawed reasoning on the guidance relation between ideal and non-‐ ideal theory: It either translates the ideal-‐theoretical assumption of pure institutionalism into non-‐ideal theory (which is theoretically unsound) or it acknowledges the instrumental nature of institutionalism (in which case it becomes an empirical issue whether institutionalism is a ‘best means’ towards justice). Secondly, and building on the first consequence, the investment regime undermines
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the state only-‐focus in poverty abatement. It does so by showing how the underlying liberal model of the state that guides normative claims on institutional development cannot be easily applied to weak states that are entangled in interloping legal-‐ economic relations.15 While the importance of domestic institutions is not denied, the undercutting effect on progressive development caused through interloping forces cannot be underestimated. To summarize, this chapter provides a core argument on the necessity for the inclusion of reflection on corporate responsibilities from within the framework of justice. In short, this chapter opens up space for a political philosophy of corporate responsibility. Going forwards, the question then becomes whether a satisfactory model is at hand to integrate the corporate agency into the normative reflections of justice theory. The main insight to take from Chapter 4 into Chapter 5 is the need for reflection on corporate responsibilities as premised on their rights and concomitant powers. In other words: To seek an understanding of corporate responsibilities within the context of the global institutional order. But what substantive implications does the understanding of corporate public agency have for our understanding of their duties within the context of socio-‐economic issues and more specifically, poverty? In Chapter 5 CSR and BHR are introduced as 2, sometimes overlapping but divergent, models that articulate a conception of normative expectations of corporations. In the discussion of the models, the focus is on their normative underpinnings as well as the ‘range’ and ‘type’ of corporate responsibilities they support. The crux of the argument is that neither can satisfactorily account for the normative implications of the ‘publicness’ of corporate agency sufficiently and the (potential positive) demands that come under the demands of reciprocity as applied to the investment regime. To be attractive, a model of corporate responsibilities would namely need to be able to translate the reciprocal basis and distributive consequences of the investment regime. Neither model does so successfully. Chapter 5 distinguishes the two dominant guises in which the CSR model appears: Instrumental CSR and CSR as Noblesse Oblige. Both varieties offer little in terms of a justificatory discourse for corporate responsibilities. 15 I take this somewhat uncommon notion of ‘interloping’ from Patterson and Afilalo (2009). ‘Interloping’ expresses the idea that someone or something becomes involved a situation or place where it or s/he is not wanted or does not belong. This idea of the involvement of an external force within a set situation, however, nicely captures the transnational impact of the investment regime as expressing a legal-institutional relation through which an external agent, the corporation, is enabled to carve out space and become involved in the sovereign sphere of a host state. It is this ‘interloping’ consequence of the legal-institutional order of the investment regime that sets it apart from the trade regime.
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Instrumental CSR ties responsibilities to profitability, while Noblesse Oblige remains content with a generic qualification that there is a responsibility, without any further specification of this responsibility. BHR, particularly the UN Guiding Principles (Ruggie 2011), is subsequently shown to offer an improved account but one that runs into similar limitations. As the drafter of the Principles, John Ruggie, chose to limit the framework to a legalistic understanding of human rights, limiting corporate responsibility to a largely negative notion of respecting human rights. In line with liberal political philosophy, thus, under the BHR model the onus of regulatory control and progressive development remains fully with the state. The obstinate public/private opposition, challenged under the account of the constitutive effect of the investment regime, is thus equally at work under this model. Premised on the acceptance of corporate agents as private, economic agents both CSR and BHR provide a limited and limiting account of corporate agency that cannot provide for a suiting justificatory basis of corporate responsibilities. The challenge of the investment regime has been unsatisfactorily answered by political philosophy and the CSR/BHR discourses. In effect, chapter 4 has shown global justice theory to be reticent to allowing non-‐institutional elements into justice-‐considerations and the corporate responsibility-‐models refrain from articulating corporate agency within its institutional context. Hereby 2 parallel research tracks have seemingly emerged on a shared theme that never transgresses each other’s disciplinary boundaries. The grey area between ‘interactional’ and institutional normative analysis is thereby left open. 16 A successful account of corporate responsibility needs to bridge this gap. Chapter 6 provides for such an account by analyzing the justificatory basis for institutional corporate responsibilities and subsequently outlining the contours of a model that can successfully translate the reasonable expectations upon corporate agents that follow. In as much, this chapter sets out the basis for an institutional understanding of corporate responsibilities as underwritten by the justice-‐generative relation of reciprocity in investment. These necessary elements are brought together under the Basic Structure Model (BSM). The chapter starts off with a discussion of 3 recent justificatory accounts that ground corporate responsibilities in the context of burdened societies. These accounts are presented to inform and contrast with an 16 Pogge (2002) introduces the notion of the ‘interactional’ to denote the opposite of the institutional in his account of human rights. Interactional accounts deal with the actions of agents (contracting would be a good example) and not with the underpinnings of the institution of these actions (such as those of the contract).
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eye on proposing a novel model. All three accounts provide a justificatory account but none of the specified grounds turn out to be satisfactory nor do they translate into a reasonable model for responsibility ascription. The claim subsequently developed is that a satisfactory account of corporate responsibilities needs to be justified in terms of reasonably fair reciprocity, thereby premising moral claims upon the institutional relations under which the corporate agent stands vis-‐à-‐vis the state. Utilizing the concept of ‘overlapping practices’ of PDA, a justificatory account is provided that interprets the distributed public powers of corporate agents as the premise upon which reasonable responsibilities – based on substantive scope and relational balance within the context of burdened societies – can be formulated. A convincing model of corporate responsibilities accounts for, on the one hand, the corporations’ constitutive role in practices and needs to secure a form of background justice within these practices as a demand of reciprocity, on the other hands. Yet, the picture is complicated by the fact that a model of corporate responsibilities needs to provide for adequate space for the legitimate exercise of corporate economic agency and the still necessary position of the state as a crucial political ‘hub’ within an ever-‐increasing transnational context to ensure democratic legitimacy and its instrumental role in development. The BSM will not only be solidly morally grounded but will also lead to a reorientation in the specification of particular corporate responsibilities with regards to poverty issues under burdened societal conditions: Corporate responsibilities need be articulated so as to functionally (either by improving or substituting) contribute to the enhancement of the basic institutions of a burdened society, as a complimentary agent of justice. Where this sets corporate responsibilities mostly at the level of distribution instead of re-‐distribution, it stipulates responsibilities to be integrated as constraints upon the economic agency of corporations. 1.5. Limitations This thesis certainly has its limitations but the hope is that the success of the specific argument developed makes up for what is not or is not sufficiently explored. Before turning to the substantive chapters of the thesis, in this last section, a number of important limitations will be given so as to forego false hope and misaligned interpretations.
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First, while ultimately the argument is developed from a perspective of global justice theory, i.e. this is the discipline in which the argument operates, within the thesis no attempt is made to construct anything resembling a full-‐scale theory. The contribution that I want to make to the field is more limited although not less fundamental. As outlined under the project description, the main philosophical debate of the last decade on the scope of justice is barely touched upon, nor is there an attempt to articulate a normative deductive account that necessarily is the judge of all things fully just or unjust – as it stands it is also unclear what such deductive account would look like as it needs to decide on the position of the corporate agent tout court within an enormously complex globalized order. This thesis remains content with providing a model that should be able to provide general guidance for actual corporate managers to review their approaches to corporate responsibility from a moral perspective, and to steer CSR and BHR initiatives into a direction that stresses the integrative nature of corporate agency and society. Secondly, although an understanding of what constitutes poverty is crucial in its own right and is instrumental to any full-‐scale account concerning poverty abatement, no in-‐depth reflection on poverty is to be expected here. Firstly, it has been quite the trend in the global justice debate to widely cite poverty numbers. In other words, these numbers are well known by now.17 Secondly, since I speak of extreme and endemic forms of poverty, I believe it is satisfactory clear that this poverty is not equal to relative poverty in the developed world. I also do not contend to provide for a ‘plan to eradicate poverty,’ although the hope is that the argument presented here can further and improve the inclusion of corporate agents in structural approaches to development. The core exercise is to provide normative precision in what are reasonable expectations in terms of the responsibilities corporate agents hold. The contribution is thus theoretical in nature. It should also be noted that mere limited, instrumental usage is made of the account of the investment regime. In other words, our account of this regime plays a strategic role in articulating the grounds upon which normative analysis of corporate agents ought to take place. There is thus no in-‐depth analysis of the fine-‐grain of legal argumentation nor are normative claims ventilated on possible far-‐reaching causal relations between the investment regime and poverty. There is no need for 17 What story lies behind these numbers is of course crucial to the understanding of global justice as such but goes far beyond the reach of this thesis.
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such claims as this thesis understands harm not solely in terms of wrongdoings but, more pertinently descriptive of global relations, as ‘taking advantage, which might on the one hand reduce the weightiness of a normative demand but also allows for less controversial assessments of injustice structures. Although the investment regime is taken as the core of the practice that triggers the justice-‐considerations a full-‐blown account of justice pertaining to its structures and impacts should not be expected. Such an account would also need to further develop the relation between the protective regime of investment and other more indirect factors influencing the impact of the regime – though we do not steer fully clear from commentary on IMF structural conditioning for instance as integrally important to the development of the regime. Concerning the idea of corporate responsibility, it should also be clear that the argument presented here does not engage with all (potentially) relevant normative questions on corporate agency. The famous question of whether corporations can actually be bearers of moral duties, i.e. whether they are ‘capable’ as a question of the meta-‐ethical notion of intentionality of a constituted legal personality, is not under consideration here. While the question is interesting in its own right it has little value for practical discourse in which we understand states, corporations, NGOs and so on to be able to bear responsibilities (French 1984; Erskine 2001) have provided convincing accounts on based in the notion of collective responsibilities, understanding corporations as relevantly collective moral agents based on a set of rational criteria that spell out the potential of exercising such agency. Lastly, a note is in place on the type of issue pertaining to corporate agent this study is interested in. The interpretation of the corporation as a budding source of political power cannot be dealt with. Even though a complete understanding of corporate responsibilities will need both an understanding of corporate economic as well as (direct) political power, this thesis focuses only on the former. The research agenda of ‘Political CSR’ driven mainly by the work of Palazzo and Scherer (2008 and 2011) has become an important contribution to understanding the accountability problems facing the new found role of corporate agents, proposing a deliberative democratic inclusion to ensure legitimacy. 18 As they summarize this perspective on CSR, “political CSR 18 While commencing her research from a different angle, namely democracy beyond borders, T. Macdonald’s (2008a) work has many commonalities with the study of ‘Political CSR.’
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suggests an extended model of governance with business firms contributing to global regulation and providing public goods. It goes beyond the instrumental view on politics in order to develop a new understanding of global politics where private actors such as corporations and civil society organizations play an active role in the democratic regulation and control of market transactions (Scherer and Palazzo 2011, 901). Lastly, in line with the Rawlsian’ inspiration of normative philosophy as articulating a ‘reflective equilibrium,’ i.e. a developed theoretical account to inform our moral intuitions, the account provided in terms of the Basic Structure Model is not to be expected to provide radical new insights. This is not so much a limitation to this thesis as much as it is a stricture of what it means to improve moral debate in society. This comment develops into a next one pertaining to the ‘problem’ based approach supported in this thesis. Again, readers that take this approach to imply that the account given here actually provides on-‐the-‐ground solutions will be disappointed. There is certainly a limit to what philosophy can provide here. Although I will try to provide for some direction at the end of thesis on how the argument could impact more specific thinking on poverty abatement, I accept that the issues encountered in practice are by definition complex, ‘dirty,’ and political and therefore not directly a question of theoretical expertise. Philosophy has its own peculiar place in research.
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Chapter 2 Investment Law, Justice and Corporate Public Power 2.1. Introduction As corporate responsibilities towards the poor are considered to depend on their role within relevant practices and the position (of power) they hold towards states, there is a need to articulate the practices constitutive of corporate agency. The investment regime is a promising candidate to analyze the institutional building blocks of corporate agency. This chapter explores 2 interwoven paths into the investment regime. Firstly, it sets out to establish the regime as triggering justificatory demands, i.e. whether investment law is a subject of justice. Secondly, it outlines the constitutive role of the investment regime in determining the agency of corporations. If both can be established as reasonable inroads to further normative inquiry, this chapter is successful in setting a stepping-‐stone to articulate the implications of the function of ‘corporate public power.’ The account given in this chapter will largely be of an empirical-‐interpretative nature, outlining the formal and informal qualities of the investment regime as a recently emerged form of global governance. This Chapter wants to particularly draw out its impact on the balance of power between corporate and state agency in order to articulate the transnational legal-‐institutional grounding of the powers of the corporate agent – the ground on which its responsibilities will be ascribed – and the limitations it generates on host state’s regulatory policy. Before the investment regime is unpacked as a high-‐impact system of global governance, two theoretical notes are provided as lenses to the interpretative 29
reading of the investment regime. The thesis wants to capture the regime as establishing a practice that evidently passes the threshold of structured and continuous social interaction as to require justice-‐considerations. Articulating the network of investment related measures as a regime built on a type of serial multilateralism (Salacuse 2010) provides for such understanding. Consequently the interpretative lens of the constitutionalization of investor’ rights (Schneiderman 2008) is utilized to draw out the balancing exercises between state and corporate agency. A range of BIT provisions and arbitral rulings based on these will be reviewed. The last two sections provide an integration of these two results by stressing both the direct effects of balancing (the corporate ‘free space’ of liberalized markets) and the indirect effect thereof, i.e. the chilling effect of the regime on the regulatory agency of the state and its dependence on corporate agency. This will allow for an initial grasp of the emergence of the ‘publicness’ of corporate agency. 2.2. Two Points on the Theoretical Framework 2.2.1. Introducing the investment regime into political theory
As a methodological approach to justice theory (Banai, Ronzoni and Schemmel 2011), PDA builds from Rawls’ idea of the practice-‐dependence of principles of justice. To have traction on practical issues namely, a theory of justice needs to disentangle the ‘justice-‐generating’ relations that color a practice. This implies that a conception of the grounds of justice, or an understanding of “what is the characteristic in virtue of which [practices] create obligations of justice and greater normative demands than humanitarianism” (J. Cohen & Sabel 2006, 163) provide the basis of any informed theory. In this thesis we take reciprocity, the “expression of an idea of fair terms of cooperation” (Rawls 2005, 50; 2001, 6) to provide the grounds for questions of justification to emerge. Establishing, however, how and in what sense such reciprocal relations uphold and what implications ought to be derived from these formal relations, is as much an issue of empirical/interpretative work (James 2005a; Sangiovanni 2007) as a conceptual endeavor. Importantly this reading of a practice-‐informed approach to justice implies that, from a methodological point of view, our conceptual maps are not to be pre-‐defined from within a specific
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context (such as that of the state) by certain substantive claims that uphold in that context.19 Applying the empirical/interpretative methodology of PDA, it should become clear that the investment regime, unique as it may be in its set-‐up, has joined the ranks of transnational practices that meet a certain ‘threshold’ of ‘density of interaction’ (Julius 2006; Abizadeh 2007). As such, it is a reciprocal, cooperative venture, coercively implemented (or at least with coercive consequences), and with arguably (since the mid-‐1990’s) extensive impact on the life-‐chances of people in the developing world.20 The argument in favor of such a perspective on the investment regime will turn out to be evident but of consequence. Establishing the regime as a subject of justification makes that an uncommon actor enters the purview of justice theory. The regime namely has a unique characteristic in that it enables a third party beneficiary: the corporate agent. The extent of the benefits and the implications hereof will be sketched throughout the thesis. A crucial point in this regard should be specified. The corporate agent cannot be understood as some “transhistorical entity from which moral rights and responsibilities can be derived” (DeWinter 2001, 115). The opposite is true, it is the resultant of socio-‐historic relations “through which the boundaries of an actor as a moral entity are drawn and justified” (DeWinter 2001, 100). The investor rights’ regime, in an obvious sense, qualifies as a relevant case study in such socio-‐historic relations. Understanding what the (temporary) end-‐point is of this constitutive process will allow us to discriminate the practice-‐based role of the corporate agent and understand its position towards the state. Lastly, no justice theorist, even those of a cosmopolitan creed, will deny the importance of the definition and enforcement of property rights as a core characteristic of at least the ‘peculiarity’ of the state (M. Risse, 2006). The investment regime both mirrors the state in this function and limits it in its own exercise thereof.
19 See for instance (Nagel 2005). Nagel tries to define the concept of justice in such a way that it can only apply to the state (or potentially a world state): unmediated self-rule and coercion are set as the defining elements of the concept of justice. I follow (Banai, Ronzoni and Schemmel 2011) in formulating the research of practices along methodological and not substantive lines. 20 Reciprocity, cooperative venture, coercion, and extensive impact – these four categories constitute the basic relational grounds of justice all theories adhere to (although under different restrictions).
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2.2.2. The Constitutive Role of Law
The analysis of the investment regime plays an instrumental role in this thesis in the sense that it premises a specific argument on corporate responsibilities that premises itself on the relevant moral agency of corporations as a (social) construct (DeWinter 2001). The challenge here is to show how this regime introduces the corporate agent besides the contracting states as a third actor on stage within a justice-‐generative practice. An interpretative framework that reads the evolution of investment law as a process of constitutionalization (Schneiderman 2008) is employed to draw out this specific but crucial effect of the investment regime. To clarify the intended use of constitutionalization, he notion is not to be understood in a descriptive sense that a global constitution (at least on investment) is on its way,21 nor in the normative sense of the emergence of a constitution-‐type rule of law-‐enhancement (Dupuy, Francioni, and Petersmann 2009). I use the concept in a functional manner, as a lens through which to understand the functions and (non) intended effects of the emerging investor rights’ regime. It describes the emergence of internationally defined and elaborated rights and freedoms of investors that are largely immune from the host country’s legislative and regulatory sphere in a manner familiar from constitutional provisions. Constitutionalization then is “a prism through which one can observe a landscape in a certain way […] an intellectual construct by which one can assign meaning to […] that which is observed” (Weiler 1999, 223). In our specific case, the process of constitutionalization allows for a crucial shift in understanding the role of law as a constitutive22 force instead of a mere reactive force, a corrective functioning within a logic of justice-‐provision; evaluative space is opened up to consider its ‘constitutive’ and potentially detrimental character: the way it locks-‐in, generates and reshapes agency and inter-‐agent relations. The notion of constitutionalization thus marks out the constitutive role of investment law in reshaping the notion of corporate agency and its concomitant powers. Such understanding of law is oddly enough rarely
21 There is of course overlap but as will become clear constitutionalizing processes are under the understanding provided here not opposite legal fragmentation. The notion of constitutionalization is thus not meant to contribute to the constitutionalism versus legal fragmentation debate (Koskenniemi 2007; Teubner and Fischer-Lescano 2004). 22 ‘Constitutive’ should not be confused with ‘constitutionalization.’ The latter is an interpretative lens through which a process is described under which corporate agents gain important rights and freedoms. The notion ‘constitutive,’ on the other hand, describes the function of law. The relation between the two in the account presented here is obvious: Through the process of constitutionalization law constitutes corporate public power.
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conceived, certainly in debates on the forces of globalization and the normative evaluations thereof as under global justice theory. Rob Howse has argued that the omission of the constitutive role of law in globalization “reflects the general assumption […] that law’s role is to react to globalization as a given force, and that law has not itself been an element in that force” (Howse 2008, 1529). 23 To Howse such a blind spot in the analysis of globalization leads to overly optimistic policy precepts. He exemplifies his warning by commenting on Bhagwati’s (2007) mistaken proposal to ensure globalization with a human face through the use of safeguards to check (trade) liberalization. Bhagwati’s appeal to Article XIX under GATT, 24 Howse notes, cannot provide any such safeguard: It has been highly restrictively interpreted by the Appellate Body and in effect is not applicable to domestic policy but to ‘border-‐issues’ such as tariffs only. Even worse, instruments such as the General Agreement on Trade in Services (GATS) offer no safeguards provisions whatsoever since these were not desired by the dominant states.25 In another, co-‐authored article (Howse and Teitel 2010), Howse applies the same type of argument to Pogge’s position concerning the international resource and borrowing privileges of governments, underwritten by the principle of ‘might is right.’ To Pogge, these privileges play an important role within the underlying global institutional arrangements that generate extreme poverty in developing countries, as they incentivize rogue regimes to cling on to power by all means necessary and incentivize rebel groups to attempt a coup d’état. This remains so as long as the legality of power in the international regime is dependent on de facto power only and not the legitimacy thereof. Pogge seeks to curtail these principles by implementing a human rights-‐based evaluation of the legitimacy of institutions. Importantly however such a proposal needs to fulfill his own stipulated conditions (Pogge 2002) to be considered a successful normative alternative. He thus claims such curtailing of the privileges concerns a minor, feasible and foreseeably positive 23 Howse sees Habermas as providing an exemplary definition: “By ‘globalization’ is meant the cumulative processes of a worldwide expansion of trade and production, commodity and financial markets, fashions, the media and computer programs, news and communications networks, transportation systems and flows of migration, the risks generated by large-scale technology, environmental damage and epidemics, as well as organized crime and terrorism” (Habermas 2006, 175). 24 Article
XIX
articulates
emergency
conditions
following
unforeseen
effects
of
trade
openness.
See:
http://www.wto.org/english/res_e/booksp_e/analytic_index_e/gatt1994_07_e.htm 25 The GATS did hold a promise “to negotiate such safeguards, but the United States and other developed countries strongly resisted the advancement of such negotiations and the deadline in question has long been exceeded” (Howse, 2008, 1538),.
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correction to the current global legal order. Howse and Teitel however, reminiscent of Howse’s argument against Bhagwati, claim that once the argument is lifted out of circumscribed context of international economic law and placed into the wider context of international law, the proposed changes are instead far from minor. In effect, the proposal runs counter to potentially the most fundamental article of faith of international law: Pacta sunct servanda. In other words, here and in the former example, law’s constitutive role bites. These reflections are directly relevant to this thesis. Investment law too implies limitations to the utopia’s we seek. The notion of the constitutive role of law is in this context important for two reasons. Firstly, and critically, it brings the attention back to those constitutive moments of contingent yet defining ideology and power-‐infused changes in the evolution of the current order and undermines the idea of the ‘necessary’ or ‘neutral’ character thereof. The ‘law-‐as-‐reactive’ picture blurs our vision to this evolutionary process within which law comes to be what it is since it reads law as a necessitated answer to external challenges. The ‘law-‐ as-‐constitutive’ picture on the other hand reflects on exactly the ideological and power-‐based constellations enabling a regime to emerge in its specific way. Legitimacy issues emerge and realistic limitations to normative utopias become apparent. These topics will be addressed in Chapter 3. Secondly, the ‘constitutive’ understanding of law opens up to the constitutive basis of the relevantly influenced agencies, and their relations – here corporate agency in relation to state agency. Understanding the constitutive effect of investment law on corporations it becomes clear that corporate power is not merely economic or even political in the sense of a) fulfilling public functions (Scherer & Palazzo, 2011) and b) applying economic power for lobbying an standard setting (Bohman 2007; Benhabib 2007); it is also in a crucial sense ‘legal-‐institutional,’ i.e. set in the legal-‐institutional arrangements of the global order. The “freezing of strategic policy choices based on debatable interpretations of reality into legal norms” (Howse 2008, 1550) has as such created a ‘neutral’ and at face value ‘legitimate’ new reality of a balance of power between corporate and state agency. Law, investment law, generates and constitutes social realities exactly at the point of intersection between systems of economics and politics, enabling and constraining
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corporate agency within international and national institutional orders.26 This is a basic premise to the thesis at hand, which will play an instrumental role in arguing for corporate duties of justice to poverty abatement. The concept of constitutionalization grasps the interchange between economic ideology, legal implementation and ‘neutralization,’ as well as the delineation of future possibilities within and through the investment regime. I will argue that corporate agency ought to be ascribed a ‘public’ character as a result of those constitutive processes of investment law. This chapter shows how an investors’ rights regime has developed that supports far-‐reaching powers of corporations while curtailing state regulatory powers over corporations and public policy, establishing a first ground for the consideration of corporations as public powers. 2.3. The Regime of International Investment as a Subject of Justice The basic idea behind the investment regime is relatively clear-‐cut, namely, the protection of investment particularly to forestall the so-‐called “obsolescence bargain” (Vernon 1971, 46). This protective function instrumentally connects to a second basic notion of the regime: development. Investment protection ought to trigger increased investment flows into, and consequently economic growth for, developing countries. The regime thus offers a reciprocal form of (mutual) cooperation; in exchange for external limitation onto sovereign control to protect investments, the influx of investment and thereby growth is promised. While this investment relation has taken the proportions of a full-‐fledged (quasi)-‐global regime international ethics has not yet subjected it to any form of analysis. 2.3.1 argues that it ought to be, while section 2.3.2 shows the unique type of regime that investment generates.
26 The focus on the linkage of these three ‘systems’ should make clear that I do not want to focus on the quantitative question of globalization (is the world more globalized today than at, for instance, the start of the 20th century) (see the contributions of Hirst and Thompson (2001)). The focus is more specifically on the type of constellation that emerges from the interplay of the different logics of economics, politics and law. The interplay creates a unique constellation and it is therefore (for qualitative reasons) that today’s world is different from the one of the early 20th century.
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2.3.1. Relevance I: Scope and Depth
The lack of philosophical interest so far might be the result of the regimes’ less than common structure but also the fact that even within the field of international law itself it was long seen as an ‘exotic’ subject at the fringes of international law.27 This is unfortunate if only for the fact that the regime challenges certain assumptions of theories of justice beyond borders. To use it as an argumentative tool within justice debates, however, the regime28 needs to be ‘qualified’ as a relevant subject for justification. There is a burden of proof here since the regime in essence consists of voluntarily signed bilateral treaties.29 Such a qualification would however heavily downplay the evolution of the regime over the last 2 decades and the importance of the active role of the corporate investor. The relations of the corporation towards the host state, by now, cannot anymore be qualified as ‘mere economic’ (Nagel 2005). Instead these interactions are mediated by a (well-‐developed) legal-‐ institutional framework of investment law, which effectively (re)distributes power from host state to corporate agent. As such, it has arguably an even more in-‐depth impact on state governance and the status of the poor than any other regime.
The numbers show the underlying development from fringe exoticism to a
fully-‐fledged sub-‐field of international law. Today, the BITs landscape is elaborate as the World Investment Report (WIR) of 2012 notes: “By the end of 2011, the overall IIA universe consisted of 3.164 agreements, which included 2.833 BITs and 331 27 The International Law Commission’s 2006 Fragmentation Report headed by Koskenniemi still qualifies international investment law as exotic and highly specialized, in contrast to for instance human rights law (UN Doc A/CN.4/L.682). 28 Stephen Krasner (1982) coined the concept of ‘regime’ within the field of international relations theory to unpack the organization of global governance. My usage in relation to the investment regime is based on, though in no sense necessarily equal to, Jeswald Salacuse work (2010). The latter makes a convincing case as to why international investment can be considered a regime, and as to why that concept better grabs the workings of the investment realm than notions like ‘system’ or ‘network.’ The main intent of using this concept (more loosely potentially than the other authors) is to specify the scope and depth of the impact of the international and transnational legal-institutional framework of international investment. In general terms, a regime refers to the principles, norms, rules and decision-making procedures on which participants converge, and which constrain and regulate their behavior. 29 Investment by foreign corporations into a host state is regulated by contract, domestic legislation and IIAs. Where all three are of importance, the focus here is on BITs since they most clearly exemplify the shifting of global power structures between public and private agents. However, the recent wave of neoliberal market ideology did directly effect domestic legislation as well. As the UNCTAD recounts each year in its WIR, domestic legal innovation, by far and large pro-liberalization, is on a continuum – with national laws oftentimes extensively amended before investment treaties are signed. Still, while economic effects of contractual litigation can be of greater impact, contractual arbitration remains within the private sphere since governments stand as private party in the contractual arrangement. BITs are qualitatively different in the fact that they apply to government in its public, regulatory function. In the analysis of the regime, we will focus however on 2 aspects relating to contracts: 1) the Umbrella Clause, technically an element of a BIT but used to ‘lift’ a contractual issue into a treaty issue; 2) Stabilization Clauses since these contractual clauses are included to put constraints on the regulatory regime of a host state.
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‘other IIAs’” (UNCTAD 2012b, 84).30 It is only since, what (Vandevelde 2009) calls the emergence of the ‘global era’ that a boom of treaties codifying investor’s rights has begun to take place. As the data on BITs shows, between 1959, when Germany and Pakistan concluded the first BIT, and 1989, when the Soviet Union collapsed, fewer than 400 BITs31 had been concluded. In the next 15 years, between 1990 and 2004, alone 2000 treaties would be concluded, and since then (up until 2011) another 400+ have been added so as to reach the total number of 2.833 BITs (Montt, 2009; Vandevelde 2009; UNCTAD 2010b and 2012b). The yearly numbers have shown a slowdown in IIAs added. In 2011 a ‘mere’ 47 IIAs (33 BITs and 14 other IIAs) were concluded while 2009 still saw a full 102 (82 BITs and 20 other IIAs) added (UNCTAD 2010). This recent decline can have multiple reasons that range from saturation, to contestation (particularly by Latin American countries). Another obvious reason seems to be the push towards regionalization. Under the Lisbon Treaty for instance, foreign investment regulation has become a EU competency meaning that all current European BITs could be annulled – something that will impact the regime as almost half of global FDI outflow and half of the world’s BITs (UNCTAD 2012b) are concluded by EU member states. The ongoing increase in investor-‐state arbitration shows that the fact that relatively fewer IIAs are concluded in no way means that the regime is on its return. It took until as late as 1987 before an investor-‐state arbitral tribunal was set up (AAPL)32 and in the first decade after only 1 or 2 cases per year were registered. Slowly rising to 16 in 2001, a real jump came in the next years –27 in 2002 and 43 in 2003 with a temporary high point in 2004 at 45.33 With a retreating Washington Consensus, arbitration ironically took flight. And while the number of cases dropped to 30 cases in 2008, 2011 has topped 2004 with a total of 46 known arbitrations
30 International Investment Agreements (IIAs) contain besides BITs also Free Trade Agreements (FTAs) with investment chapters. 31 The exact number is 386. But even in those decades one sees a progressive growth: with 75 BITs signed in the 1960s, 92 in the 1970s and 219 in the 1980s (Vandevelde 2009, 15) 32 Agricultural Products Ltd v. The Republic of Sri Lanka, ICSID Case No ARB/87/3. The final award was signed in 1990. 33 Many of these cases directly stemmed from the Argentina crisis of 2001 and the concomitant policy responses by the government that impacted investors (UNCTAD 2010b).
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(UNCTAD 2012b).34 The total count of cases up until January 1 2012 is now up to 450 known commenced arbitrations (ibid).35
The numbers by themselves, however, cannot tell the full story. Given the
growth of the regime, both through the signing of IIAs and of arbitral rulings, slowly the nature of the beast changed too. Thus, once considered an exotic discipline within the field of international law, today the law of international investment is hauled as one of the pillars of contemporary economic globalization. In Stefan Schill’s words, “foreign investment flows and investment treaties have become a truly global phenomenon that is part and parcel of the process of economic globalization” (Schill 2011, 879). More than that, Salacuse (2010) argues that although built-‐up out of separate and distinct international legal instruments together these form a (emerging) global regime of investment: “[I]nternational investment treaties as a group represent a convergence of expectations by states as to how host governments will behave toward investments from other regime members. The norms and rules embodied in investment treaties are intended to constraints and regularize such behavior in order to fulfill those expectations” (Salacuse 2010, 431). Montt (2009), also, speaks of a ‘network’ of treaties effectively establishing an ‘economic constitution’ regulating the economic activities of foreign investors. The investment regime presents thus a unique example of a global governance system that has been constituted through serial multilateralism, instead of ‘one-‐off conference multilateralism (Salacuse 2010) – the latter, ironically, attempted but failed many times.
The uniqueness of the emergent regime of investment is to be found in the
manner in which it is strung together as a serial form of multilateralism. While the regime is largely bilateral and as such only applies to the signatory countries and
34 Whereas the Argentina cases were a reaction to the emergency policies of the government, 2011 high numbers reflect the reactions by investors to Latin-American economic nationalism. Not surprisingly, Venezuela topped the list of respondents with 10 cases started against the government (UNCTAD 2012b). 35 The numbers reflect the known cases. Of the venues for arbitration only the International Center for the Settlement of Disputes (ICSID) publicly registers all cases filed. By far most of the known cases have run through ICSID (279). United Nations Commission on International Trade Law (UNCITRAL) is the second largest with a count of 126 but UNCITRAL does not require a public notification of an initiated case; the number is thus probably an underestimation. The same goes for the 21 cases filed at the Stockholm Chamber of Commerce (SCC), and the 7 cases filed at the International Chamber of Commerce (ICC).. As Peterson states in general on the role and impact of the regime: “[o]ddly, there is no way to know how many claims are filed worldwide against governments, much less the details of such claims and their legal, policy and financial implications.” (2009, 17)
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their investors, many caveats arise: the identity of language between treaties, linkage with the evolution of domestic law and most importantly the ‘networked’ organization of BITs,’ i.e. investors can creatively use BITs not signed by their own home state. A core tool available is the possibility of forum shopping, which refers to the structuring of an investment in such a way that arbitration can be initiated through a third country’s BIT. Thus strategy is used either when the home and host state have no BIT in place or when the BIT of the second country provides more expansive investment protections. Three famous cases that exemplify this instrument of ‘stretching’ the regime are Aquas del Tunari, S.A. v Bolivia,36 Tokios Tokolès v. Ukraine.37 In the first case, the US parent company Bechtel, fearing the effects of local resistance against its privatized water utility, set up a holding company in the Netherlands so as to be entitled to arbitrate under the Dutch BIT with Bolivia. Most telling of the ‘systemic’ part of this story is that “[…] two of the three arbitrators at ICSID seemingly were enthusiastic about Bechtel’s strategy describing BITs as ‘portals’ through which investors from a multitude of countries might choose to make onward investments into the developing world, and thereby enjoy the treaty protection” (Stiglitz 2008, 509, fn 130). Pressure from civil society groups finally lead Bechtel to settle the initial $50 million claim in 2006 for the symbolic amount of 30 cents (Anderson and Glusky 2007). In the case of Tokios a Lithuanian company, for 99% owned by Ukrainian nationals, was allowed to make a claim against the Ukraine under the Lithuanian-‐Ukranian BIT (Peterson 2004) magnifying the troubling understanding of ‘nationality’ in international investment. The Ukranian investors had created a legal entity under Lithuanian law, which they then used to make investments into the Ukraine. Given the fact that the BIT between the two countries allows for a very liberal definition of the nationality of investor, namely, any entity established under Lithuanian law. Tokios did fulfill this minimal criterion. These BITs are in no sense unique. Many countries define ‘investor’ loosely as encompassing any corporate entity. Whether an investor is considered foreign is dependent on the applicable nationality rules of the home state and the more liberal these are the more leeway exists to forum-‐shop, particularly in the combination with a tribunal’s liberal ascription of jurisdiction. By establishing holding companies, 36 Aquas del Tunari, S.A. v. Republic of Bolivia ICSID Case No. ARB/02/3. 37 Tokio Tokeles v. Ukraine ICSID Case No. ARB/02/18.
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subsidiaries or intermediary companies abroad MNCs can launch claims from different parts of their corporate structure, picking and choosing applicable BITs. This makes the existence of a BIT between a home and host state at least to some extent inconsequential. In effect, “it is increasingly commonplace for investors to structure their investments so that they flow through at least one country which has a protective treaty with the intended host state” (Peterson 2009, 18). Even if the home country has a BIT, a different BIT can be used to file a claim when this is in the corporate interest.38 As long as the actual claimant can be declared foreign under some treaty and can establish some threshold level of ownership or control, a claim can be made. To that extent, “the origin of the capital is not relevant to the existence of an investment” (Van Harten 2007, 116). A secondary implication of flexibility in nationality is that host state regulators can hardly track the provenance of foreign ownership in a company, with ownership also often spread among different foreign investors. This leaves governments to assume that “any economic activity in their territory involving substantial capital could lead to an international claim. The foreignness of an investor is neither identifiable nor stable where firms can legally maneuver to alter and expand their nationalities” (Ibid, 116).
A standard contained in all BITs, and familiar from WTO law, provides for yet
another ‘interlinkage’ between bilateral treaties: Most Favored Nation (MFN). This standard in principle bars discrimination between investors of different nationality. Extending all forms of preferential treatment granted to the nationals of one home country to nationals of all home countries. Thus if an investor from Belgium is granted a certain treatment (say a favor on applicable taxes) this favor has to, by provision of MFN, be granted to the investor from, for instance, Spain too39. This ‘leveling’ of the playing field however also means that investors from country A can make a claim on a specific form of treatment by the host country not because of the fact that the applicable BIT contains such treatment but solely because an investor from country B does get afforded such a treatment under its states’ BIT. In
38 A case in point is the Montreal-based Aeroport Development Corporation, which started arbitration under a BIT between Cyprus and Hungary even though Canada and Hungary have a treaty in force. See ADC Affiliate Limited and ADC & ADMC Management Limited v. The Republic of Hungary. ICSID Case No. ARB/03/16. 39 MFN comes in conditional and unconditional form although the latter dominates today. Certain exceptions are the rule however for instance on taxation and on specific obligations through regional integration agreements. These do not generally fall under MFN.
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RosInvestCo v. Russia40 the investor used the MFN clause of the UK-‐Russia BIT to get access to the more generous provisions contained in the Denmark-‐Russia treaty. In Maffezini v. Spain and Siemens AG v. Argentina arbitrators even allowed MFN to apply to procedural provisions of other BITs in their filing, both accepting consequently jurisdiction. 41 The Siemens tribunal went furthest in understanding MFN to allow the claimant to pick and choose the most favorable combination of aspects of provisions, effectively constructing “them into the most desirable collection of procedural and substantive rights in relation to a claim” (Van Harten 2007, 98, fn 17). MFN thus creates strong linkages within the regime.42 While formally set up through mostly bilateral agreements, the ubiquitous spread of IIAs combined with the particular interpretations given to the status of nationality and the provision of MFN makes that we can convincingly speak of a global investment regime the scope, density and pervasiveness of which is beyond doubt. The investment regime thus qualifies as an intriguing prospect for the study of justice beyond borders. 2.3.2. Relevance II: Re-‐balancing powers The balance between state and corporate agent, much simplified, depends on the 2 main pillars of the regime: treaty-‐based substantive investment protection-‐ provisions and a procedural mechanism under which investors can claim their distributed rights in case of a (what they perceive as a) breach. It is through the interaction of both pillars over time that corporate agents have stabilized a set of powers vis-‐à-‐vis the host state. This process is captured here under the notion of 40 RosInvestCo UK Ltd v. The Russian Federation, Arbitration Institute of the Stockholm Chamber of Commerce, Case No. Arbtration V 0 79/2005. 41 Emilio Augustin Maffezini v. The Kingdom of Spain (2000), ICSID Case No. ARB/97/7 (Decision on Jurisdiction). Siemens AG v. The Argentine Republic (2004), ICSID Case No. ARB/02/8 (Decision on Jurisdiction; Final Award 2007). For Maffezini see par. 40-42 for the arguments of claimant and defendant and par 64 for the tribunals’ judgment. For the Siemens judgment, see par 116 for Siemens claim that the use of MFN to access more favorable treatment under a provision from another applicable BIT does not imply that the whole BIT would apply. In par 120 and 135 the tribunal supports Siemens AGs contention. 42 The application of MFN is however not uncontested, especially with respect to procedural standards. Muchlinski states that “[d]espite recent arbitral decisions, it remains uncertain how far the MFN standard can allow a claim that more favorable treatment, accorded by a host contracting party to nationals of a home contracting country under another IIA […] must extend to nationals of the home contracting country under the IIA pertaining to the claimant […]” (Muchlinski 2009, 53). The Tecmed tribunal (Tecnicas Medioambienrales Tecmed, S.A. v. United Mexican States, ICSID Case No. ARB (AF)/00/2), for instance, drawing a comparison to Maffezini declined the application of MFN to procedural provisions. As the Introductory Note to the award notes however this was for the fact that the treaty did not allow for retroactive application of the MFN provision, not a categorical denial of MFN in like cases.
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constitutionalization. Analysis of these two sides of investment law will also deepen our understanding of the make-‐up of the regime. The substantive provisions, often written in a constitution-‐like broad and open-‐ended manner, set out to discipline the host states regulatory and policing tools with respect to foreign investment (at least after entrance) 43 either in an absolute manner (prohibiting demands of local performance requirements) or in a relative manner (prescribing National Treatment (NT) to foreign investment). Procedural prescriptions are included prescribing the steps an investor can take in case the host does not live up to the stipulated provisions. The broadness of treaty language makes the provisions under-‐defined enough so as to capture general regulatory activity not aimed at the investor, allowing for a wide scope of administrative, legislative and juridical actions of the host state to potentially fall under the scope of the treaty. BITs show a high resemblance in terms of their structure and content since most BITs have been construed on the basis of Model BITs created by capital-‐exporting countries, and developed by a select community of lawyers and scholars. Besides the open-‐ended language, “investment treaties rarely expressly state the specific consequences to a host country of its failure to grant a protected investment the promised treaty” (Salacuse 2010, 445-‐6). Here the arbitral tribunal steps in. In case of a breach of a treaty-‐provision, an investor can file a claim directly (under international law!), meaning without deference to the home state, under the ICSID-‐rules or the rules of comparable and recognized arbitration mechanisms such as those of the United Nations Commission on International Trade Law (UNCITRAL), and the those of the Stockholm Chamber of Commerce (SCC). These arbitration mechanisms ascribe regulatory disputes between investor and state to an ad hoc established (private) tribunal that is procedurally equal to commercial arbitration. Both parties select one arbitrator, while the third – the president – is chosen by both or suggested by the President of the International Center for Settlement of Investment Disputes (ICSID), i.e. the World Bank president. Subsequently the arbitrators decide on jurisdiction and finally, after a long a costly process, write up their judgment, potentially awarding remuneration for damages suffered. The potential awards granted to investors are binding and enforceable in all (currently) 43 The application of the substantive standards of IIAs depends on the treaty at hand. The US and Canadian model BITs do provide for pre-investment application of for instance MFN, European capital exporters do not in general provide for this option.
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146 countries that have signed the New York Convention44 and are largely insulated from domestic judicial review. Except for issues of jurisdiction or gross procedural mistakes, an award will stand. Arbitration under the investment regime is revolutionary as consent to arbitration is prospectively accorded to investors. Hereby they can file arbitral claims effectively anytime they feel wrongfully treated. Paulsson (1995) famously captures this dramatic shift with his notion of ‘arbitration without privity,’ i.e. the possibility to engage in arbitration by an investor on the basis of a legal relationship (the treaty) of which the investor is not part. Van Harten (2007), subsequently qualified Paulson’s insight since ‘privity,’ the legal relation, is not fully inexistent (there is an agreement to arbitrate). The shift then is in the state’s general consent to arbitration. Such general consent “authorizes the arbitration of any future dispute concerning the state’s exercise of public authority in relation to foreign investors, at the option of the investor” (Van Harten 2007, 24-‐5). This marks a clear-‐cut break from earlier forms of specific consent, which had no reach beyond the contracting parties. As again Van Harten clarifies “[b]y consenting generally to investment treaty arbitration, the state submits itself to a particular mechanism for controlling its own regulatory conduct” (Ibid, 65). As such investment arbitration “transforms from a subcategory of commercial arbitration, based on a reciprocal legal relationship between the disputing parties, into a governing arrangement” (Ibid, 25) that breaks down “the reciprocity between rights and duties [of the parties] in the adjudication of regulatory disputes between the state and individuals” (Ibid, 106). In light of this shift in character, Van Harten argued in his groundbreaking study that investment arbitration should be seen as “a mechanism of adjudicative review in public law” (Ibid, 45), effectively disciplining state sovereignty (Cotula 2011). This perspective provides for an interpretative lens45 that magnifies how the investment regime challenges the basic public/private distinction upheld in international law. Providing direct access to international arbitration, the investment law enables corporations to review and control the behavior of states while tribunals, 44 Commonly referred to by the place where it was signed in 1958 the full name reads ‘United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards.’ 45 I speak of an ‘interpretative lens’ since the field of investment law has traditionally been divided up into epistemic communities. Van Harten positions his approach as international public law against private commercial law, public law and public international law as interpretative frames. This thesis does not concern itself with the debate (to the extent all positions are still upheld). For our purposes it is most important to draw out specific impacts of the regime, namely, those concerning the relation between state and corporation. Van Harten’s perspective is most suitable to do this.
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through dispute resolution develop the system of broadly formulated standards and provisions. In addition, without stare decisis to arbitral decision-‐making, and with investment law still interpreted by some as lex specialis, BITs arbitration allows for a relatively self-‐standing interpretation of these standards. Therefore, arbitral interpretation has been the core mechanism through which standards acquire meaning and reality, effectively placing them in the business of norm elaboration and (more contentiously) even norm creation. But if that is so, the role of corporations as the initiators of the legal claims and thus primary interpreters of fact situations becomes also crucial to the development of the norms. To continue down this interpretative path, the investment regime as an international mechanism of adjudication separates itself as a tool of global governance by specifically concerning itself with state liability, i.e. the disciplining of public authority. For this strong functional equivalence then between international investment law and domestic public law “to enshrine rights of private [corporate] actors and thereby to restrict government action” (Schill 2011, 896) investment arbitration should be considered a form of international public law instead of public international law (Van Harten 2007; Schneiderman 2008). As a process, the notion of constitutionalization of investor’ rights captures well the regimes ‘carving out’ of a space for corporate agency outside of the (democratic) control of the state. Tribunals play a crucial role in this evolution. Ruling on the basis of broadly, almost constitution-‐like, provisions, arbitrators have to make sense of the ‘fact-‐ situations in “the absence of legal definitions in the relevant treaties” (Montt 2009, 149). This has lead to the claim that the regime “delegate[s] jurisdiction of constitutional character to arbitral tribunals” but at a cost that “constitutional adjudication no longer resides exclusively in domestic supreme or constitutional court” (Ibid, 12). The adjudicative power of arbitral tribunals to an extent reach beyond that of constitutional adjudication since they “can and do adopt treaty interpretations which democratic institutions cannot control and overturn by proper amendment […]” (Ibid, 138) and they can potentially even “trump domestic constitutional law within the state’s own territory” (Ibid, 12). While this extensive democracy-‐undermining nature of the regime is problematic in its own right (and has been a main object of concern (Scheiderman’s thesis is the most well-‐known)), what is routinely forgotten in legal debate is that de
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facto the corporate agent is the operative cog in the disciplining machinery. Where the investment regime provides for arbitration as ‘a mechanism of adjudicative review in public law’ it is the corporate agent that fulfills the role of private attorney general (Franck 2005a). And in that position it can effectively operate as a (brass) ‘norm entrepreneur’ as it has “the discretion to make arguments in its own interest, unburdened by considerations of the home state’s wider interest or by the prospect of having to defend a similar claim” (Van Harten 2007, 86). The contention thus is that a tangible, institutional fabric that interpenetrates and undermines the (developing) states’ capacity for policy development within its own borders concurrently empowers the corporate agent. It is on this basis that corporate agency will be understood to having a ‘public’ character. 2.4. ‘Enshrining Rights’: The Practice of Investment Arbitration
With the breadth of the regime established, we turn to the ‘institutional fabric’ of the regime to draw out more concretely how corporate agents are empowered. In other words, the following ought to give content to the question ‘on what basis are the corporate agent’s interpretative powers premised?’ The notion of constitutionalization of investor rights reflecting the double process of substantive and procedural innovations producing a transnational regime for the protection and promotion of foreign investment provides the lens under which a rebalancing between state and corporate agent emerges through the concrete standards of international investment. In the following subsections a selection of core provisions of the investment regime are highlighted to color-‐in the above systemic account, while at the same time providing for investment law’s constitutive role in forming corporate ‘public’ agency. 2.4.1. The Scope of Investment/Property In the example of corporate nationality it became clear that nationality has received a wide and somewhat counter-‐intuitive definition. The definition of investment, i.e. what constitutes an investment, is the other basic element that sets the terms of application of an IIA. Here too, a very broad interpretation is favored, creating a range of difficulties for host state regulatory activity. Once again, the role of the regime to articulate property rights and their regulation within sovereign host states
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is crucial with respect to the oftentimes unquestioned ascription of the function of defining and enforcing these rights the state.
Given the aim of the investment regime, expectedly economic interests as
rights in property are in the forefront of all treaties. However, what is protected as being ‘owned’ as property of an investor and who can claim to be an investor has become almost without limit. The concept of investment includes (in)tangible property, shares, bonds and other interest in companies, right to money or in effect any activity that creates economic value, intellectual property rights, goodwill and know-‐how, rights granted in law or contract, including concessionary rights. As a consequence a wide range of state activity affecting foreign owned investment fall under potential arbitral scrutiny as at least one of the above forms of investments is probably impacted. As an example of this broad reach, Argentina faced claims filed by minority shareholders who were merely indirectly impacted in CMS46, Azurix47, Siemens, and GAMI48. The CMS Annulment Committee49 for instance “confirmed that, where a treaty’s definition of ‘investment’ includes equity, stock or shares in a company, a minority shareholder has a direct right of action against the host state that can be asserted independently from the rights of the company itself” (Bernasconi-‐ Osterwalder and Johnson 2010). Another example concerns S.D. Meyer 50 where compensation was awarded for lost ‘business opportunities,’ which included “the value of the lost and delayed net income streams […]” (Stiglitz 2008, 510). This ‘principle of compensation for value loss’ allows for claims that are mired in the opacity of future projections, allowing for investors to produce high estimate losses – potentially a reason behind the gap between what investors claim and what is awarded as compensation by tribunals.51 The scope of what makes up investment however is not unlimited and many ICSID tribunals have curtailed it through a requirement of economic contribution, risk-‐taking and the existence of a controlling interest. To the extent possible, 46 CMS Gas Transmission Company v. Argentine Republic (2005), ICSID Case No. ARB/01/8. 47 Azurix Corp. v. Argentine Republic (2006), ICSID Case No. ARB/01/12. 48 GAMI Investments Inc v. Government of the United Mexican States (2004), UNCITRAL. 49 CMS Gas Transmission Company v. Argentine Republic (2007), ICSID Case No. ARB/01/8 (Decision of the Ad Hoc Committee on the Application for Annulment of the Argentine Republic). 50 S.D. Myers Inc. v. Government of Canada (2002), UNCITRAL. 51 Susan Franck’s important contributions to the debate on investor bias in treaty adjudication make much out of this gap to debunk bias-claims. The gap however is not obviously interpreted along these lines for among others the mentioned reason.
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portfolio investment is still distinguished from FDI, and would not find coverage under treaty law (Sornarajah 2010). Investment protection under the WTO treaty, through TRIMS and GATS, holds a more limited definition of investment. While TRIMS connects its definition, expectedly, directly to those investments related to trade (which could in practice still amount to rather broad considerations), GATS uses a bottom-‐up, positive list approach that requires express consent of the state to open up sectors and modes of supply to its standards in order to enable for the safeguarding infant industries. BITs on the other hand, however, rely on negative lists, i.e. all sectors fall under the treaty except those explicitly excluded. This approach has shown itself to favor the stronger party. While there thus is some retraction in tribunal decisions, the point remains: in investment law property rights are expansive, including in principle all rights that can be evaluated in financial or economic terms, turning the idea that property under investment law has a tangible basis obsolete. Besides the scope also the force of property triggers concern. As Sornarajah (2003) argues, a (rudimentary) Lockean, neoliberal, conception of property rights, the protection whereof trumps its social function of ensuring public good, has permeated the investment regime. Thus, any infringement into the very broadly conceived property rights attained by foreign investors can trigger claims of state liability under investment treaties. Two consequences are highly relevant to our account: First, a potentially broad subset of property rights within a country will be defined and enforced under a (quasi)global regime thereby undermining the state’s control over property within its territory. Second, in this uncertain environment, “[f]or public officials it becomes prudent to regard all (virtual) economic loss of an investor by a sovereign act as falling under the concept and thus liable to arbitration (Van Harten 2007, 80). The scope and ‘force’ then of the investment regime contribute to a general chilling52 of host state policy-‐making.
52 The notion of regulatory chill was coined in the investment law literature to suggest that the investment regime as an institution could negatively influence the willingness of governments to police for social goals. While there are some skeptics on the practical implications of the chill (Coe and Rubins 2005; Schill 2007), their criticisms have been highly underdeveloped (See Tienhaara 2011 for an incisive deconstruction of the criticisms). The fact is however that a general chilling effect of the regime on all policy is hard to measure. But regulatory chill can also appear in relation to a specific measure, i.e. when an investor targets a government on a particular policy proposal. While the idea of a general chilling effect is upheld here, the focus of this chapter is on the specific form of chill, as a consequence of the corporate agents use of public power.
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2.4.2 No Discrimination under ‘Like’ Circumstances A standard that most clearly expresses the idea of an even playing field for corporate agents investing abroad is National Treatment (NT). This provision, both de jure and de facto, seeks to “ensure equality of competitive conditions between foreign investors and domestic investors in like situation” (Muchlinski 2009, 50). NT is broadly accepted and contains a basic pattern of application. However, crucial differences do exist. For instance, other than under NAFTA and the US as well as Canadian Model BITs, the European countries do not provide for a (effectively ‘liberalizing’) pre-‐entry application of NT. 53 GATS provisions also apply pre-‐entry under Article XVII but only in those sectors that thus have been designated by the host state. There are three core contentions concerning NT that are directly relevant to our analysis. The first concerns the somewhat opaque notion of ‘like situations’ that determines a potential breach. ‘Like’ is understood in strict (‘identical’) and loose (‘similar’) terms. Arbitral decisions have spun he whole range from narrow readings (Methanex)54, which demands for proof of a non-‐isolated event of non-‐NT and broad readings (Occidental 55 and S.D. Myers) that takes a violation to have occurred whenever a foreign investor is treated differentially. 56 Clearly, the broader the notion of ‘like’ comes with more chilling constraints on the ability of governments to regulate since basically all regulatory activity has a differentiated effect. Another element of concern related to the unduly limiting of government agency pertains to the distinction of intent and effect of regulation. As Stiglitz (2008) has argued, tribunals have so far shown little sensitivity to this distinction, which is problematic exactly for the same reason that all policy will have a differentiated effect on, at times wildly, diverse agents. The last concern has to do with the fact that NT is 53 Pre-establishment application of BIT provisions were first introduced under the US 1984 Model BIT. Pre-establishment application is most obviously not for investment protection but for the liberalization of markets. 54 Methanex Corp. v. United States of America (2005), UNCITRAL. 55 Occidental Petroleum Corp. and Occidental Exploration and Production Co. v. Republic of Ecuador (2008), ICSID Case No. ARB/06/11 (Decision on Jurisdiction) 56 In Occidental the tax authorities discontinued the reimbursement of Value-Added Tax (VAT) on goods and services purchased by Occidental for its exploration and production activities. The tribunal ruled that this established a breach of NT since Ecuadorean non-petroleum export companies continued to receive the refunds (S. D. Franck, 2005b). In S.D. Myers the tribunal saw the restriction of cross-border transport of toxic waste stopped by the Canadian government based on the Basel Convention on Control of Transboundary Movements of Hazardous Waste as a discriminatory measure based on ownership. Methanex took ‘likeness’ only to be relevant with respect to the most direct competitors (other methanol producing companies). See Mann (2005) on Methanex as compared to S.D. Myers.
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defined in terms of ‘at least as favorable as,’ or ‘no less favorable;’ allowing thus for a more favorable treatment of foreign investors. This can imply measures tailored specifically to attracting foreign investors. However, the ‘more favorable’ treatment is evident already outside of the NT provision in the case of procedural opportunities: Foreign investors can adhere to the oftentimes more advanced and pro-‐investor oriented standards of treaty law instead of more restrictive domestic law. In short then, interpretation is key in establishing the scope of application of NT to fact-‐situations. Combined with the individualization of claims, the openness in meaning of NT has so far allowed for corporate agents to argue for a very broad reading, and getting their way. 2.4.3. Expropriation: From No Compensation to Regulatory Takings The standard of compensation for expropriation has a long and contentious history in customary international law57 and was the main reason why BITs were established as means of protection of investment in the first place.58 The contention revolved around the question whether ‘compensation for expropriation’ was established as an international minimal standard (IMS). Under the current regime expropriation is allowed as longs as it is done for a public purpose, under due process, non-‐ discriminatory and upon payment of ‘prompt, adequate and effective’ compensation. Ironically, barring a recent wave of nationalizations in Latin-‐American countries, full expropriation has become rare. Today, most cases will consider ‘indirect expropriation,’ ‘tantamount to expropriation,’ or ‘regulatory takings.’ These terms describe the neutralizing effect on the value of an investment as a result of state action, even though formal ownership is retained. This extension of the expropriation provision still links in with the idea of BITs as forms of investment protection but it also hints at an important shift towards the more expansive role of BITs as instruments of liberalization, i.e. as an instrument of (ideological) governance. The debate on what establishes a ‘compensable regulatory takings’ instead of a ‘legitimate governmental regulation’ is at the heart of this shift and revolves around 2 issues: What governmental actions are legitimate in se and what aspects of an investment in effect can be expropriated.
57 See Chapter 3 58 Yackee (2010) calls it the explanatory provision in the ‘standard’ theory on BITs.
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Most treaties allow, in principle, make compensable any incidental impact on
investment as a result of regulatory action by the state. NAFTA tribunals such as Pope&Talbot59 and Metalclad60 have upheld such an expansive reading. Tecmed61 provides the main example under a BIT (Spain-‐Mexico). In paragraph 121 of the Tecmed award, the arbitrators write: “we find no principle stating that regulatory administrative actions are per se excluded from the scope of the Agreement [BIT], even if they are beneficial to society as a whole […] particularly if the negative economic impact of such actions on the financial position of the investor is sufficient to neutralize in full the value, or economic or commercial use of its investment without receiving any compensation whatsoever” [Authors’ italics]. And such broad understanding of the application of the provision has been re-‐iterated: In Metalclad regulation to forego hazardous waste to pollute subterranean water streams that supplied water to the city was considered a regulatory taking. In Santa Elena62 a hierarchy of values was made explicit: “Expropriatory environmental measures – no matter how laudable and beneficial to society as a whole – are, in this respect, similar to any other expropriatory measures that a state may take in order to implement its policies. Where property is expropriated, even for environmental purposes, whether domestic or international, the state’s obligation to pay compensation remains” (Quoted in Sornarajah 2003, 12).63 Expropriation cases on (re)distributive policies (Foresti), 64 cancellations of water concessions (Biwater Gauff),65 free trade zone revocations (Goetz and Consorts),66 and most pronounced, environmental measures (Tecmed, Methanex and Metalclad among others) have been in line with this reading.
While there have been few cases addressing (re)distributive reforms directly,
BITs can “open a path for foreign investors to challenge land reform and other redistributionist policy initiatives, including those designed to benefit indigenous communities […]” (Cotula 2011, 39). Land reforms in sub-‐Saharan African countries
59 Pope & Talbot Inc. v. The Government of Canada (2002), UNCITRAL. 60 Metalclad Corp. v. United Mexican States (2000), ICSID Case No. ARB(AF)/97/1. 61 Tecnicas Medioambienrales Tecmed, S.A. v. United Mexican States (2003), ICSID Case No. ARB (AF)/00/2 62 Compania del Desarrollo de Santa Elena SA v. The Republic of Costa Rica (2000), ICSID Case No ARB/96/1. 63 In a commentary on this ruling, Sornarajah harshly denounces this ruling as having no place in law “as it is not supported by any authority, either in domestic legal systems or in international law” (Sornarajah 2010, 396). 64 Piero Foresti, Laura de Carli & Others v. The Republic of South Africa (2010), ICSID Case No. ARB(AF)/07/01. 65 Biwater Gauff (Tanzania) Ltd. v. United Republic of Tanzania (2008), ICSID Case No. ARB/05/22. 66 Antione Goetz & Consort and S.A. Affinage des metaux (2012) No. ARB/01/2.
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have lead in some instances to arbitration, such as Funnekotter v. Zimbabwe.67 A much more high profile and contentious case in this respect is Foresti. A group of Italian owners of mining companies and mineral rights filed an ICSID case under the Italy-‐South Africa and Belgium as well as the Luxemburg-‐South Africa BIT (through their subsidiary Finstone) for violation of the expropriation provision. They specifically targeted the 2002 Mineral and Petroleum Resources Development Act (MPRDA)68 that included provision seeking to improve racial equity as a part of the broader Black Economic Empowerment (BEE) program of the South African government to correct for the disadvantages of the countries racist past. To establish equity the Act included affirmative action quota setting targets for black ownership and management within the main industries (26% ownership and 40% management). The mandatory ‘conversion’ would imply an abdication by the investors of their private mining rights to the state, which would subsequently allow the companies to file for licenses to those rights provided that they would meet certain criteria under the MPRDA. The significant estimated costs of this operation (up to $350 million), the investors argued, would effectively imply expropriation of the mining rights and unfair treatment (Peterson 2006; 2009).
This case is of interest for the clear human rights and social justice based
sovereign policy that is challenged by corporate investors. Fortunate or not, it will forever remain unclear if the tribunal would have taken the BEE-‐provisions as ‘tantamount to’ or ‘indirect’ expropriation, the case does teach us that such clear-‐cut rectificatory socio-‐economic policies are not insulated from BIT-‐based challenges. The case also sheds some light on the grey area between arbitration and renegotiation as the claimants discontinued for reasons of improvements of the conditions of the BEE and a newly established contract with the government (we will return to this ‘grey area’ shortly). The main issue at hand in extending the conception of expropriation to notions of ‘tantamount to,’ ‘indirect,’ and by implication ‘regulatory takings’ concerns the legitimacy of governmental action for the public good tout court. Interestingly, while
67 Bernardus Henricus Funnekotter and Others v. Republic of Zimbabwe (2009), ICSID Case No. ARB/05/6. (116) ---pars 107 and 148. Zimbabwe has refused to pay the compensation awarded. A Southern District Court of New York enforced the award subsequently, leading in the end to the auctioning of 4 villa’s owned by the Zimbabwean government. See: (Howse 2008) 68 The Act can be retrieved here: http://www.info.gov.za/view/DownloadFileAction?id=68062.
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the pro-‐investor regime is considered to have evolved out of US legal principles,69 US domestic law has allowed and still allows for expropriation without compensation in specific cases. As Stiglitz (2008) points out, Endangered Species Act of 1973 is an example of an Act under which government can intervene in business without being required to compensate losses. Within the American legal system of today, there still is a presumption at work that makes regulatory intervention for a public cause in principle non-‐compensable. The state of affairs in investment arbitration is less clear. While corporations have explicitly tried to use the Metalclad ruling, placing primacy of property over public purpose, as a precedent this has not been always successful. In Methanex, the tribunal reversed the order of primacy by first considering the accepted space of public purpose regulation. Pope&Talbot subsequently has introduced the now common, under NAFTA, ‘substantial deprivation test,’ which states that a ‘regulatory taking’ has occurred only when an investor will as a result “not be able to use, enjoy, or dispose of the property” (Interim Award, par.102). Some more recent Model BITs, such as the US and Canadian Model BIT, contain language specifying legitimate public interests in terms of the environment and public health have been included. These remain exceptions though as by far most BITs currently in force do not contain any such language. 70 The underlying ambiguity remains, thus, and perhaps “inevitably, the issue tends to boomerang back to the question of how to differentiate legitimate regulation from indirect expropriation” (Van Harten 2007, 93). However, adding injury to insult for host states, where regulatory takings claims by investors were denied on the above-‐mentioned grounds, the less demanding standard of Fair and Equitable Treatment (FET) could still be successfully employed. 2.4.4. Fair and Equitable Treatment: ‘Bad Faith’ and ‘Legitimate Expectations’ The FET standard has become the focal point of the debate on the chilling effect’ of investment law. Where expropriation and ‘tantamount to expropriation’ have had a relatively high threshold to be established, FET has turned out to provide a surrogate solution when such thresholds were not made. 69 See Sornarajah (2003, 6): “The notion that it is not the absolute taking of property but any diminution of interest or depreciation of the value of the property that needs protection through just compensation is a particular vision that has been developed by the American courts. It is this vision that is now being transported into the international field.” 70 And, as, Alvarez (2011) notes, only limited agreements have been renegotiated under the 2004 Model BIT and that it is questionable whether the US will have much interest in extending these re-negotiations to countries that solely import capital.
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FET figures in at least two seemingly distinct debates, one concentrating on the status of investment law as either lex specialis (under which FET is understood as an autonomous standard) or as general international law (FET understood as expressing IMS), the other concerning the implications of FET for the status of investors vis-‐à-‐vis states. The first, technical, debate is only interesting to this thesis to the extent it informs on the scope of FET. 71 The second debate revolves around the interpretation of FET. As it is highly ‘constitutional’ (i.e. open-‐ended) in essence, tribunals have done the lion’s share in developing this provision. In its most minimal guise, FET refers solely to non-‐discriminatory treatment and ‘access to justice.’ Such an interpretation has arguably been the IMS of the first three quarters of the twentieth century established with the Neer claim of 1926.72 The crux to Neer is its bad faith-‐clause. The “will-‐full neglect of duty, or to an insufficiency of governmental action so far short of international standards, that every reasonable man would readily recognize its insufficiency” (quoted in Vandevelde 2009). This highly restrictive qualification of state liability only in cases of ‘bad faith’ has been clearly superseded.
Under NAFTA cases such as CMS, LG&E, 73 and Metalclad, FET has been
interpreted to go well beyond customary international law. In Metalclad the tribunal interpreted FET to mean that ‘all relevant legal requirements’ an investor encounters are clear to the investors and to correct ‘any scope for misunderstanding or confusion.’ A defining FET-‐case however is the already referenced Tecmed-‐case. The novel element to this case is the translation of FET in terms of the ‘legitimate expectations’ of the investor. In a long sum-‐up of such expectations, FET is said to include the expectation “for the host state to act in a consistent manner, free from ambiguity, and totally transparently in its relations with the foreign investor, so that it may know beforehand any and all rules and regulations that will govern its investments, as well as the goals of the relevant policies and administrative practices or directives to be able to plan its investments and comply with such regulations” (Tecmed par. 154) Such standard of legitimate expectation was not lived up to when 71 Alvarez (2009) defends the position that within the investment regime certain standards, like FET, have developed into customary law. Guzman (1998) and Muchlinski (2009) hold on to the interpretation of investment law as a lex specialis. Those that see FET as IMS often times see less of a problem with the provision (since it is supposedly an accepted and minimal standard). Even for this camp however the question should remain whether IMS has not simply become more pro-investor. 72 Interestingly, Neer did not deal with investment at all but had to do with denial of justice in a case of manslaughter. 73 LG&E Energy Cop., LG&E Capital Corp. and LG&E International Inc v. The Argentine Republic (2006), ICSID Case No. ARB/02/1.
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a renewable license to operate a landfill for hazardous waste was declined by the national environmental regulator. Emphatically, the tribunal stated that the respondents’ defense by invoking health and environmental concerns was not ‘in good faith’ as political and social pressure favoring health and environmental concerns, had lead to the revocation of the license. Tecmed set out a line of reasoning on FET that made expectations of investors – including consistency, regulatory stability, transparency, and predictability – a benchmark for awarding compensation. This raises the bar even for advanced economies, let alone for burdened society – especially if one thinks of the principle of unity of state, allowing the actions of local governments to be scrutinized under BIT-‐arbitrations.74 Some have in light hereof wondered whether this standard should not reflect the state of development of a country (Gallus 2006; UNCTAD 2012a). From a societal perspective, the most brazen NAFTA ruling on FET is CMS. While there was no doubt that the Argentine government operated under conditions of enormous economic distress, the tribunal pointed out that a “stable legal and business environment is an essential element of fair and equitable treatment” (par. 274). This was an obligation of the government assumed under the BIT and was to be considered unrelated to the question whether the Argentine government had “any deliberate intention or bad faith in adopting the measures in question” (280). In its judgment therefore it positioned itself within the ‘precedents’ of Metalclad (par. 278) and Tecmed (par. 279). CMS is particularly interesting since it opened up a key topic in current debates: the necessity defense. The main defensive line taken by Argentina against the many claims it faced was that it was forced by the extreme circumstances to act as it did. Such ‘necessity defense’ seeks to define the fact that situations as an example of “exceptional cases where the only way a State can safeguard an essential interest threatened by a grave and imminent peril is, for the time being, not to perform some other international obligation of lesser weight or urgency” (ILC 2001, Article 25 commentary (1)) The necessity defense has been met with divergent success. The tribunals in Impreglio,75 CMS, and, more recently, the combined case of
74 Chile sought the annulment of an earlier award arguing that since the tribunal had applied the dictum of Tecmed an unreasonably high standard had been set for the country. The Annulment committee denied Chile’s claim. See: MTD Equity Sdn. Bhd. v. Republic of Chile ( ), ICSID Case No. ARB/01/7 (Decision on Annulment), par. 65-71. 75 Impregilo S.p.A. v. Argentine Republic (2011), ICSID Case No. ARB/07/17.
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Suez 76 all turned down the necessity defense against a breach of FET, while LG&E (arguing on equal facts and under the same BIT as CMS) accepted it. Establishing that economic interests are part of the essential security of a state, the LG&E tribunal excused Argentina for the breach of FET since “[t]here was no requirement that the necessary actions be shown to have been done ‘fairly and equitably’” (Stiglitz 2008, 524).77 The award in CMS directly opposed this judgment. It denied the necessity defense since “no essential interest of the state was at stake under the circumstances, that no grave and imminent peril existed, that the measures adopted were not the only way for the state to protect its interests and that the state had contributed to the state of necessity by its own policies” (Stern 2011, 182; footnotes omitted). Much of the difference between the two outcomes was in the legal methodology followed (Alexandrov 2011; Stern 2011)78 but for us the core of these cases concerns the serious built-‐in problem of the application of FET in cases of crisis. What gives the 3 selected arbitrators the authority to decide on the effective causes of the crisis? A topic, Stiglitz notes, “about which the most qualified economists have not reached agreement?” (Stiglitz 2008, 525) While more moderate readings have followed, and with some commentators considering the expansive readings a thing of the past, considerations pertaining to the potential discriminatory effect of FET – domestic companies do not have any claim on predictability, transparency and so on –, the role of other stakeholders in deciding on fairness or economic efficiency, and the question what constitutes ‘fair’ investment risks (and thereby limits on ‘legitimate expectations’) remain on the agenda. The FET standard is best read as a provision demanding ‘good governance’ on the side of the host state, including the need to provide “favorable investment conditions and the observance of the legitimate commercial expectations of the investor” (Muchlinski 2009, 49). To that extent, FET complements regulatory takings in curtailing state regulatory powers.
76 Suez, Sociedad General de Aguas de Barcelona, S.A.and Vivendi Universal, S.A. v. Argentine Republic (ongoing), ICSID Case No. ARB/03/19. 77 This does not mean that the tribunal did not consider the action in se, namely the freezing of prices although necessary to stop further economic deterioration, as a breach of FET under the terms of the BIT. 78 While CMS read Article XI from the US-Argentina BIT only in light of Article 25 of the ILC, LG&E did the exact opposite placing the burden of proof yet on the other party.
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2.4.5. From Contracts to BITs; Stabilizing Regulatory Frameworks Where treaties set the general framework under which international investments are made, contracts specify the conditions of each investment. As noted above, the contractual relation between investor and state has its own commercial arbitral circuit under which state and investor stand in a reciprocal relation as equal and autonomous agents. States under commercial international contract law operate not as sovereigns but simply as one party to the contract. There are two complicating factors with respect to contracts in light of the balance between state and corporation. The first concerns the ‘lifting’ of contractual disputes into treaty disputes (potentially allowing for parallel proceedings); the second relates to the so-‐ called stabilization clauses included in contracts that freeze, over a long period of time, the applicable law at the time of investment. 2.4.5.1. The Umbrella Clause The inclusion of the Clause in a BIT provides for the translation of the more specific and (often) favorable arrangement of a contract into a treaty standard (and thus an enforceable one through arbitration) thus “reinforcing the existing contractual duties owed to the investor” (Muchlinski 2009, 54). Substantial contractual breaches can establish treaty breaches in their own right when they violate legitimate expectations. Under the ‘Umbrella Clause,’ however, the implication is that ‘mere’ contractual breaches can be taken up into treaty-‐based arbitration. This can have potentially far-‐reaching implications: In luring in investments, states go far in making concessions to a specific investor (they ‘race to the bottom’) and MNCs wield their economic power to gain such special treatment. These concessions, through the Umbrella Clause, become an issue of state liability under international law. Contractual obligations are ‘treatified’ and ‘internationalized,’ thereby paralleling79 or even surpassing domestic courts as well as ‘ratcheting up’ the standards under which the claim will be decided. The Clause has been included in about 40% of all treaties and shows a distinctive divergence in wording among BITs. Through the application of the MFN standard however, a tribunal can effectively extend the clause to all BITs. As a result, 79 Parallel cases are an effect of Umbrella Clauses I will not deal with. Simplified, the literature seems to accept the possibility hereof distinguishing between commercial arbitration and treaty arbitration in terms of difference of ‘cause of action’ (See Voss 2010)
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the number of contracts that can lead to treaty arbitration multiplies. The Clause is therefore considered a strong concession to investors (Alvarez 2009; Henry 2009). It lowers the bar for treaty arbitration, making mere contract breach a cause to initiate treaty arbitration. Tribunals have responded in a divergent manner on the core claim of the Clause, depending on their answer to the question whether or not it elevates basic contractual issues (those that do not in and of themselves establish a treaty breach) to the treaty level. Some ICSID tribunals have been weary about overextending the scope of the clause, for it could well translate all contractual disputes into treaty disputes. The ruling in Societé General de Surveillance (SGS)80 against Pakistan exemplifies the ‘narrow’ reading. The tribunal denied the ‘elevating effect’ of the clause and stated that it should be read as ‘an applied affirmative commitment’ towards investments protection (against Switzerland’s own explicitly stated intention) since a wider reading implies legal uncertainty and the possibility of parallel proceedings. This argument was mirrored in Salini,81 Joy Mining82 and El Paso83 but has been the minority position. Interestingly another case of SGS, this time against the Philippines (and followed in Azurix, Occidental Exploration and Sempra) 84 is representative of the ‘broad’ reading. This tribunal stated that the Umbrella Clause does turn the performance of contract into a treaty obligation; it did warn however for the effects of such overexpansion of the clause. Still, on legalistic grounds, commentators argue that only the broad reading is sensible. Voss (2010) argues for instance that based on the Vienna Convention (the ‘plain wording’ prescription for treaty interpretation) and Article 10 (1) of the Energy Charter Treaty (ECT) that only the broad reading makes legal sense. Besides, under the narrow reading the clause would not add to FET and non-‐discrimination provisions. Muchlinski agrees, stating that, “the inexorable conclusion must be that all substantial breaches of contract are justiciable as breaches of the BIT, unless the parties to the investment contract expressly exclude them from admissibility in their contract […]” (2009, 58).
80 SGS Société Générale de Surveillance S.A. v. Islamic Republic of Pakistan (2003), ICSID Case No. ARB/01/13. 81 Salini Costruttori S.p.A. and Italstrade S.p.A. v. Kingdom of Morocco (2001), ICSID Case No. ARB/00/4 (Decision on Jurisdiction). 82 Joy Mining Machinery Limited v. Arab Republic of Egypt (2004), ICSID Case No. ARB/03/11. 83 El Paso Energy International Company v. The Argentine Republic (2011), ICSID Case No. ARB/03/15 84 Sempra Energy v. Argentina (2007), ICSID Case No. ARB/02/16.
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2.4.5.2. Stabilization In industries with a high obsolescence bargain-‐risk, such as the extractive industries, infrastructure and the energy sector, stabilization clauses will appear in contracts. Stabilization clauses are risk-‐management devices that address the potential “changes in law in the host state during the life of the project” (Schemberg 2008, vii). By ‘stabilizing’ the applicable law at the time of investment for the rest of the lifespan of the project, the clause seeks to preempt the undermining of the value of the investment by ‘freezing’ the sovereign’s legislative function (Sornarajah 2010). ‘Stabilization’ appears in contracts in broadly two manners: as ‘freezing clauses,’ (freeze law over project’s life) or as ‘economic equilibrium clauses’ (stabilizing the economic value of the investment).85 The clause applies to both fiscal (i.e. taxes, royalties etc.) and non-‐fiscal issues (health, human rights or environment policy and so on). While the latter economic equilibrium clause is considered a milder form of stabilization, de facto they have similar effect on countries with highly strained public finances. In light of the application of Stability Clauses, the divergence between the conditions put on developing countries and those put on OECD countries is striking. In case of the former, even non-‐discriminatory and foreseeable changes in law form part of the ‘freezing’ conditions. The main reason hereto is rather obvious: A greater fear of investors for arbitrary changes post-‐investment because of lacking rule of law, corruption and/or very limited administrative coherence. Arguably, this stringent language of stabilization clauses in contracts with particularly sub-‐Saharan African countries allows investors to “avoid compliance with, or seek compensation for compliance with, laws designed to promote environmental, social, or human rights goals” (Schemberg 2008, par. 146), potentially negatively impacting “host state’s implementation of its human rights obligations” (Ibid., par. 135). As Cotula notes, “where public finances are a concern, as in many lower income countries, the obligation to pay compensation could create disincentives against desirable public action” (2011, 122). This is a perverse consequence given the international obligations of the state to progressively realize human rights under the International Covenant on Economic, Social and Cultural Rights (ICESCR) – a mammoth challenge for these 85 Schemberg (2008) ads stabilization through ‘hybrid clauses’ (restoring position of investor pre legal change through either compensation or exemption) for completeness sake.
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countries already. To the developing state, however, like the signing of BITs, stabilization clauses are adhered to as part of a swap between sovereignty and incoming investment for growth. Importantly, this philosophy is expressed by international organizations such as the World Bank that see these clauses as signaling devices for a positive investment environment.86 Large-‐scale, World Bank financed projects, like the Chad-‐Cameroon and the Baku-‐Tiblisi Pipeline thus include very broadly worded stabilization clauses within the myriad of contracts that cover the investment (Amnesty International 2003 and 2005; Cotula 2011). Some commentators have raised some doubt on the practical impact of stabilization clauses. Sheppard and Crockett (2011) for instance note that they are unaware of arbitral claims based on them and that the stabilization clause seems to be on its way out in any case. It is certainly true that scrutiny of the clause is rising, particularly with older contracts that were oftentimes signed with illegitimate or corrupt rulers. 87 The skepticism of these authors, however, is based on a naive understanding of the reach of stabilization. Most profoundly, stabilization can lead to fragmentation of the legal landscape because of stabilization clauses excluding certain investments (with investors holding on to the ‘frozen’ conditions) from new regulations creating enclaves of ‘diluted sovereignty’ resulting in a form of ‘graduated sovereignty country-‐wide “[w]hereby the regulation and exercise of state sovereignty vary as a function of the nature of the property rights at stake” (Cotula 2011, 132). Existing stabilization clauses disincentivize investors from taking progressive steps forward for they effectively are instruments for investor’ rent-‐seeking (Howse 2011). At the same time, as Mann (2011b) notes, theses clauses will also hold back corporations from moving towards more sustainable investment strategies, waiting for the host government to implement new regulations so at to pass the costs of corporate amendments onto society. Stabilization clauses thus enable a form of regulatory capture by the investor that goes far beyond the impact of treaty standards. When stabilization clauses 86 Although the fact that these clauses also make it into the contract certainly has to do with the relative bargaining positions of the parties too. In light of the ‘exchange’ one can wonder to what extend the ‘obsolescence bargain’ operates in practice. As (Cotula 2011) notes, the Chad 2006 tax dispute showed the effective need for the investors since Chad itself simply missed the autonomous petrol capacity to continue operations. 87 This is both because of local opposition against the constrictive consequence today and because an “increasing number of arbitration decisions that highlight international corruption as a singular scourge against international public order […]” (H. Mann, 2011b), fn 4, 8).
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would be taken up under BIT arbitration they would also significantly lower the threshold establishing a breach, thereby triggering subsequent compensation (Sheppard and Crockett 2011). Where, at least under NAFTA for instance, a verdict of indirect expropriation requires ‘substantial deprivation,’ the requirement concerning stabilization is fulfilled when mere economic disequilibrium results from state regulation. No arbitral tribunal has ruled on a case involving stabilization yet but he CMS tribunal stated that Umbrella Clauses (and certainly FET) can turn iure imperii violations of contractual stabilization commitments (to the exclusion of purely commercial disputes arising out of a contract) a breach of the investment treaty” (Cotula 2011, 125). The mere possibility can already trigger deterrence concerning human rights, social and environmental legislation by a state. One thing certainly is true of stabilization clauses: if they are allowed under FET or an Umbrella Clause, state liability will come under yet more stringent limitations. Sornarajah noted that “the idea that a yet-‐to-‐be-‐identified multinational corporation […] could create fresh international obligations in a state through a contract lacks a theoretical basis in international law” (Sornarajah 2010, 304); practice however does not per se build on the theoretical bases of international law. 88 2.5. Uncertainty in Arbitration
One element that stands out with respect to the provisions discussed above is that states face uncertainty in arbitral decision-‐making. Given the set up of the arbitral system consisting of one-‐off tribunals ruling on unique BITs oftentimes slightly differently worded, this is little surprising. It ties in however with further, problematic, considerations that could well be reduced to the system’s roots in commercial arbitration. Firstly, arbitration takes place under limited transparency. Even the ICSID, which is the only mechanism that demands public registration of date and indication of subject matter, places stark limits on publication of materials and highly restricts access to proceedings. Although there is some development in the provision of Amicus Curea (Bernasconi-‐Osterwalder 2011), allowing third party contribution is still dependent on the involved parties and the arbitrators of the specific case. There is, secondly, a (perceived) bias built into the system. Although 88 And as he reiterates, “[]he attempt to create an international law on investment protection through purely private means did succeed to a large extent, despite the fact that its theoretical foundations were slim.” (Sornarajah 2010, 305)
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each party selects one arbitrator and a third one is either chosen together or appointed by the President of the ICSID, the fact that these are of a close-‐knit community (a small group of professionals from a select number of mostly American law firms), whose members wear different hats in contemporaneous proceedings – as counsel in one, arbitrator in the other case – and have a personal interests in being perceived as favorable to the investment community as the industry depends on investors motivations to engage. States thus have a subordinate position as an effect of the structure of the arbitral system (Suda 2006; Van Harten 2007; Peterson 2010). Lastly, the lack of predictability impacts the valuation of the risk of arbitration in state policy-‐making. Coupled with the lack of broad-‐based special expertise required for arbitrators to rule on highly complex issues concerning the balance of private and public welfare and the high costs of arbitration and potential awards, the system incentivizes states – especially those with small means – to remain afar from ‘offensive’ policies. 89 In sum, their position on the receiving end in investment arbitration, coupled with the skewed accountability structures of investment arbitration, the complexity of cases and the high costs of arbitration and crippling awards together provide good reason to assume that the arbitration mechanisms themselves further stifle less affluent countries in their policy-‐making. 2.6. Drawing Implications: Shadows, Chills and Corporate Public Power
A main conclusion to draw from the above is that the balance of power between state and corporation is unsettled through investment law. The process captured by constitutionalization has enabled extensive constraints on state control of corporate agents operating within their territory and allows corporate agents to address arbitral tribunals unmediated in cases of perceived breach of their rights. This effectively implies a transnational rebalancing, through legal structures, of the governance relation between corporate and state agents along the normative precepts of an economic ideology of the unfettered markets of strong property rights and corporate welfare.
89 Arbitration costs easily exceed a million dollars. For instance South Africa claimed to have incurred more than 5 million euro in legal costs in the discontinued Foresti-case. The claimants had to only contribute a small fee of 400.000 euro to cover for these costs) while damages awarded can be in the tens of millions. The 45 cases decided by 2008 totaled 2.8 billion dollars in damages (UNCTAD 2009).
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The impact thus of the regime extends farther than simply the general provisions under which investments are made and the optional redress at hand. These broadly termed provisions and built-‐in uncertainties in arbitral mechanisms indirectly chill socio-‐economic policy-‐making by the state. The reshuffle namely of the power balance between corporate and state agent facilitates a novel shadow of law. 90 As Cotula summarizes, “signing up to BITs that give investors legal entitlements backed by effective dispute settlement and enforcement systems would tend to erode the negotiating power of states vis-‐à-‐vis investors if disputes were to arise” (Cotula 2011, 139-‐140). In other words, in enacting public policy states become dependent on the interpretations given to these policies by foreign corporations. The process of constitutionalization, in its full understanding, ‘throws a shadow’ under which the powers of corporate agents attain a relevant form of ‘publicness’ since their interpretations of pending policy becomes directly constitutive of the effectuation of that policy. It is in this sense that the legal framework of investment inverses (at least partially) the relational powers between state and corporation agent. It is also in this sense that corporate power becomes a public form of power that chills progressive pro-‐poor policy-‐making. The shadow cast by investment law chills progressive policy-‐making by states for it enables (or substantially strengthens) corporate power over government. So far, however, only the importance of the direct route to arbitration has been stressed as enabling corporate public power. Many investor claims, though, never reach a tribunal or are settled before the arbitrators have articulated a verdict. That is to say that investors and states quite often refer to Alternative Dispute Resolution (ADR) such as consultation and negotiation. For instance, 27% of ICSID cases are settled before leading to binding awards (UNCTAD 2013). The use of ADRs is generally taken to be a positive development. It is questionable, however, whether this is as positive development as is assumed since resolution through negotiations is an even less public way of settlement than arbitration, minimizing the role of external agents such as NGOs in the process. ADRs also make investor empowerment through investment law even harder to scrutinize. From the evidence we have it is not too adventurous to assert that corporate agents see the threat of arbitration as a powerful tool to trigger a chilling effect on government policy and 90 The ‘shadow of law’ describes a bargaining modality, i.e. the horizon against which bargaining takes place. The (expected) legal endowments one holds (through the procedural and substantive rights that define the legal practice in which one is involved) help articulate the negotiating power one has (Mnookin and Kornhauser 1979; Steinberg 2004; Cotula 2011).
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thereby hold an important bargaining chip in negotiations. As the investigative journalist and founder of the International Arbitration Reporter (IAR), Luke Erik Peterson notes, “[i]t is certainly commonplace for foreign investors to send threatening letters to governments urging that they reconsider certain policy actions or postures, lest they face arbitration for damages” (Peterson 2009, 35). Aguas91 provides for a clear-‐cut case in which BITs arbitration has been used as leverage in negotiations. One of multiple water cases involving Argentina, Aguas, a subsidiary of Suez, saw its rights to operate the Buenos Aires water systems infringed by the government’s crisis policies. Subsequently Suez filed a $1.7 billion claim against the government but used it more as a stick to renegotiate the existing contract than as a goal in its own right as the company quickly urged for a renegotiated deal in exchange for dropping the claim (Anderson and Grusky, 2007). Suez discontinued the claim in January 2007 and walked away with a notably improved contract binding Argentina till 2027. Amongst others, the new contract included debt pardoning (including fines for contractual incompliance by the company!), large consumer rate increases, installation of new water meters, annual subsidies, and a reduction of power of the regulatory agency.
While the shadow of law articulates the indirect power shift towards
corporate negotiating powers, a shadow of power92 further turns the tables. Where corporate agents namely have initiated claims, multilateral institutions and home state governments have flexed their muscle in support of the corporation. The World Bank and IMF for instance delayed their debt relief to Gambia for several years pending the outcome of an ICSID claim filed by the Swiss company Alimenta after the government had seized property of the company following allegations of money laundering (M Sornarajah 2003). In the US, the 1994 Helms Amendment93 demands suspension of bilateral assistance and pressure on multilateral and international banks to block financial (except for humanitarian) aid to a country that has breached the property rights of a US citizen. The fact that many of the countries facing (or threatened with) arbitrations are in one way or another dependent on loans or aid 91 Aguas Cordobesas SA, Suez, and Sociedad General de Aguas de Barcelona S.A., ICSID Case No. ARB/03/19. The parties settled and discontinued proceedings on 24 January 2007. 92 (Steinberg 2004) in his analysis of WTO consensus-based bargaining shows that dominant players such as the US shift between the modality of law and power in their bargaining within the WTO. Corporate agents follow a similar pattern and can draw integrally upon both the juridical options as well as their own economic cloud as well as the diplomatic and finance power of home states and multilateral organization. 93 22 USC SEC 2378a (April 30 1994). The amendment was for instance used in Santa Elena.
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of the US, or the multilateral institutions, puts a damper on pro-‐poor policies that might potentially ‘harm’ investments. The investment regime then has direct ‘transnational’ consequences: “[T]he key substantive provisions contained in investment treaties constitute a clear limit to states’ police powers within their own territory. This represents an external redefinition of the domestic equilibrium and boundaries between property rights and regulatory powers” (Montt 2009, 13). The corporate agent forms the nexus of this regime of state liability. As initiator of claims, like an advocate-‐general, it holds the primary interpretative power of the substantive framing of state liability, while the shadow of law and power substantiate this interpretative power. It is in this light, in the manner that the corporation strains state policy-‐making, that the emergence of a legal-‐institutional realm becomes evident that provides for corporate powers that are relevantly ‘public’ in their application. Asha Kaushal has argued that ultimately “BITs […] collapse the public/private binary and shift the boundary between the public good and private interests by privatizing part of the public” (Kaushal 2009, 519). She could have added that the complex but skewed mixture of public and private elements of law constituting the regime contemporaneously ‘publicizes’ part of the private: the powers that corporate agents hold. A constitutionalized, private, system of control and discipline on the regulatory, legislative and juridical powers of government has effectively emptied out the idea of a separated public realm in which socio-‐economic rights and the states’ duty to ensure them are situated and a parallel private realm where economic agents reside. Investment law has constituted a corporate agent, hybrid in character, both an economic agent and a public power. 2.7. Concluding Remarks
The investment regime is a mature, distributive transnational regime that defies the idea of territoriality and nationality on the one side and the public-‐private distinction on the other. The transnational investment regime is namely not a physical space above and beyond the state but a legal realm itself created and supported through domestic and international orders that enables private actors to operate as freely and without impediment as much as possible. As such it is a crucial mechanism of contemporary global governance “that has a more immediate impact on domestic
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law-‐ and policy making than any other international legal regime” (Schill 2011, 902 [my italics]). The investment regime, therefore, constitutes a reciprocal practice between home and host states as well as corporations, the distributive consequence of which stand under strong requirements of justification. At the same time, corporate agency under the cloak of this regime cannot anymore be understood as maintaining merely ‘contingent’ economic interactions. Their agency builds on a well-‐established, coordinative framework for the establishment and protection of corporate investments that reaches deep into the heart of a society, effectively turning corporations in to a disciplining and governing public power.
Crucial to a moralized understanding of the regime, as the second
interpretative step under a Dworkinian reading of the PDA implies, are the basic principles upon which the regime claims its legitimacy. Chapter 3 provides for a first tentative normative evaluation of the regime. Arguably, when such legitimacy is established, the critical claim of this chapter, of corporate public power and its potential detrimental effect on public policy-‐making can be undercut. A form of ‘fair’ reciprocity would be established. For this reason the notion of corporate public power is not (yet) further developed. If the cooperative venture can be upheld under the premises of justificatory demands upon the advantaged agent (here the home state through the corporate agent) the idea of corporate public power as sketched above is not more than a unique though justified consequence.
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Chapter 3 Legitimizing the Investment Regime 3.1. Introduction
Formal theories of justice work out idealized conditions under which the grounds of justice can be translated into regulatory principles for a practice. These principles themselves can subsequently be ‘applied’ to discern legitimacy concerns pertaining to actual societal arrangements and propose reforms. An interpretative approach, certainly in a non-‐ideal variant, travels a somewhat opposite direction. Loosely moving on the second plane of the interpretative model of PDA – where “we propose a characterization of the accepted ‘purpose or aim in the practice’” (James 2005a) – this chapter draws out the legitimacy concerns pertaining to the regime. More precisely, it selects strategies of procedural fairness (or commutative justice)94 and output-‐based reciprocity to ‘test’ whether the regime fulfills certain basic values of reasonableness to be expected from an interest-‐neutral perspective (an impartial spectator if you will). To that extent this chapter engages in the moral interpretation of the investment regime. Instead of ‘capturing’ a ‘point’ (James 2005a) it articulates the contestations surrounding the practice so as to draw out the problematic nature of the regime under a perspective of reciprocity, i.e. from the idea that fair terms of cooperation should guide the organization of the practice. The legitimizing strategies that will be discussed are attempts to do just that; show the reasonableness of the terms of cooperation under the investment regime. In this chapter we, thus, move from the ‘descriptive-‐analytic’ understanding of the investment regime as 94 Brandi (2011; 2012) has brought the notion commutative justice – morality in transactions – into the justice debate recently. This chapter has benefited much from her work on justice in trade.
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‘coordinative’ and ‘distributive’ to the ‘moral-‐interpretative’ understanding of the regime as a cooperative venture. Three ‘strategies’ are outlined: consent, exit and output. Consent is at the basis of a commutative or procedural justification of an agreement and plays an important role in normative thinking on international relations in general. The basic claim is that when states voluntarily partake in the regime it implies that no injustice can be done. As part of a procedural notion of legitimacy, ‘exit’ plays a complementary role to consent in the normative assessment of international arrangements. As long as a country can easily exit from the binds it has put itself into, delegitimizing effect of either skewed consent or adverse evolution are less forceful. Lastly, output legitimacy provides support for the maintenance of a regime for it can premise the reciprocal relation between actors as for mutual advantage. Even if there might be certain mishaps in the short run, the long run positive impact of a regime is a crucial determinant in any justificatory strategy. The investment regime, not by chance, is premised on a few such output-‐promises. This inquiry is not just theoretical: In recent years, with the regime more forcefully present than ever, a backlash against it has emerged on the side of government officials, scholars and legal/NGO-‐practitioners alike. Its legitimacy is directly contested in practice. Questioning the legitimacy of the regime as it stands, a need for improvements is obvious. To understand what these improvements ought to look like we need to a) understand what elements are exactly problematic as an issue of socio-‐economic justice (i.e. of unfair power-‐imbalances) and b) how such imbalances can be superseded. Issue a) has been set up in Chapter 2: The main distributive consequence of the regime is the constitution of corporate public power. In the following, this effect will be further shown to have no legitimizing counterpart within the cooperative framework. Issue b) will show to be a challenging task as the regime shows high resilience in its current form, undermining alternatives as either uncertain or (politically) unfeasible. Since this argument will be central to the rest of the thesis it is helpful to keep this in mind throughout the development of this chapter. 3.2. A Backlash to the Regime
In recent years an apparent backlash against the regime has emerged. Certainly, a regime that moved within one decade from ‘exoticism’ (Koskenniemi 2004) to the
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most “directly impactful international regime” (Schill 2011) expectedly runs into some opposition, simply as a sign of the maturing of the regime. Particularly, the “insight that international investment treaties are not just political treaties signaling a state’s good will to promote and protect foreign investment, but obligations under international law that are implemented by a powerful enforcement mechanism in the form of investment treaty arbitration” (Schill 2011, 896) that has slowly emerged upon participating (developing) nations has triggered opposition. This insight is at least at the root of one prong of the backlash: The sovereignty redux and developmentalist critique coming from developing countries, academic and NGO alike (Mann 2011a). 95 A backlash as a result of a ‘national security crisis’ articulates the second prong. This is mostly a concern of affluent nations, particularly the US, having become a net capital importers and thereby experiencing the burden of market liberalization under its BITs. This chapter attends for obvious reasons to the first prong of the backlash. The presumed biased nature of investment arbitration (outcome) against developing countries and, relatedly, with the undemocratic nature of the arbitral system, are at the core of the ‘clarion calls’ against the regime (Kaushal 2009). Particularly outspoken are the Latin American countries such as Bolivia and Ecuador that have stepped out of the ICSID, fully or partially, in 2007 and 2010 respectively (UNCTAD 2010a).
Reminiscent of the early post-‐colonial debates of the 1960’s and 1970’s, the
investment regime is criticized as an imperial extension of the affluent countries over the developing world, concretized by a bias towards private, investor rights over public, state regulatory powers in inconsistent arbitral rulings. Government leaders like Bolivia’s President Morales have called out the system for being in place to cater to corporate grievances (Franck 2011), while many others have stipulated the high costs of arbitration, the enormous sums claimed by corporations and the fact that mostly developing countries are on the receiving end of corporate claims. The lack of transparency in the one-‐off arbitral system adds to the negative sentiment, as inconsistent rulings upon the sole initiation of corporate agents have contemporaneously expanded the transnational disciplining of state regulatory functions by “concretizing and further developing investment law in a treaty-‐ overarching manner” (Schill 2011, 896). 95 See for academic opposition the Public Statement on the International Investment Regime of August 31 2010 signed by 53 academics: http://www.osgoode.yorku.ca/public-statement/documents/Public%20Statement%20%28June%202011%29.pdf.
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While the empirics of these claims – most particularly its presumed bias against developing countries in terms of cases and amounts awarded – have become a subject of debate,96 the backlash triggers serious consideration. As Rawls states, “[a] practice will strike the parties as conforming to the notion of reciprocity if none feels that, by participating in it, he or the others are taken advantage of or forced to give in to claims which they do not accept as legitimate” (1999a, 208). The backlash presents us at least with a legitimacy issue from a sociological point of view (‘is there a belief of a right to rule’). The question is whether normatively (is there ‘a right to rule’)97 this belief of illegitimacy can be reasoned or can it be legitimized. Interested in ‘the right to rule.’ this chapter takes up and tests the backlash critique against a set of (normative) parameters of legitimacy. This is (thus) not an articulation of justice-‐criteria applied to the concrete case but merely a provisional outline of an idea of reciprocity within a cooperative practice. A regime that binds the hands of governments can be illegitimate under different criteria but the mere effect of limitations to policy space is not sufficient to foster this claim in its own right (just think of the comparable function of the human rights regime). The investment regime seems at face value to provide for a legitimate curtailment of state sovereignty.98 A critic, therefore, could reply to my expose of chapter 2 that while it might be true that the regime is skewed towards investors, the regime is necessarily so given the fact that public law in first instance seeks an answer to the question of potentially invasive public authority. In the case of investment such critic can point out that the asymmetries of the regime are exactly in place to correct for what Thomas Wälde called the “pre-‐existing and inherent structural asymmetry in which foreign investors find themselves” (Wälde 2007, 55) as they engage with a foreign host. While questions could be raised concerning this understanding of the ‘corrective’ function of BITs, it makes that the legitimacy question is a relevant one to current debates on the investment regime. There is, however, also a directly relevant philosophical dimension to the discussion that should not be missed out upon. Particularly the issue of ‘consent,’ and less
96 See particularly the work of Susan Franck who has been a driving force behind the ‘quantification’ of investment law arbitration research. Her work has done much to test, refute or support many of the intuitive wisdoms in the field (See (Franck 2009; Franck 2005a) and has generated criticism of its own (Van Harten 2011). 97 This distinction draws on (Buchanan and Keohane 2006). 98 Legal scholars have made quite a lot of the functional parallel between investment and human rights law. See particularly the many contribution of (Dupuy, Francioni, and Petersmann 2009).
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weighty ‘exit,’ take us into a debate on the relation between commutative or procedural justice and more substantive principles of socioeconomic justice. 3.3.Legitimacy Through Consent
3.3.1. The Normativity of Consent Commentators cynical of any idea of the lack of the ‘broader’ legitimacy of the investment regime, i.e. those that deny substantive failures to the regime beyond mere procedural ones, can find justification by pointing out the voluntary nature of the bilateral agreements signed between governments. To the extent that countries have signed these agreements voluntarily and to the extent that the treaties create mutually beneficial outcomes for both parties, commutative justice is upheld. ‘Consent’ is probably the most straightforward way to legitimize the existence of a relationship, even if this relationship (ceteris paribus) might not turn out beneficial for one of the parties to the relationship since volenti non fit injuria (to one who consents no wrong is done). Although there are clear limit cases to this general rule, such as consenting to slavery, in general voluntarily entering into a relationship by consenting to it provides for a procedurally justified basis to that relation. This rule plays out no differently in the case of international binding treaties: Consent to the established authority through a treaty legitimizes this authority. 99 There is thus a potent legitimizing argument in place regarding the investment regime, given the fact that individual countries sign bilateral treaties with one another. From a normative perspective the case is thus relatively plain: Each signature of a country directly underwrites the moral legitimacy of the investment regime. In other words, substantive critique of the regime is as such curtailed.
On the face of it, once it is accepted that consent can premise the legitimacy
of the regime in a necessary and sufficient manner, little room for debate is left.100 Such an account would provide for a ‘contractual model of legitimacy,’ one made familiar by Gauthier (1986). While I do not want to specifically engage with his 99 It should be obvious that no claim is made on the legality of the treaty. Although the legality of a treaty can be challenged under relatively comparable conditions – especially in the case that a corrupt regime has signed a treaty – the ‘legitimacy threshold’ is certainly lower than the legality threshold. 100 In its strictest interpretation this reads similar to Robert Nozick’s Wilt Chamberlain example: In the case that all people wanting to see Wilt play pay a voluntary additional amount of money; how can this ever lead to an unjust outcome? These people consent to a deal. That fact, and that fact alone, suffices to establish the moral legitimacy of the outcome (Nozick 1974).
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account, the core element of his approach – the moral legitimacy of outcomes on the basis of voluntary consent – is also at stake. Barring certain procedural characteristics (no direct coercion for instance), consenting voluntary to an agreement will be considered not only legitimate but would also pre-‐empt further questions of justification, i.e. it would fulfill necessary and sufficient conditions. This account of legitimacy within the relations of states can reflects a ‘thin’ form of proceduralism and could be called ‘nation-‐state proceduralism’ (Brandi 2011). Such a position reverberates in, for instance, Thomas Nagel’s The Problem of Justice (2005), which denies global or transnational justice for the purely contractual nature of agreements between states. Under this picture the regime is dependent on nothing but consenting parties furthering their mutual interests, thereby excluding duties of distributive justice beyond international humanitarian justice across states. In chapter 2, however, I banked on an understanding of the investment regime that reaches beyond the nation-‐state proceduralism. More needs to be said thus about the idea of procedural legitimacy of the regime. While it will be put into question whether even ‘thin’ proceduralism’ upholds in the investment regime, it should be noted that it is in and of itself a questionable notion. ‘Consent’ is a complex category in normative theory. Conceptually ‘consent’ needs further specification. For ‘consent’ to be accepted as performing a legitimizing function, it has to refer to an informed form of consent and should be relevantly voluntary, i.e. the procedure should be devoid of outside coercion including more indirect forms of coercion. ‘Informed consent’ in treaty-‐making, for instance, can thus be said to depend on having appropriate finances and resources/knowledge to negotiate a treaty. In light of such enhanced understanding of ‘consent,’ simply agreeing by signing can still be devoid of legitimacy in case of an asymmetry of information and its voluntary character can be undermined as a consequence of an asymmetry in bargaining position, of which outright coercion is only an extreme outlier case. Both asymmetries can lead to a form of exploitation as taking unfair advantage (Wertheimer 1999) or a ‘harming-‐as-‐taking-‐advantage’ (Miller, 2010).101 As Kelly and McPherson note, “[t]hat desperate societies (or persons) will accept economic arrangements that leave them better off is no reliable indicator of mutually respectful cooperation: being better off than some desperate alternative is 101 Exploitation is, thus, not per se a form of ‘harm-as-violation’ in the way (Pogge 2002) conceptualizes the injustice of the global system.
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not good enough for justice” (Kelly and McPherson 2010, 115). Recognizing these features as crucial to a properly developed notion of voluntary and informed consent a ‘thick’ notion of proceduralism appears to set the legitimacy baseline for the consent strategy. To understand the legitimizing claim of consent, thus, besides an informed understanding of the regime it is also necessary to look into the times and conditions under which developing countries started signing BITs. The following account of the evolution of the regime, and the circumstances under which BITs were signed raises questions about consent as a legitimizing strategy as it highlights the ‘exploitative’ stance of the affluent states in furthering the regime. Making full use of the specific global political economy of the 1980’s and 1990’s – as advanced economies moved forward their agenda of market liberalization and far-‐reaching investment protection – the affluent nations arguably were “making improper use of the desperate neediness of people in developing countries” (R. W. Miller 2010, 59). Lastly, as a short note of clarification, consent can be historical and hypothetical. Hypothetical consent in normative theory is a formal tool under idealized standards. While it can be a helpful tool in reconstructing the emergence of authority, it is less so in evaluating the legitimacy of actual historical processes. The focus will therefore be on historical consent.102 Although few would consider it a condition that is both sufficient and necessary to legitimize a form of authority over time, I engage the argument of the under-‐determination of the legitimacy of the authority of the investment regime through historic consent. My question is: if we can understand consent as a basis for legitimacy, can the investment regime be legitimized through it? My answer is to this question is negative. In the following I will outline how the regime emerged and evolved to clarify this answer. 3.3.2. Historical Shifts in Investment Governance To grasp the notion of consent not solely as a formal term of art but to test its function in light of the investment regime, the history of accession of states is crucial. I will recount this history by shortly outlining the evolution of investment governance to clarify the general background against which developing states start signing up. ‘Why’ these states signed up will be the main question of sub-‐section 3.3.3. Read together, these sections provide for an account of the second 102 Of course, historical consent has problems of its own, as our reference to the value of initial consent will show.
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understanding of the study of the constitutive role of law: The seeking out of the contingent but defining moments in the development of the regime. Although the regime came to fruition only in the last 2 decades, it has a history going back even before the signing of the first BIT in 1959. Vandevelde (2009) distinguishes 3 periods: the colonial, post-‐colonial and global era. During the colonial era investment was not separately regulated yet. Property protection for (non-‐ corporate) individuals, however, was sought (but not found) under the League of Nations.103 The IMS is said to have reflected the judgment in the Neer claim104 but even if such criteria were established, for action against expropriation or maltreatment investors were dependent on diplomatic espousal, at times dramatically leading to ‘gunboat diplomacy.’105 The post-‐colonial era, roughly between 1950/1960 and the fall of the Berlin Wall, projects a growing gap between the affluent and the former colonies especially. Where investors sought a strengthening of the international law on foreign investment – for it was “incomplete, vague, contested, and without effective enforcement mechanism” (Salacuse 2010, 439) – to accompany the global corporate expansion, the former colonies saw corporations as mechanisms of colonial exploitation. Unsuccessful attempts to depoliticize investment disputes were undertaken at the International Trade Organization’s 1948 Havana Charter, by the strongly pro-‐investor 1959 Abs-‐Shawcross Draft Convention on Investment Abroad, and found their way into the OECD Draft Convention on the Protection of Foreign Property of 1967. 106 In the same time-‐period, however, the first BIT between Germany and Pakistan was signed (1959)107 Notable successes were also achieved for the capital exporters in establishing arbitral instruments – the establishment of the New York Convention of 1958 and the ICSID in 1965 – enabling the internationalization of investment arbitration and to reduce political interference. 103 Under the Economic Committee a ‘Draft Convention on the Treatment of Foreigners’ was proposed in1929. 104 In actual fact, there was much contention over IMS in the Americas during particularly the first part of the 20th century. The US favored the so-called Hull Rule, requiring ‘prompt, adequate and effective’ compensation for expropriation while Latin American countries held on to the Calvo Doctrine and Calvo Clause, the former domesticizing expropriation issues and the latter barring diplomatic protection even in cases of denial of justice (See (See Montt 2009; Vandevelde 2009). 105 The United States ‘gunboat diplomacy’ was explicitly authorized in the Monroe Doctrine (1823) and extended through the Roosevelt Corollary (1904) (Vandevelde 2009). 106 The Havana Charter although initially pushed forward by, was in the end rejected by business. The two other proposals ran into opposition from the capital-importing developing world for their pro-investor nature. 107 As an effect of the loss of the Second World War, German property was expropriated en masse throughout the world. One way to establish some security with an eye on this loss of private property was the setting-up of a investment program.
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Opposite the depoliticization push, the newly independent countries, joined together in the Group of 77, were gathering critical mass at the United Nations to ensure their hard won autonomy. Especially Sub-‐Saharan African countries regarded foreign companies with great suspicion as they represented neo-‐colonial strongholds. Under the banner of the ‘New International Economy Order’ (NIEO) this group sought natural resource sovereignty and control of the means of production, while nationalizing and expropriating (without compensation!) private, often European owned, industries. The NIEO had its hay-‐days from the late 1960’s till the late-‐1970’s and is epitomized by the 1973 adoption of Resolution 3171 on Permanent Sovereignty over National Resources by the UN General Assembly108 and the 1974 Charter of Economic Rights and Duties of States (CERDS).109 Its program was endorsed as articulating a counter-‐discourse to that of the affluent, former colonizing, countries. In this oppositional context BITs at first sight seem to have slowly emerged as an apparent middle ground. Nothing like the current institutionalized regime that we know now was yet in place however. Only with the advent of the global era mirroring shifts in the global political economy, the end of the power-‐bid by the NIEO, the crumbling of the Soviet Empire, and the expansion of global capitalism, did a radical change in the global governance of capital, cumulating in the current investment regime, come about. However, while bilateral, regional (NAFTA) and partial multilateral (TRIMs and GATS) agreements were cemented, no comprehensive multilateral agreement was ever established. The most comprehensive attempt, the Multilateral Agreement on Investment (MAI) under the OECD in 1996 was but the latest failed attempt hereto. 110 The WTO’s Singapore Ministerial Conference of 2003 constituted a committee to examine the feasibility of drafting a multilateral investment agreement to be administered by the WTO but this was flatly rejected by developing countries. With the comatose state of the Doha round in mind, and the flourishing of FTAs and BITs, meager expectations are in place for such a regime – an insight that will carry consequences within this thesis’ argument. 108 UNGA res. 3171 (XXVIII), 17 December 1973). 109.UNGA Res. 3281 (XXIX), 1974 Dec 12. U.N. Doc. A/3281. The Charter was accepted over opposition and abstention from developed countries. 110 The MAI under the OECD would of course have been a plurilateral agreement but with all OECD countries signed up its reach would soon be global. This insight was consciously behind removing the process of creating a global regime from the WTO to the OECD since in the former context opposition by developing countries barred any attempt.
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The global era stands apart not only for the increased focus of enabling direct protection of investment. It is also the period in which the internationalization of disputes takes places and the liberalization of markets becomes an article of faith. Only in this period the customary rule of the exhaustion of local remedies was undermined and probably most intriguing and consequential, investment disputes increasingly moved from claims concerning expropriation to claims on regulatory action or inaction ‘harming’ corporate profits. This shift parallels the evolution of BITs from the 1980’s onward from protecting investments to BITs as a liberalization and globalization tool. An obvious question emerges from this general reflection on the development of the regime: Why did developing states start to sign BITs? Less than a decade before they submerged themselves into the emerging regime these countries as a group were upholding rules that represented the antithesis of the current regime and they never accepted a full-‐fledged multilateral regime even while signing up to these BITs. An answer, or at least an inquiry, (in)to this question should help understand the normative value of their consent.
3.3.3. Why Sign? A range of explanations has been offered on the question of why developing countries, Least Development Countries (LDCs) particularly, began signing BITs. Weighing them one against the other, I seek to extract an answer to our question whether consent was voluntary. The answer to the ‘why’ question has to explain why BITs are signed while they a) had been fighting for exactly the opposite development of investment law and b) they have no proven positive effect. Andrew Guzman (1998) provided for a first answer to the question. LDCs began signing according to Guzman while caught in a prisoner’s dilemma: As a group they upheld the philosophy of a new IMS under the NIEO, individually they defected by signing BITs. This paradoxical state of affairs was ultimately self-‐defeating, triggering a race to the bottom that left the LDCs worse off as a group than they would have been if they had stuck together. The signing of BITs and the concomitant deconstruction of NIEO therefore should be understood as a desperate but, from an individual country’s perspective, rational attempt to gain capital by securing the inflow of investments. In need of foreign capital, namely, “a sovereign country is not able,
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absent BITs, to credibly bind itself to a particular set of rules when it negotiates with a potential investor” (Guzman 2009, 78). Jose Alvarez (2009; 2010) challenged Guzman’s prisoner’s dilemma account, pointing out that it does not sit well with actual historical developments. The paradoxical simultaneity of LDCs opposing IMS while signing BITs has never existed. The highpoint of the resistance came in 1974 while most LDCs only commenced signing BITs in larger numbers in the second half of 1980ies, when the NIEO is already a relic of the intellectual past and market ideology has taken over international political discourse. Alvarez claim is supported by the numbers: Between 1959 and 1989 only 386 BITs were signed while between 1989 and 2004 more than 2000 were added. At the ‘high-‐point’ of LDC-‐resistance no more than about 120 BITs had been in place, often not including investor-‐state arbitration.111 Developing countries flocked into BITs just when ‘strong’ BITs took off with the US 1984 Model BIT that included strong international arbitration provisions and pre-‐ establishment application (Alvarez 2010). Alvarez’ own tentative answer sees developing countries coming to grips with the value of a solid and consistent international customary law pertaining to investment.112 Where Guzman too narrowly focused on the ‘economics of signing,’ Alvarez stresses the importance of the legal and political reasons motivating developing countries as they became increasingly aware of the signaling effect of BITs as to gain competitive advantage of openness.113 This trend continues today, as pro-‐investment legal developments were prevalent even during the most recent economic crisis years (UNCTAD 2012b, 76-‐7). While befitting much of the empirics, there is something odd to this argument. If national policy as well as law and regulation turned pro-‐investment and while a plethora of international risk insurance schemes such as the Multilateral Investment Guarantee Agency (MIGA) 111 See Yackee (2008). Remember too that only from 1965 onward, with the birth of ICSID, has investor-state arbitration become formally possible. Effectively only in 1969 the first BIT (Italy-Chad) included the option, which however became prevalent only in the second half of the 1980ies (Alvarez 2010). 112 This can for instance be distilled from Alvarez (2009) critique that “[w]hile Guzman is correct that most BITs do not affirm, in so many words, their intent to codify or progressively develop the general law, man of them do the next best thing: they expressly include the protections extended by customary law and make these subject to investor-state dispute settlement.” (41, footnote omitted) 113 See Alvarez (2009, 41-2). From signaling that they were now more open to investors, to have their legal structure live up to the adjustment programs, or the signaling of the political commitment to other states; all of these rationales revolve around market liberalization and an open economy. The only reason escaping this picture concerns the attempts of current political efforts to ‘lock-in’ future forces into the market paradigm.
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and the US Overseas Private Investment Corporation (OPIC) are in place; why did affluent countries still need to draw the developing world into signing BITs? (Stiglitz and Charlton 2005) And why did developing countries continue their opposition against a multilateral regime? Assuming that these countries simply had a pro-‐ market epiphany cannot answer these question. If the numbers on BITs signed would be plotted in a diagram with the calendar years spread out on the x-‐axis, a half parabolic shape would emerge, expressing the evolutionary dynamics of the regime. At first an almost flat line (pre-‐ 1984) will be followed by a slight upward curve (post-‐1984) culminating in a sharp climb (mid-‐1990ies onward). Neither Guzman nor Alvarez can sufficiently explain the particular shape of this model for they cannot explain the ‘tipping point.’ The missing component is given by Montt (2009): BIT by BIT a ‘virtual network’114 of investment treaties emerge that, after reaching a ‘tipping point,’ became part of rational incentive structures of states to jump on the bandwagon. BITs still function as a signaling device in this explanation but the motivation behind it is not the pro-‐ market epiphany Alvarez assumes. A dilemma is also still in place in Montt’s account but it did not have the characteristics of a prisoner’s dilemma. BITs simply became (as part of a re-‐iterated game) the last ritual to perform in order to attain acceptance as a country fully adhering to the market ideology. Signing BITs was not per se considered to be beneficial in this context; not signing on the other hand was considered potentially hurtful.
Behind the increasing push for developing countries to start bandwagoning
there was nothing but a complete shake-‐up of the global order. A debt crisis, the bankruptcy of the Import Substitution Model, a crumbling Soviet communist empire, and a market-‐based ideology taking shape within GATTS/WTO, together played out against the opportunity set at hand for developing countries. The neoliberal wave that consequently hit the global political economy under the banner of the Washington Consensus, appeared to developing countries in the form of souring interest rates bloating their debts, the drying up of alternative forms of financing for, among others, the entrance of the US on the private credit market under Reagan, 114 Montt’s challenge to Guzman has a normative edge. As he states: “A theory in which competition leads capital-importing states to adopt treaties containing standardized substantive provisions, that are open-ended and reasonable in character, appears much more favorable to developing countries than Guzman and AGS’s account, where countries erode all benefits in their race to the bottom among developing countries” (Montt 2009, 122). Montt himself sees ‘economies of scale ‘ as a strong reason “to having a global regime of treaties worded using closely similar substantive terms, particularly when those terms are as openended as the ones contained in BITs” (Ibid., 96).
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the decline in official development assistance as well as an enormous drop in commercial bank loans (dropping from providing 83% of all foreign capital in 1981 to only 38% in 1982). As a consequence, governments were unable to service their outstanding debts, a situation worsened by a decrease in development aid. FDI, however, while almost irrelevant up till 1981, started booming exceeding $400 billion in 1982 (UNCTAD 2009, 5). It is also in this context that the IMF and the World Bank began exerting influence on the ‘structural’ make-‐up of developing countries.115 The liberalization and privatization agenda for growth scripted in these institutions of the Washington Consensus took BITs as instrumental to achieve its goals. With the IMF’s and World Bank’s development programs unmistakably premised on an attractive and conducive investment climate, the structural adjustment programs largely collated strong investment protection with privatization demands. Both Biwater Gauff and Bechtel are clear-‐cut examples of this double bind for debt-‐ridden countries. In both cases the World Bank required privatization as part of their ‘development package,’ allowing foreign companies to move in (Bechtel, for instance, was the only bidder in Bolivia’s auction of the rights to water provision) (Anderson Grusky 2007). Lastly, the World Bank and IMF began valuing the creditworthiness of countries in terms of their openness to investment. The ‘knowledge politics’ of the Bretton Woods institutions thus turns directly in to a form of power over debt-‐ridden developing countries seeking alternative ways to service debts and pushes developing countries into signing BITs. Signing BITs became a rite of passage, a signaling of good will and of the length a country wanted to go in ensuring a pro-‐investment environment. Signaling in this context of competition could not be a collective exercise as it is in essence a means to differentiate oneself from others. This explains why in multilateral contexts developing countries have remained skeptical as a group. BITs may be formally interpreted “as a mechanism to overcome commitment problems between investors and host state in order to generate mutual benefits” (Van Aaken 2009), the signaling then of credible property rights protection (Elkins, Guzman, and Simmons 2008), along with the willingness to trade-‐off sovereignty for credibility captures the face-‐ value stance of the developing world lacking capital. An interpretation along the 115 Stiglitz’ Globalization and its Discontents (2002) is probably the most well-known and forceful indictment of the IMF’s and to lesser extend the World Bank’s programs from the mid 1980s onward. See also Rodrik (2007).
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lines of ‘pressured’ bandwagoning through both interstate competition and the ‘straightjacketing’ (T. Friedman, 2000) into the Washington Consensus ideology is thus most convincing.
What can be concluded from the above is that developing countries began
signing up in large numbers only within a context in which their bargaining position was minimal. They were most literally with their backs against the wall. The NIEO period stood for a focus on sovereignty of the newly independent states and saw a diminishing status of investors’ rights. Once these countries got into debt problems and the international economy began to reshape itself from the early 1980’s onward with an eye on free trade and investment, the rights of investors took center stage. To that extend, if a fair bargaining position is a condition for legitimizing consent, the history of the emergence of the investment regime ought to make one skeptical of such a strategy. Delving a little further into the issue of signing: What did LDCs actually sign up to? Besides their weak bargaining position, the standing of developing states was further undermined by the informational asymmetry in the initial consent situation of treaty making. From the early stages on it was affluent ‘Northern’ states that reached out to developing states offering to engage in negotiation on investment treaties – Model BIT in hand. No BITs were signed between affluent states. Reasons hereto are evident: Firstly, affluent states had similar well-‐developed legal and regulatory systems. Transaction costs for international investments could be significantly lowered however in developing countries particularly in light of the policy implications of the NIEO philosophy. Secondly, no investment under BITs was expected from developing countries thus minimizing the competitive threat to domestic companies. Preferential provisions for outgoing FDI from these countries did thus not offset a loss of control over the management of incoming FDI for developing countries. This set-‐up triggers a range of difficulties concerning the developing countries’ informational position in negotiations. But the informational asymmetry does not only consist of the term-‐setting Models of capital exporters; alas a lack of expertise and financial resources to review and fully capture the implications of these Models and to substantiate the commitments made to reform domestic law and regulation, so as to get the BIT ‘right’ (Joubin-‐Bret, Rey, and Weber 2011)
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further undermined the developing countries’ position. These positional problems are aggravated by the fact that oftentimes “[a] disadvantageous investment agreement is part of the price developing countries may feel they have to pay to obtain the desired trade agreement” (Stiglitz 2008, fn. 67, 479) – an unproblematic trade-‐off so long BITs do not bite. The final effect of the different bargaining and informational limitations to developing countries is the challenge that the diverse BITs in force bring to creating a homogenous and consistent IIA frameworks within a country – a consequence that only adds to the chilling effect of the regime (Joubin-‐ Bret et al., 2011).
One can challenge the above account by pointing at the rise of so-‐called
South-‐South BITs (Ewelukwa 2011; UNCTAD 2005), which might support Alvarez’ position. Two things should be kept in mind however: First, under the heading of ‘development country’ China and India are still included. While under certain parameters this is a valid characterization, in terms of outward investment and outsider interest it is quite obviously not. Both these countries are however big BIT-‐ proponents116 and especially China has become increasingly aggressive in its BIT-‐ language (Alvarez 2010). In any case, the emergence of South-‐South BITs does not undermine the exploitative development of the regime. At most, developing countries now operate under and are ‘socialized’ into an ‘open markets’ ideology and BITs fit in well in this context. Secondly, the case in point is that South-‐South BITs show significant deviations from the North-‐South BITs in terms of protection granted to investment (Skovgaard Poulsen 2011; UNCTAD 2005), 117 a feat more surprising given the fact that they are based on the same ‘Northern’ Model BITs. The lack of far-‐reaching implications on policy standards and corporate privileges seems to shed light on the concessions made still today by developing countries lacking powers of negotiation. As these treaties do contain MFN clauses investors from other Southern economies can always forward claims under a North-‐South BIT. A third issue should be raised in the context of a consent-‐based procedural model of legitimacy: ‘Reflexivity’ (Teubner 1997), or the autonomous development of a legal regime. Investment law has developed not so much through the steering of 116 See (UNCTAD 2012b) Annex Table III.1 on page 199. China has 128 BITs in force, making it second only to Germany (136). 117 In his analysis Skovgaard Poulsen to my mind makes the important correction of not including China, Russia and Brazil. This importantly influences the outcome, providing a more accurate understanding of the position of the developing countries than those researches that still team a economic juggernaut like China to countries like Mozambique and Ecuador.
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affluent states and their ‘imperial wishes’ as a so-‐called ‘realist’ interpretation, which takes the regime as a means for the hegemon to assert its power (Sornarajah 2003) would have it. This is not to deny the impact of the affluent states’ interests in furthering the serial multilateralization. The regime was created through the intentional yet uncoordinated actions of capital-‐exporting states that sought a depoliticized and decentralized system to ensure efficiency and lower transaction costs. No clear-‐cut hegemon was thus pushing the agenda. Even more so, non-‐state actors, and in particular corporate agents and arbitrators but also the counter-‐veiling forces of civil society, steered the further normative and substantive development of the regime. With the ‘norm entrepreneurialism’ of corporations and tribunals as the main drivers of an indeterminate regime, the constitutionalization of the investor rights’ regime is a convincing example of reflexive law, which ‘locked-‐in’ the market ideology of the affluent state’ contingent policy choices into objective legal norms (Howse 2008). With a regime developing outside of the grip of states, the idea of consent, let alone informed consent, is in danger of being void of meaning. A telling anecdote in this respect comes from Makhdoom Kahn, Pakistan’s attorney general when SGS files its claim against the country. As he clarifies, even he did not know what a BIT was, nor was he familiar with the existence of the ICSID. Solely the relevant ministry (of industry in his case) was aware of these strictures on Pakistan’s government but they too saw BITs as harmless pieces of paper, sufficient for photo-‐ops and relation building tools. As Kahn is quoted: ‘“These [treaties] are signed without any knowledge of their implications. And when you are hit by the first investor-‐state arbitration you realize what these words mean.” (Quoted in Peterson 2010). It is exactly the ‘bite’ of the treaties that sets-‐off the current backlash. But not only developing states have been taken by surprise. As said, most prominently within the US government a backlash on national security issues has taken place. Concluding, then, besides the questions surrounding the initial situation of consent, the development towards a full-‐blown regime has taken place at least for an important part outside of (developing) state control. The case of investment thereby provides for a convincing case that ‘initial consent’ (Goldsmith and Levinson 2009) can hardly be legitimizing of the unforeseen: There is an inverse relation between consent and indeterminacy in the sense that the more open the content of the agreement is the less value can be attached to the meaning of ‘initial consent.’ In
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its own right, therefore, consent cannot provide for the necessary procedural legitimacy of the regime. There is one caveat to disavowing consent as a legitimacy function. Someone could rebut that while the argument on initial consent and the underdetermined nature of the evolution of the regime preempt consent as the basis for justification of the regime, an argument could be made that under ‘low cost’ exit options, no-‐exit strategies by states constitute ‘implied’ consent. 3.4. Exit As Ensuring Voluntary Participation
Where conscious and voluntary consent sediments commutative justice, ‘exit’ secures this legitimacy by underwriting voluntariness after initiation. The argument from ‘exit’ says that an agreement is to be considered a voluntary one when there are no substantial impediments to exiting the agreement. Like the consent argument, the defense of agreements, particularly between two parties, in terms of the liberty to exit would provide a strong legitimation of the regime and would at least minimize the ‘sovereignty redux’ argument against it. More over, exit can trump the lack of initial consent, as a continued adherence under such conditions can reasonably be understood as voluntarily consenting.118 That said the empirics in the case of investment treaties are not promising. Countries are formally free to exit but the practice is questionable in terms of substantial costs and the complexity of exit. The argument here is similar to a well-‐known concerning the WTO (J. Cohen and Sabel 2006; Armstrong 2009), which stresses the implication of the Single Undertaking (i.e. one can only sign up to the whole package offered by the WTO not cherry-‐pick your preferred arrangements). As a part of the Single Undertaking, TRIMs, GATS and TRIPS (all linked up to investment) confront the investment regime at least partially with the same limitations in terms of exit. ‘Package-‐deal’ effects exist within the investment regime also, though less critically so, in FTAs and regional treaties such as NAFTA, whose investment chapters cannot be abdicated on singularly. BITs are the most obvious case in which exit should be 118 As a not unimportant side-note: ‘Exit’ has a particular function to play in a moral understanding of reciprocity. Besides thus that it can indirectly justify the regime, it also plays an important role in the more theoretical issue whether the investment regime concerns ‘merely’ an issue of fairness or of full-blown justice. The import of this distinction by Rawls (1999a, 192) is somewhat unclear in its implications but it expresses a common idea (See Nagel (2005) above) that freely entered engagements are morally less demanding than those entered without a choice.
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relatively easy. We need to distinguish two types of exit here: 1) One could exit a specific BIT, i.e. cancel the bilateral relation one has to a specific country as Venezuela did with its BIT with the Netherlands;119 2) A country could also choose to exit a specific convention providing for arbitral access to foreign investors like Ecuador’s and Venezuela’s exit from the ICSID. A qualifying note is in place before discussing the two types of exit. The countries most active in their opposition to the regime are part of the so-‐called Bolivaran revolutionary countries. These have been able in the last decade or so to re-‐position themselves vis-‐à-‐vis the traditionally dominant countries like the US and European countries by establishing a strong trading block within Latin America, at least partially enabled through the emergence of the BRIC countries (Alvarez 2010). Other less endowed, less technologically advanced and less regionally connected countries may not have the opportunity to stand up in a similar fashion. The first contextual condition limiting exit concerns the ‘reputational damage’ faced by a country. The damage to reputation of rescinding BITs can trigger disinvestment, indirect retribution through cut lines of aid and trade, and it can have a crippling effect on domestic investment and international investment alike by worsening risk appreciation subsequently impacting credit provisions. The Bolivaran block might temper the harshness of the effects but not all or so placed. The point to make in relation to these countries is that a set of positive (political) preconditions enabled their attempt to partially retreat from the regime. Unsurprisingly, plain political and economic cloud matters also in the investment regime. However, no matter the emergence of this political-‐economic block their partial retreat makes for mostly a pyrrhic victory. Secondly, and more concretely, BITs expectedly spell out the specific legal arrangement allowing for exit. Importantly a ‘survival clause’ is included in BITs that determine how long BIT provisions remain legally valid after denunciation of the BIT itself. To take one example, while Venezuela has effectively denounced its BIT with the Netherlands per November 1 2008, the standards of the BITs will remain applicable to all investments already made under the Dutch BIT before November 1 2008 for another 15 years. This is determined under the ‘survival clause’ (Article 14 (3)) of the Dutch-‐Venezuelan BIT of 1993. In other words, only in 2023 is the exit from the BIT fully effectuated. While this might still be worth the consideration, 119 See http://www.iareporter.com/articles/20091001_93.
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especially since investors from third countries often use Dutch BITs through their mailbox companies in the Netherlands,120 the effect is in the short to middle term highly dubitable. Also, Venezuela still has 26 other BITs in force. Investors can thus relatively easily seek new ways of structuring their investment to receive treatment comparable to that set under the Dutch-‐Venezuelan BIT. With respect to exiting a specific convention, more specifically, the ICSID Convention, a similar caution is in place. The ICSID is simply one of the mechanisms under which arbitrations can be initiated. Investors normally would still be able to file under UNCITRAL or the SCC among others. 121 While these do set different procedural rules, provided that the BIT is the same little substantive difference in judgment should be expected. A main distinction as Ripinsky (2012) notes is that under Article 54(1) of the ICSID Convention the tribunals’ award finds instant enforcement while for instance under UNCITRAL subsequent enforcement by a domestic court is necessary. This difference is to be considered marginal however, given the fact that all signatory countries to the New York Convention allow for an investor to execute an award whenever the respondent state holds assets in a third signatory country. The shifting away from ICSID has little direct impact on the position of investor as is exemplified by Bolivia withdrawal from the Convention. Bolivia left the ICSID in May 2007 in a reaction to threats of claims by multinationals in relation to its planned nationalizations. This move did not in any way release them from the binding investment protection treaties. In an almost ironic act, the UK-‐ based energy transportation corporation Ashmore soon after showed the limits to Bolivia’s act by filing a claim against the country under the SCC, which ultimately resulted in a 240 million dollar settlement. Lastly, there is still lack of clarity on the effect of Article 71 of the ICSID convention on continuing effect of mechanism for investments made prior to termination. The current legal opinion seems to distinguish between those claims made on the basis of contractual breach (under a treaty) and those based on a treaty breach, where the former is still considered to be claimable under ICSID even after cancellation (since specific consent was given), the latter is not (since the original general consent has been revoked) (Ripinsky 2012).
120 In chapter 2, Bechtel was referenced already. Van (Van Os and Knottnerus 2011) note that 41 of the known 400 (10%) treaty claims have been filed under a Dutch BIT. Venezuela itself has been confronted by (threats of) claims under the Dutch BIT by many large US companies such as Mobil and Exxon-Mobil. See: http://www.iareporter.com/articles/20091001_93. 121 For instance, only 2 of the 26 BITs to which Venezuela is a party refer to ICSID as the sole arbitrator (Ripinsky 2012).
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To conclude, the investment regime is sticky in the sense that its current patchwork, serial, make-‐up makes for a highly resilient regime that cannot be easily escaped by individual participants. The regime is implemented through many different instruments that cannot be descended from all at once but even where termination is at face value relatively easy (as is the case with BITs) there is quite a long time-‐gap before termination actually takes effect. Even when denunciation (say of a particular BIT or a arbitration mechanism) takes effect, it is hardly the case that the landscape will have changed much. While not formally an example of a Single Undertaking in any strict sense, thus, the investment regime shares with the trade regime the highly improbably road of escape once signed-‐up. Having kept the discussion short, it is clear: Choosing ‘exit’ as a marker of the voluntariness of the regime is dubitable. In combination with the critical account of the legitimizing function of consent to the regime, the conclusion can be no other than a denial of any formal procedural legitimacy. 3.5. The Legitimacy Function of Output
It seems plausible to argue that the investors’ rights regime, even if it weighs investor rights over public authority, could be legitimized because of the output it generates in terms of a growing stock of FDI in general, the re-‐direction of FDI flows towards developing countries and the pro-‐development effects this flow creates. A consequentialist argument thus can be made that under certain conditions the advantages created under the regime could trump the procedural legitimacy concerns.122 Positively inclined commentators on the regime certainly use the output of the regime in a legitimizing function. This is done, generally, in two ways: by either arguing that signing IIAs attracts FDI and consequentially growth and development (through capital provision, infrastructure development, jobs and so on) or by arguing that this international legal regime opts-‐in the domestic legal structures enabling rule of law improvements. The legitimization effect of these two claims can be stated as follows: if these outputs are realized (in a sufficient manner) a trade-‐off argument could be made. Governments exchange some (regulatory) sovereignty within their territory for the development of their economies. FDI will bring direct value to the 122 I do not consider what specific conditions would define the relation between the two. My aim is merely to test the hypothesis that BITs generate output. Also, the idea that a certain a consequentialist argument could be used to trump procedural concerns opens the door to paternalism.
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economy through capital, infrastructure, labor and linking-‐in local companies operating up-‐stream or down-‐stream from the foreign company’s operations. The rule of law improvements will at the same time improve the investment climate for both new foreign investors and local entrepreneurs, while simultaneously placing a country on a path of good governance in general. In as much, the investment regime as a global governance institution thereby is taken to play a coordinative role within the global order. Unique in its largely bilateral structure, the current investment regime has the function and effect of creating guiding norms and providing information so as to coordinate the behavior of the participating actors. Fulfilling this coordinative function, global governance institutions “can reduce transaction costs, create opportunities for states and other actors to demonstrate their credibility, thereby overcoming commitment problems, and provide public goods, including rule-‐based peaceful resolutions of conflicts” (Buchanan & Keohane 2006, 408). The investment regime is adherent to these aims, coordinating the transnational relations between investors and states along a set of rules and regulations that institutionalizes investor protection. The main question however is whether this coordinative function is executed in a mutually beneficial way, i.e. is the regime living-‐up to its promise of reciprocity? Before putting the above consequentialist claim to the test, a note on the ‘mutuality’ of the advantage of the regime. Other than for instance the trade regime, the investment regime entails an asymmetry in its goals. For the capital exporting countries investment protection is the main aim. For developing countries on the other hand the advantage comes from the developmental effect of liberalized and ‘safe’ markets. In other words, as a scheme of social cooperation for mutual advantage, the investment regime instills a form of ‘indirect’ reciprocity (Kapstein 2006): The developing state is reciprocated for its abdication of sovereignty by a promise of economic development through the anticipated inward investment.123 In effect, as Van Harten notes, “[t]hese treaties do not affirm the rights and interests of international business as an inherent good they utilize investor protection as a means to an end” (Van Harten 2007, 140). 123 While for instance the 2012 US Model BIT states that it concerns the “encouragement and reciprocal protection of investment” it also states that the signatory parties recognize that such encouragement and protection “stimulate the flow of private
capital
and
the
economic
development
of
the
Parties.”
The
Model
BIT
can
be
retrieved
at:
http://www.ustr.gov/sites/default/files/BIT%20text%20for%20ACIEP%20Meeting.pdf. Such ‘double’ intention is standard in almost all treaties.
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3.5.1. From BIT to FDI, From Growth to Economic Development As the argument on why developing countries started to sign up to BITs already noted, over the last decades FDI has become crucial for public financing within many countries in Sub-‐Saharan Africa. A crucial source of capital for developing countries, FDI attraction has been understood as a crucial tool in poverty reduction. The idea is simple: FDI contributes to growth, which subsequently trickles down into poverty reduction (Jenkins 2005). 124 FDI by MNCs however not only contributes to development in terms of capital channeled into a country but it potentially effects “productive capabilities of a host state by bringing in more advanced organization, skills and technology” (Chang 2008, 88) and access to international markets (Stiglitz 2008). FDI, thus, should bring structural and sustainable development. The question here is whether there is evidence of BITs playing a positive role in this potential growth generation.
Research into this question has come to a somewhat uncomfortable
consensus: BITs at least by themselves do no significantly (if at all) increase investment flows into countries (Rose-‐Ackerman and Tobin 2005; Yackee 2008 and 2010; Hallward-‐Driemeier 2003). The reasons hereto have been quite evident. The UNCTAD already in 1998 noticed that investors already present in host countries were requesting their home country to sign treaties (UNCTAD 1998, 142), creating no new incentives but only ensuring enhanced protection. Other limitations, drawn out in the quantitative studies relate to the importance of issues such as business climate, infrastructure and general political stability for investments to come in. BITs in their own right do not over-‐rule these considerations when companies decide on their investments. Statistical evidence thus does not show a direct link between BITs and FDI increase. The question whether BITs trigger foreign investors to enter a country must be separated from the question whether FDI itself enables growth. Although this is not the place to delve into the issue, a few comments are in place regarding the understanding of the relation between growth measurement and the position of FDI. To establish whether concluding BITs attract investment the total sum of incoming 124 The argument on FDIs impact on development of course parallels the debate on the effect of the WTO aim of facilitating and freeing up trade to enhance growth in developing countries. The literature on this subject concerning the WTO and free trade is immense. See Dollar (1992), Rodriguez and Rodrik (2001), Rodrik (2007), Collier (2008), Chang (2008).
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capital is a sufficient measure. However, the mere data on FDI-‐accumulation is not sufficient to understand the ‘developmental’ value of the investment, as not all FDI is alike or of equal value to development. First of all, there are important sectoral differences (although extractive industries make for the greater part of FDI into Sub-‐ Saharan Africa). Also, a distinction is to be made between ‘green-‐field’ investment, and merger and acquisitions (M&A). While the former entails new factories, infrastructure development and so on, the latter, M&A, concerns investments that are more a substitute instead of a complement to domestic investment. As such a foreign player, with easier access to capital and larger markets, can easily upset the balance of an economy, outcompeting local firms and thereby possibly negatively impacting growth. Secondly, there is a 2-‐pronged question of measurement. The first prong concerns the way measurement is conducted. Measurements of development are still generally captured in terms of Gross Domestic Product (GDP) but as both Stiglitz (2008) and Pogge (2012) have accounted, this is a faulty measure. GDP includes the product generated within a specific jurisdiction, without qualifications on who contributed to the product. In other words, the total output produced in a country, including the production by MNCs appears in this figure. But when these corporations repatriate the profits or use them to pay higher dividends to stockholders abroad they have little to contribute to a country’s growth. This makes for a highly corrupted indicator when interest is in the increase of wealth (let alone the spread thereof).125 Both Stiglitz and Pogge therefore propose to move towards the Gross National Income (GNI) or Net National Product (NNP) to measure growth. GNI for instance only includes the income generated by the citizens of a jurisdiction and thus excludes foreign wealth generated within it.126 The second prong to this question concerns the valuation in terms of benefit in relation to cost. The latter namely cannot seriously be measured only in terms of economic costs directly related to the investment. More intangible costs such as depletion of natural resources and the degradation of the environment, let alone the costs to relocated communities (Stiglitz 2008; Penz, Drydyk and Bose 2011) need factoring in too. 125 Based on the World Banks’ World Development Indicators Online, Pogge states that foreigners owned much of the growth in Chile, Nigeria, Equatorial Guinea, the Republic of Congo, Angola, and Mozambique. See Pogge (2012, 83, FN 4). 126 Given the fact that capital flight is a common occurrence in developing country (See Shaxson (2011)) even such a measure is not without its problems. It should also be evident that neither GDP or GNI is a very good measurement for developments concerning poverty abatement since they are simplistic per capita concepts.
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The effects of FDI on development will be much dependent on the institutional context and the politics of FDI-‐regulations. As we noted before, the different IIAs emerging over the last decades are best understood within the broader wave of liberalizations and privatizations, ‘locking in’ these developments (as seen with Biwater Gauff and Bechtel). While the success and failure of the neoliberal wave cannot be discussed here, the limits the regime sets on host state demands towards investments is of direct relevance. It is true that only few BITs demand pre-‐ establishment application but combined with the favorable conditions of entrance, more recent BITs contain effective provisions limiting the ‘management’ of incoming investment by host states. The negative impact is a topic of economic debate but certain elements of the regime such as the ban of ‘performance requirements’ on investment (on local content requirements, export requirements or foreign exchange balancing requirements) do very directly constraint governmental policy making, minimizing a host state’s demand on an incoming corporate agent to structure their investment “in ways considered beneficial to the host economy” (Suda 2006, 119). Tools thus that could create a positive ‘spill-‐over’ effect form FDI and for a government to develop a holistic (industrial) development program around incoming investment have thus at least to some extent been practically placed outside of the governments toolbox. The National Treatment (NT) provision is an impactful example in this light. While a good argument could be made against discriminatory state policy, especially in developing countries with infant industries, the direct competition with much more powerful transnational corporations can easily crowd-‐out the local industry (Stiglitz and Charlton 2005). Interestingly, as noted in Chapter 2, under GATs countries do have the ability to protect their infant industry. The so-‐called positive list approach formally allows countries to open up only those sectors of the economy they deem suitable for foreign competition. 127 BITs do not allow for such an approach. In the realm of BITs a so-‐called negative list approach has emerged allows for specific exemptions from the overall application of the provision. These exemptions have to be negotiated out but provided that these negotiations are done
127 This claim is contentious of course since it assumes that local entrepreneurs have the cloud to voice concerns and be heard by their representatives pressured by foreign powers to open their economy.
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based on advanced economies’ BITs, they often allow little room for infant industry protection if that is in opposition to specific interests of the affluent country. The account developed so far should not be read as a defense of the now defunct Import Substitution models (IMS).128 However, there is reason to believe that at least some homogeneity of investment planning is beneficial to development. The praised success stories of the last decades, with such diverse cases as China, South Korea and Mauritania all allowed for a crucial role of states management of their economies (Wade 1992 and 2000; Woo-‐Cummings 1999; Stiglitz and Charlton 2005; Stiglitz 2006; Rodrik 2007).129 To apply the term somewhat erroneously, such states are ‘development’ states (Johnson 1999; Woo-‐Cummings 1999; Wade 2003), i.e. intelligent states that shape their markets within an international economy according to their preferred ‘recipe.’ BITs have effectively created a legal-‐ institutional realm that homogenizes the way in which investment can be managed (or not). Paraphrasing (Rodrik 2007) then, investment law allows not only for one economy but also for only one recipe. The lack of development promise of BITs has lead to criticisms of the regime under a sustainable development lens. 130 As a critical lens it has broadly drawn out an argument comparable to the one presented here. As the sustainability literature aims to turn investment law into an equitable undertaking, a positive contribution through this lens could be read as potentially undermining this thesis’ claim on corporate responsibilities. Since the argument here is of an ‘if x then y’ nature, in the sense that y is a conceptualization of corporate responsibilities that follows a certain reading of x (the investment regime), a fix on the x-‐side would pre-‐empt further analysis at the y-‐level. The sustainability literature however runs into some (obvious) difficulties at least when it sees sustainability as a function of a state’s right to regulate. 128 See Moran (2009) for an insightful critique on proposals for management of FDI by states. A hard blow was delivered to the Import Substitution Model in the 1980ies. See Lal (1983) for an incisive analysis of the economic flaws of the model. 129 Chang (2002; 2008) has made the argument that affluent countries have reached their level of development also through state management, only to open up to free markets once it would be beneficial to their economies.. 130 Certainly, ‘sustainable development’ and ‘sustainability’ are catch-all terms. Defined a long the lines of the Brundtland Report (World Commission on Environment 1987), which captures sustainable development in terms of the generational distribution of the fruits of development, or, more usefully in the context of socio-economic development, by reference to the first
Principle
of
the
1992
Rio
Declaration
on
Environment
and
Development
(http://www.un.org/documents/ga/conf151/aconf15126-1annex1.htm), which states that people should be at the forefront of the development process.
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As BITs promise reciprocal gains, 131 ensuring of sustainable development through them is seemingly obvious. Only relatively recently has the topic really garnered interest, largely due to the UNCTAD’s role as a driving force. With the increasing importance of FDI for economic growth in the developing world (UNCTAD 2012b), instrumentalizing FDI towards (real) development becomes increasingly crucial too. The UNCTAD already a decade ago coined the idea of ‘flexibility for development’ under BITs (UNCTAD 2000) so as to capture the need for regulatory ability of states toward development. The last WIR published in 2012 contains a long section on sustainable development and contains the outlines of the Investment Policy Framework for Sustainable Development; a framework which is further developed in a publication with the same name (2012b).132 These initiatives, while enriching the debate, have largely remained non-‐committal on the UNCTAD’s side, as they are considered part of a ‘policy-‐pallet’ (Muchlinski 2011). The UNCTAD’s work nonetheless pushed the subject and has been a reflection of sustainability considerations more generally as countries such as the US, Canada, Norway, South Africa and Australia have (sought to) revise(d) their model BITs over the last decade allowing for more leeway to states. The most advanced statement however came with the International Institute for Sustainable Development’s (IISD) Model International Agreement on Investment and Sustainable Development (IISD, 2005). This Model provides a strong belief in the states’ right to regulate (Article 25(b) of the Model) that, on the one hand, includes very wide economic social and economic policy objectives and, on the other hand, only limited only by customary international law. As BITs have effectively developed as a response to the ambiguity of the status of property held in foreign hands its raison d’etre is to “do what the IISD draft seeks to avoid, namely to subject the state’s right to regulate to investor control” (Muchlinski 2011, 52-‐3). The broad formulation of the right to regulate would effectively void BITs as such. A ‘right’ to regulate then can hardly be defined in a document that is devised to curtail the investor’s main fear of regulatory changes.133 Pro-‐development changes within BITs are therefore to be expected to be 131 Vandevelde (2009a) has noted that the pro-development argument only emerged in the 1990s as spreading democracy and development became points on the foreign policy agenda of the US. This clearly shows the historical particularities of the regime. 132 The Framework is more of a tool kit from which BIT negotiator’s can pick and choose, informed on sustainability effects of provisions. 133 In a report by the Economist Intelligence Unit (EIU) for MIGA (2011), a survey among 60 MNCs shows that contract breach and adverse regulatory changes are the key elements installing fear in managers.
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(highly) incremental and only allowing a small range of improvements so as not to default the BITs regime. This seems ‘politically’ (but in effect also from a regime-‐ internal perspective) the only way forward – as juridification of investment protection has furthered investor protection and limited transaction costs for home states, limiting protection and extending the responsibilities and costs of the latter would radically move in the opposite direction. Lastly, a paradoxical situation might emerge: The attempt to develop a sustainable investment treaty might trigger companies altogether to leave this realm behind since it simply no longer provide any certainty to corporations, while it does trigger obligations.134 Leaving BITs can imply more aggressive contract negotiations but more importantly it can trigger a withdrawal of investors, particularly in sectors other than extractives, from developing countries. Some have noted a ‘Return to the State’ (Alvarez 2011) within investment regulation. This ‘return’ can be traced in a range of Model BITs such as the US 2004 Model 135 that is much more detailed in its language, and explicitly allows for regulation on topics such as health. It is also fostered by the fact that US national security interests have been oppositional to the regime. Feeling the heat of having become a net importer of capital, protectionist behavior in sensitive areas (potentially widely defined when it concerns Chinese investors for instance) has increased.136 Lastly, the regime has faced a backlash from Latin American resource nationalism. While these developments are a reality and do create increasing space for the state within the regime, one can, ironically, also argue that an opposite development is taking place. 2012, firstly, saw the highest number of known arbitrations (62) initiated, with the large majority of these cases (63%) filed by investors from developed countries, almost exclusively targeting developing countries as respondents (68%), and, lastly, saw the largest claim ever awarded (Occidental Exploration: $1.77 billion) (UNCTAD 2013; see more generally UNCTAD 134 Under the IISD Model, Article 17 for instance extends liability under the home state’s jurisdiction onto corporate agents operating abroad. 135 In the appendix to (Alvarez 2009) an interesting and helpful representation and comparison of both the 1984 and the 2004 US Model is provided. 136 The claim is not that no review of investment was in place before recent years (the 1988 Exon-Florio Provision established a review mechanism) but that the urgency and extent thereof have significantly increased (particularly with the passage of the 2007 Foreign Investment and National Security Act (FINA)). See (Cobau, 2011)for a detailed account.
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(2012b). While these numbers as such do not prove the opposite of Alvarez’ contention, they at least pinpoint that there is still a robust space for investors to claim their rights under BITs. Secondly, the 2004 US Model BIT has, besides including the above ‘social’ limitations on investor’s rights, also scrapped the ‘Umbrella Clause’ from its list of standards; an improvement in terms of state liberties. It is at the same time the first BIT ever to directly include what it calls ‘Investment Agreements’ under the scope of BITs. Hereby, in effect, all contractual relations in the natural resource, infrastructure and large-‐scale service sector are included under the treaty (Henry 2009), vastly expanding the application of the BIT. Importantly, the revised 2012 US Model BIT has added yet another element to the powers of corporations, effectively strengthening the argument on the chilling of regulation. Under Article 11(2)-‐(3) namely a demand is formulated requiring countries to publish an advance notice of proposed action to investors and to allow for and respond to investor comments. In effect, corporate agents under this requirement increase their direct influence over law making and will have further ground against states in which new regulations might not themselves even find direct way from department to department within the government.137 Crucially, where the US has thus been on the forefront in reinstalling state-‐ management within investment for national security issues, it has showed much less interest in the specific issues that confront particularly LDCs. Moreover, a new Model BIT does not imply the realization of a new actual BIT. Where BITs are in place both parties need to be willing to renegotiate the BIT and it is questionable whether the US has much interest to reset the standards of investment with countries that are mere (or largely) importers of US capital. Renegotiation is a incentive-‐based undertaking that still fits a mercantile stereotype in which the shadow of power plays out. To follow up on Alvarez’ line: The relevant question is how the state returns if it returns? Or maybe even better, which state returns? It should also be noted that while some countries have made promising steps towards more ‘pro-‐state’ BITs, European countries – leaders in the amount of BITs signed, huge sources of FDI to Sub-‐Saharan Africa, and purveyors of strongly pro-‐ investor BITs – have been lackluster in their reforms. This unwillingness for change can be argued to result, firstly, from the fact that other than the US, European 137 The requirements only apply “to the extent possible,” softening the effects of the new requirement. I thank Lise Johnson and Lisa Sachs for pointing out this change in the 2012 US Model BIT.
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countries until very recently have not been confronted by large investment claims. Secondly, most probably the Lisbon Treaty negotiations, which included the shift of competence over the regulation of inflow and outflow of investment to the EU Commission, made countries little interested to reform their laws in advance. The shift of full competence over international investment treaties to the EU Commission most likely will improve the lot of those on the receiving end but the extent and type of state regulatory liberties and the impact on development are for now unclear. A third, now dominant player in the BIT-‐regime, China, it has to be noted, moves in a direction opposite of what is sketched above as it increasingly signs BITs that more resemble the heavily pro-‐investor 1984 US Model BIT. These ‘opposite’ developments do not bode well for any short-‐term radical change in the governance of the investment regime. Certainly, as long as the ‘serial’ make-‐up of the regime is not substituted by a, for now inconceivable, full-‐blown multilateral regime that is able to incorporate crucial corrective elements to investor rights that enable sustainable governance by the state while retaining interest from corporations, the limitations set by the path-‐dependent nature and the particular ‘stickiness’ of the investment regime should not be underestimated (Boettke, Coyne and Leeson 2008). As long as substantial changes are little more than ‘pie in the sky,’ and reciprocity is continuingly undermined without prospect, there is a legitimate argument to be made on the necessary corrections to our current models of corporate agency upon which their responsibilities are formulated. Within the investment regime there are attempts in this direction (see the unsuccessful Norwegian Model BIT that had to include the OECD Guidelines into the BIT as a complement) but the BIT might not be the place to include such claims. In the end BITs are tools of implementation that translate prior notions of right and responsibility. 3.5.2. Rule of Law-‐legitimacy
Investment law can be touted as providing improved governance and strengthened rule of law by correcting deficiencies in state governance institutions through international means. This certainly could be a motivational reason for developing countries to sign into the regime since it allows them to signal their commitment not only to investment openness but also ‘good governance.’ BITs solve the credibility issue for they lock-‐in regulatory stability by considerably increasing the costs of
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abrogation of promises, in a way that pro-‐investor domestic legislation could never do.138 Echandi (2011) stretches the argument even further: Placing oneself under the stringency of the BITs regime enables progressive elites in a developing country to utilize an external corrective measure to push trough the necessary good governance and rule of law institutional changes at home. In as much, therefore, the investment regime as an “instrument of global governance and expansion of the rule of law” (Montt 2009, 75) obtains its legitimacy through the enablement of security (for investment) and institutional progress and concomitant welfare (for developing countries). The idea of the investment regime as providing a coordinative function enabling consistency, coherence and consequential participant expectations and thereby reducing transaction costs, is an appealing one. It is unmistakably the case that the investment regime contains the qualities of such a regime and does provide a coordinative function. The investment regime ‘locks in’ certain legal arrangements pertaining to property rights and the treatment of investment. Again, the question remains open whether such a ‘lock in’ represents a fair distribution of advantages, i.e. reciprocity in benefits – a serious challenge provided the ingrained differences between the states involved in the regime and the goals they seek within it. Strangely enough, given the oft-‐repeated ‘good governance’ claim, little research has been done into the topic. An outline of the set up of the arbitral tribunals, the variance in decisions and the effect of BITs on domestic rights holders puts the claim in context. The most obvious aspect of the investment regime, discussed in chapter 2, that sits uncomfortably with the idea of rule of law, is the set-‐up of the arbitral tribunals. One-‐off tribunals, manned by (almost always) 3 arbitrators selected among a small international group of elite legal professionals, that wear different hats contemporaneously at times, and the existence of highly divergent interpretations given by tribunals (whether this is a crise de croissance (Stern 2011) or an in-‐built deficit) create a sense of uncertainty especially for (developing) states in fear of a challenge. In addition, the tribunals operate under a veil of opacity. Notably, while 138 The sketch provided is to make a case for BITs as rule of law-enhancing. The depictions is therefore intentionally somewhat at odds with the earlier comment in relation to Alvarez understanding of ’why’ developing nations sign BITs. One question to be asked in this case: If BITs hold a motivational factor for developing countries, why are BITs almost singularly demanded by developed nations and not offered by developing ones?
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the ICSID is the only arbitral mechanism providing for regular publication of its awards, large parts of the proceedings remain undisclosed to the wider public. Although the admission of Amicus curiae, since Methanex, has become somewhat commonplace, access to proceedings by ‘externals’ is not, nor are the documents of the claimants or defense released on a consistent basis. These flaws of design are framed within a general judicial system that itself allows little space for second-‐ guessing given the limited jurisdiction that domestic courts have over awards and the highly restricted ‘corrective’ powers of (one-‐off and ad hoc) appellate panels. In this context, it should not be forgotten that BIT arbitration concerns regulatory and not simply contractual and commercial issues. As Stiglitz notes, reflecting on Tecmed and MTD, “[t]here is something ironic about arbitration panels criticizing the administrative processes in developing countries” (Stiglitz, 2008, 523) and, we may add, to depicting them as the harbingers of the rule of law. Gus van Harten, the most vocal commentator on these issues of the regime’s architecture, has argued that the consensual model of arbitration built in to the regime is fundamentally inadequate in the case of regulatory issues. His claim is radical: “[T]he courts and only the courts should have the final authority to interpret the law that binds sovereign power and to stipulate the appropriate remedies for sovereign wrongs that lead to business loss” (Van Harten 2007, 118). With respect to the direct relation between BITs and domestic rule of law enhancement, Tom Ginsburg’s (2005) explorative work stands out. In a quantitative study he found that instead of the professed rule of law-‐enhancement as a result of signing BITs, the adoption of BITs correlated with subsequent declines of rule of law scorings under the World Bank Worldwide Governance Indicators.139 While there is certainly further empirical work to be done, 2 assumptions made in the rule of law as legitimacy claims are uprooted by his account. The first assumption is that investment law creates incentives for establishing rule of law institutions within developing societies and secondly, that the BITs provisions translate into an efficient regulatory regime not dependent on the specific context to which it is applied. Concerning the first assumption. It is true that the international investment regime exerts pressures on signatory countries to ensure regulatory stability, a streamlining of government agencies and general good governance. The question, however, is to 139 See: http://info.worldbank.org/governance/wgi/index.asp for the indicators.
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what extent this pressure effectively translates into a general overhaul of a country’s governance system. Given the by now accepted economic wisdom that markets need strong institutions (Rodrik 2011), obviously such restructuring of the basic institutions of society towards a liberal market economy is highly costly in terms of both finances, expertise but also politically for such reforms will necessarily impact established elites. Where corporations were fully dependent on the quality of a domestic regime, there seemingly would be an incentive for them to contribute to the development of the necessary institutions. The BITs regime however takes away this incentive for it allows foreign investors to operate within a risk-‐reducing transnational legal enclave in which they are assured the necessary protection. Daniels (2004) has argued, foreign investors might even rationally oppose the development of good domestic rule of law institutions, preferring arrangement in which local elites are co-‐opted over society-‐wide improvements. The second assumption concerns the transferability of institutional frameworks. Earlier I referenced Rodrik’s (2007) important insight that while economies might (ideally) operate best in one specified way (liberal markets), in effect there are many recipes dependent on the specific context of a country to make such model work. Such argument applies equally to regulatory issues. Following Stiglitz (2008), if we believe that regulatory equilibria depend on a wider context, the argument that the one-‐size fits all BITs will increase regulatory efficiency and thereby improve the conditions of a specific society, seems misplaced. With BITs premised on a preferred equilibrium under the conditions of an advanced market economy, a misfit with the sometimes radically different societal structures of a weak governance developing country is evident. The potential effect hereof runs deeper however than merely problematic implementation as such. If the above depiction is correct, “BITs may interfere with a country’s ability to develop a legal framework maximizing society’s social welfare” (Stiglitz 2008, 465) since giving “greater security to unfettered property rights does not necessarily lead either to greater efficiency or higher levels of social welfare” (Ibid., 487-‐8). This economic insight would also challenge accepted normative claims from Global Administrative and Comparative Public Law that the legitimate cut-‐off point for investment protection lays equals current levels of protection in advanced economies (Montt 2009; Schill 2010). Although there might be a procedural kind of fairness obtained by such globally applicable level of protection, the application of a unifying regime to
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highly divergent participants might lead to welfare-‐undermining distributive effects in developing countries.
This position is supported by an obvious but somewhat underappreciated
effect of the investment regime on the grounds drawn out by Lorenzo Cotula (2011). In an in-‐depth study comparing the scope of protection of property under international investment law as compared to the protection provided by human rights regimes as well as constitutional law in three African countries, Cotula has given some concrete details on the implications of the impact of BITs on state incentives to ensure human rights and socio-‐economic policy. The application of BITs to the property rights context in sub-‐Saharan African countries oftentimes pits the customary systems of communal property rights against the individualized rights of the regime. In cases where opposition occurs or where local rights need pro-‐active governmental support not to disintegrate, BITs disincentivizes governments to do so for the potential effects of claims (Cotula 2011, 118-‐119). Communal property rights as existent in many African societies with large herding or agricultural economies do not figure often in accounts of good governance and rule of law but they need to play a role in the implementation of global regimes within local contexts. The existent of such communal rights reaffirms the insight that each context needs its own recipe. Simply asserting that BITs adhere to a formal notion of rule of law is not satisfactory in understanding real-‐world enhancement herein. In short, proponents of such rule of law-‐legitimacy argument, at the very least, need to account for some of the complex issues raised here. The rule of law argument is also made on a higher level, as part of a wider notion of a legal form of cosmopolitanism (understood as states willingly binding their hands). Petersmann is probably the most renowned proponent of the idea that International Economic Law (IEL), of which investment law makes up a critical part, presents a higher order administration of justice beyond the nation-‐state. To him, investment law, like human rights law, is part of a multilevel form of global constitutionalism that restricts government to the benefit of individuals. The relation that Petersmann sees between human rights and IEL, and investment law in particular is somewhat ambiguous. On the one hand, human rights law is a corrective to investment arbitration in the sense of rebalancing the public-‐private dimension in the arbitral considerations, while on the other hand investment law is presented as functionally
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equivalent to human rights law (as a corrective on state power) – and praiseworthy as such. This latter notion comes out clearly when he writes that “the ever-‐more comprehensive, individual rights of ‘access to justice’ in human rights law, and IEL, resulting ‘judicialization’ and ‘constitutionalization’ of international trade and investment law, reflect a systemic strengthening of ‘principles of justice’ as part of the constitutional foundations of modern IEL” (Petersmann 2009, 10). While this is certainly not the place to delve into Petersmann usage of Rawls’ theory of justice as underwriting ‘constitutionalization’ as strengthening ‘principles of justice,’140 obvious question emerge in reaction to the functional equivocation of human rights and investment law. Certainly there is a difference in object of the two treaty regimes. While both regimes, in a basic sense, limit the internal sovereign power of the state for the good of ‘individual’ actors, the object of human rights treaty law is people in general while investment law singles out a very specific set of ‘individuals.’ As noted, investment law is in existence for large foreign investors or those nationals wealthy enough to restructure their investment abroad. This is hardly a general and universal category. Conceptualizing the protection offered in terms of (fundamental) property rights, like Petersmann intends to do, does make such protection sound more benign but it does not change anything to the exclusive category of application under investment treaties. As our critical outline has shown, investors have often been highly powerful actors that can exert their will on host governments in need of their investment, either singularly, through support of their home country’s diplomatic mission or under the ‘liberalization’ guise of the Bretton Woods institutions. In any case, any notion of constitutionalization, whether intended as descriptive, critical or normative under the current global political order, which lacks effective democratic governance
140 In a 2002 and 2008 debate between Petersmann and his commentaries, Philip Alston and Rob Howse (Petersmann 2002 and 2008; Alston 2002; Howse 2002 and 2008a), the commentators, highly critical of the legal analysis of Petersmann on the one hand, forcefully pointed out the implications of Petersmann understanding of ‘constitutionalizing’ IEL as a move towards justice. Simply put this critique read that corrective international institutions that limit states regulatory function in order to protect economic rights (property) underwrite a neoliberal position that favors property over all other human rights, binding the state in securing the latter. Petersmann himself, clearly disturbed by the tone of his critics, refutes these critiques as misrepresenting his position; denying forcefully the neoliberal tendencies in his argument (See particularly Petersmann (2008). Without deciding here who is right and who is wrong, from Petersmann (2009) we can at least conclude there is a certain amount of ambiguity with respect to his position that is not solved in his writing: is the constitutionalization of investment law a step on the path to justice in its own right, or is it a completely overhauled investment law system that includes space for human rights policy making by states.
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beyond the nation-‐state, it needs at least to be critically reviewed.141 Petersmann’s support for a constitutional regime of investment law is premised on a belief that national democratic practices are by definition in need of an outside source curtailing its practices. In stark contrast to Schneiderman’s critical usage of the notion of constitutionalization, according to Petersmann investment law instead of “undermining constitutional democracy, IEL and multilevel judicial protection of rule of law are preconditions for individual and democratic self-‐governance in the globally interdependent, worldwide division of labour among states and citizens with diverse self-‐interests and preferences” (Petersmann 2009, 42). To stress this importance of such constitutional regimes, Petersmann accounts for them as developments towards citizen-‐oriented ‘constitutional justice’ (Ibid., 9). In other words, the investment regime forms part and parcel of a developing cosmopolis. In practice, however, other than neatly fitting together, human rights and investment law both collide and overlap. In that sense, instead of examples of parallel developments of constitutional norm-‐emergence within the international order, a more fragmented order shows itself through these two regimes. To shortly outline the pitfalls of the practice, 142 the relationship between human rights considerations and investment protection appears in three ways: First, there can be an overlap between the two regimes (namely both as protective of the right to property). Second, there can be direct opposition of protection of property rights under the human rights regime and the investment regime. And lastly, there can be a limitation of the ascribed human rights duties of a state because of investor protection rights under BITs. To start of with the first relation of overlap: A clear overlap can appear in the protection of property rights under investment law. As Peterson notes, the two regimes work together and overlap in limited cases only: “[I]t is those human rights which sometimes protect business or economic actors that have been cross-‐referenced as interpretative aides in the investment treaty context” (2009), 9). In the cases Mondev,143 Tecmed and Azurix such analogies with 141 Global Administrative Law (GAL) takes the potential ‘freezing’ of power-imbalances through ‘juridicalization’ exactly as the main threat to their project. Already in the defining article of the project, (Kingsbury, Krisch, and Stewart 2005) note the challenge. Krisch goes furthest by normatively favoring a form of global legal pluralism over constitutionalism as such for the risks of ‘hegemonic’ or at least a form of freezing of current power-balances within legal institutions and outside of the political realm (Krisch 2009). 142 To be sure, I do not intend to say that Petersmann is not aware of the following claims. The aim is merely to argue that provided these limitations his conclusions drawn (somewhat ambiguous in the end) come into question. 143 Mondev International Ltd. v. United States of America (2002), ICSID Case No. ARB(AF)/99/2.
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the case law of human rights were drawn to understand the rights owed to the investor. This reading of human rights as protection of investment (property) falls squarely in line with the European Convention on Human Rights, which ascribes that corporation also enjoy human rights protections (Emberland 2006). With respect to direct opposition between the two regimes, property rights protection under large national resource projects show how direct opposition of the human rights regime to the investment regime can appear on the ground. In these specific cases powerful foreign investors receive much stronger protection than the oftentimes, in sub-‐Saharan Africa, non-‐formalized communal rights of local communities. There are many reasons for this such as the fact that while investor rights are enforceable, communities have no direct access to judicial mechanisms themselves to claim their communal rights. Also, large investment projects can simply trump the rights of communities by being conceptualized as supporting the public good and thereby trumping individual or communal claims. Regarding the restriction of investor protection through human rights, the latter can be used in two ways to curtail the legitimacy of claims of corporations. Firstly, human rights can be introduced to evaluate the behavior of the corporate agent within the host state and, secondly, human rights can be invoked to excuse the behavior of the host state. The first way is still very contentious from an international law perspective. Specifically, as a type of lex specialis the idea would be that as long as human rights obligations are not specified for corporations within a BIT no such claim can rest upon them. There is some movement on this issue, however, as investor access to arbitration has been limited on the basis of corporate corrupt behavior (Muchlinski 2006). Certainly, much progress can be made here as will become clear in the following there certainly is a question of expertise to be answered with respect to the inclusion of human rights within the BIT arbitration. The second use is of human rights to grant leeway to states, although potentially valuable (as Suda (2006) shows in a reframing of a potential human rights based-‐defense in Tecmed) is also dubitable. While it often remains an open question to what extend governments are sincere in upholding their duty to ensure human rights, under treaty law (particularly the UNESCR) states do hold duties under international law hereto. Arbitrators arguably need to decide whether human rights obligations mitigate states’ obligations towards foreign investors and thus “face a difficult and novel task in determining how international human rights and economic
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law obligations are to be juggled by states” (Schill 2011, 931). It is questionable whether arbitrators that are specialist in investment law are best placed to take up this task. This comes out starkly in the ‘necessity defense,’ which has lead to divergent (even opposing) rulings under highly similar circumstances (same US-‐Argentina BIT and similar fact-‐situation, i.e. crisis management by the Argentinian state), ranging from acceptance of the defense (LG&E; Continental Causality) and repudiation (Sempra; CMS). Aquas was considered a core case to establish the balance between a state’s human rights obligations and the rights of investors. Argentina used the ‘necessity defense’ to argue that their termination of water rights to investors, who had wanted to change tariff-‐rates under their contracts equilibrium provision, was legal so as to protect fundamental rights of the Argentinian population.144 While instantly acknowledging the fact that human rights considerations were on the table, the tribunal however did not understand Argentina’s human rights duties to trump the investor’s rights (par. 262). It did so on the basis of 2 separate arguments: First, the necessity defense is supported only under the strict conditions that the governments’ actions were the only means to satisfy the end and that the government had not contributed to the dire situation (par. 265). Argentina did not fulfill these conditions. However, these conditions are not only stringent but their application is dependent on the untangling of extremely complex empirics. As Stiglitz (2008) notes, with such decisions arbitral tribunals effectively pretend to hold the answer to highly complex economic questions on which economists are still in a fierce debate. Secondly, and more fundamentally, the tribunal denied that there was in any case an opposition between the obligation of the state towards citizens and towards investors respectively. These obligations are not contradictory or mutually exclusive and thus must be respected equally and at the same time – no matter what circumstance. It is not clear how exactly this conclusion can be drawn but as Peterson has noted in relation to the original CMS ruling it is seemingly based on an odd syllogism: “property is a human right; investment treaties protect property; therefore, investment treaties are treaties which protect rather than harm human rights” (Peterson 2009, 24, Fn. 53). 144 The claim was formulated upon General Comment 15 of the UN Committee on Social, Economic and Cultural Rights to which Argentina is a signatory state. It should be noted that this defense is thus dependent upon a second treaty obligation of the Argentinian state and not upon moral grounds. It should also be noted that his implies that non-signatory states, or those that have not ratified, such as the US, do not have the possibility to infer this defense strategy.
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None of the above is to be understood as a denunciation of the potential of human rights to limit the implication of overarching investor protection. From a normative position, much can be said in favor of human rights as curtailing exactly the articulated ‘freezing’ of state regulatory activity, which is so important especially in light of the notion of ‘progressive realization’ of the rights under the UNESCR. The crux of this section is that the human rights regime and the investment law regime are not fully functional parallel regimes, even though they share certain general characteristics. They can be effectively in discordance with one another in different ways. Where overlap has been obvious, under current investment arbitration, human right provisions have so far largely been taken to apply to the position of the investor and have done little to ensure state regulatory policy.
An argument on ‘bridging the divide’ (Howse and Teitel 2007) between
economic rights and human rights within the two regimes is compelling. However, like the ‘sustainable development’ approach to investment treaties, as a response to the lacking positive effects of the investment regime on economic growth and development, human rights considerations are not easily implemented into treaties or into arbitration for a plethora of reasons. As the short discussion on the ‘necessity defense’ shows, arbitrators are not easily motivated to approach investment cases in terms of human rights. This might change over time with governments including human rights protections into their treaties (like the draft treaty of Norway or the referenced IISD model BIT) but without a global investment agreement that balances out rights and responsibilities of both states and corporations, it is an outcome highly unlikely to occur any time soon as the ‘serial’ nature of the regime makes improvements highly limited. As Peterson notes, “if the Norwegian Government negotiates more balanced bilateral treaties with foreign partners, it remains to be seen whether Norwegian investors will elect to make use of such agreements or whether they will instead structure their foreign direct investment (FDI) activities so as to make use of agreements concluded by other governments with the intended host-‐countries” (2009, 15). Again, assuming that a multilateral regime can fairly balance out economic and human rights in a way satisfactory to both sides is in itself highly dubitable – and so are the changes such regime will come about.
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3.6. Concluding Remarks This chapter concludes the first 2 stages of this thesis. After Chapter 2 outlined the regime of investment as a subject of justice and has shown how the regime constitutes corporate public power, this chapter has evaluated legitimacy strategies at hand to argue for the reasonableness of the regime. To that extent, a ‘moral-‐ interpretative’ account was presented of the regime. It turns out that the strategies under consideration do not sustain as an account of commutative justice nor is the distributive effect of corporate public power in any way offset by (indirect) reciprocal gains for the developing country. The regime to that extent triggers two organizational issues that need to be confronted: A lack of ‘fair’ reciprocity within the functioning of the regime and the emergence of corporate public power through it. These issues establish injustices in the organization in need of further evaluation and correction. In effect, at this point we are confronted with a highly pervasive regime that triggers distributive concerns that in and of themselves cannot be eliminated through a proceduralists legitimizing strategy. The next chapter, breaking from the interpretative model of PDA in its ideal form, will distill the main features from Chapter 2 and 3 that have to be accounted for in a normative endeavor of a justificatory account of the regime. The claim to be developed is that the current ‘pure’ institutionalism of liberal global justice theories are hard pressed to be fully guiding in practice. As it seeks to reduce the impacts of corporate public power to institutional tweaking and understands reciprocity as an institutional notion only, no space is allowed for reflections on the expectations that ought to connect to corporate agents under specific conditions of corporate public power and ‘weak’ states. Under the guise of the investment regime the public/private and institutional/interactional distinction has been (further) eroded. Normative guidance can therefore not be premised anymore on an abstracted reflection on institutional arrangements that simply bear little insight into the feasibility problems on the ground. Justifying Corporate Public Power
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Chapter 4 Justice Theory: Biases and Limitations
4.1. Introduction Chapter 2 concludes that the investment regime distributes power to the corporate agent in such a manner that we ought effectively to speak of a form of corporate public power. The legitimatization strategies introduced in Chapter 3 were intended to test whether this distributive effect of the regime could be legitimized either on procedural grounds or on the basis of reciprocity. Unsuccessful in the defense of the regime, the discussion of these strategies makes apparent that the distributive outcomes of the regime have been premised on existing background injustice. Skewed by the existing initial bargain and informational positions, the distributive outcomes that have favored the corporate investor from affluent home states are a direct result of the conditions under which the regime emerged and evolved. In as much, the regime undermines reciprocity as expressed by cooperation as fair mutual advantage. The investment regime is, thus, characterized by a ‘reciprocity gap.’ This Chapter opens with a further unpacking of the concepts of reciprocity, corporate public power and differential Statecraft to sharpen the normative challenge of the analysis of the investment regime.
The account that emerges sits uncomfortably with ‘institutionalist’ liberal
theories of global justice, which has traditionally understood question of justification to only apply to state and state-‐based actors. This Chapter challenges the liberal bias by questioning two of its axiomatic presumptions. This aim is not to undermine these presumptions as such but to ‘open-‐up’ space to a more problem-‐oriented type of justice theory that accepts the possibility of corporations as agents of justice. Under the heading Consequence 1, firstly, an argument is developed that shows
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‘pure’ institutionalism runs into its own limits at least when normative philosophy is thought of as holding a guidance-‐function. To develop the point, ‘pure’ institutionalism is shown to rest on a flawed account of the primacy of ideal over non-‐ideal theory. Upholding the ideal-‐theoretical assumption of institutionalism under non-‐ideal conditions is argued to be either theoretically unsound or is acknowledged to be of an instrumental nature. In the latter case, however, institutions are mere ‘best means’ implying that given certain conditions non-‐state actors such as the corporation could become subjects of justification. Secondly, and as a follow up on the non-‐ideal investigation, Consequence 2 argues that the distributive consequences of the investment regime undermine the state only-‐focus in poverty abatement. It does so by showing the liberal state model that still underpins general analysis of the challenges of burdened societies, to be insufficient in capturing the challenges posed by the interloping legal-‐institutional relations in which these societies are captured. This chapter, thus, creates space to situate an account of corporate responsibilities under a justice framework. Corporate agency, within the justice-‐ generative practice of investment, endowed with public power should be considered a site of justice. To note, this is not to undermine the importance of institutional structures to the cause of justice. It simply is a request for a more pluralist approach to justice under non-‐ideal circumstances. In their public functioning, the responsibilities of private corporate agent need to be conceptualized as relevant on the ‘institutional’ level of analysis. 4.2. Recap and explication: Reciprocity, Corporate Public Power and State Agency The following subsections tease out the core concepts of the thesis at hand. They will be explicated in terms of their normative relevance and the manner in which they translate our account on the corporate agent within the investment regime into a basic framework to analyze corporate responsibilities. 4.2.1. Reciprocity
The investment regime can be considered to provide for a clear-‐cut case of “relevant relational circumstances of justice” (Ypi 2010, 548) beyond, and non-‐reducible to, the state, consequential in its impact on the conduct of the relevant participants of
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the practice, redrawing the power-‐balance between state and corporate agent. We have articulated the relevance of the regime as a subject of justice in terms of its wide-‐ranging and particular distributive consequences (Chapter 2). Strung through Chapter 3 subsequently was the idea that both empirically, in preambles and ad hoc justifications of the regime, as well as normatively, reciprocity is the key concept to critically engage and evaluate the current status of the regime.145 As such Chapter 3 evaluated the legitimacy of the emerging cooperative venture that is the investment regime and questioned its distributive promise, i.e. the ‘unbounded’ distributive consequence of corporate public power remains without a reasonable counterpart. Where the empirical notion of reciprocity was quite clear already in this evaluation, the moral understanding remained underdeveloped. To critically engage the regime as a case of background injustice, this subsection provides a further stipulation of reciprocity as a moral concept.
Under reciprocity as a moral notion, a moralized understanding is given of
a practice representing a cooperative venture. This is not to make the historically false assumption that the regime emerged as a cooperative venture. It merely says that we will evaluate the fairness of the practice as if it is cooperatively undertaken. Rawls’ ‘criterion of reciprocity’ provides a helpful baseline understanding of the meaning of reciprocity “when terms are proposed as the most reasonable terms of fair cooperation, those proposing them must think it at least reasonable to accept them […] not as dominated or manipulated or under pressure caused by an inferior political or social position” (Rawls, 1999b, 14). Formally thus, reciprocity entails what can be called ‘justificatory equality’ in the sense that a practice needs to be justified to all participants considered as moral equals. In other words, all participants are entitled fair ‘reasonable’ terms of cooperation under the practice to which they are a party. As a formal concept, however, reciprocity does not articulate the specific conditions of fairness but merely provides the contours of an idea of fairness as ‘reasonable for all to accept.’ In as much, the notion of reciprocity functions as a formal evaluative criterion within the methodology of the PDA by which justice-‐ generative relations can be teased out and articulated. The contents, however, of the relation that triggers justification – and, thus, what terms are to be reasonably
145 As a reminder, accepting a pluralist approach to the grounds of justice, reciprocity is here not singled out as the singular expression of grounds of justice, as say Sangiovanni (2007) has it.
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proposed – is not given by the notion of reciprocity but is dependent on the empirics of the practice under evaluation.
The investment regime does not live up to standards of procedural justice
for the lack of meaningful consent and rather large impediments to exit. At the same time, it falls short of fulfilling the demands of reasonability under reciprocity. In other words, it does not fulfill the ‘criterion of reciprocity’ as the regime effectively is built on certain background injustices that subsequently translate into injustice distributive effects that stand in need of correction. The current reciprocity gap is arguably thus an effect of the exploitative relation (as ‘advantage-‐taking’) throughout the evolution of the regime. The exploitative relation is, thus, not only to be traced into those constitutive moments of the regime but also in its continuing distributive effects as it further debilitates the position of the exploited through its distribution of positional power towards the corporate agent.
Cooperation under the investment regime has implied a re-‐balancing of
corporate and state agency augmenting the vulnerability of the state to corporate intervention. Firstly, the regime allots freedoms to the corporations by curtailing state FDI management and, secondly, it ascribes substantive as well as procedural rights to the corporations that enables it to impact state policy-‐making. Noteworthy to the investment regime is that while it has been premised on asymmetries in power (of information and of bargaining position) on the state-‐to-‐state level, the consequence is a power asymmetry in the corporate-‐to-‐state relationship. In the case of the investment regime, then, the main characteristic of background injustice, and what stands most particularly in need of justification from a reciprocal stance, is the power of the ‘third party’ beneficiary, the corporate agent, as is acknowledged in the notion of corporate public power. It is the corporate agent endowed with public power that stands in need of justification as a reasonable effect under reciprocity as fair cooperation. The promise of the regime that market openness and protection of incoming investment would be traded off against economic development through FDI has not shown to be the reasonable terms that can ensure fairness in the practice.
The import of the moral understanding of reciprocity is not the derivation
of redistributive duties to straighten out certain inequities in the structural make-‐up of the practice. Reciprocity weighs whether a cooperative venture is reasonable to all sides and does not simply translate pre-‐existing power asymmetries into a legal-‐
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institutional regime. To that extent, under reciprocity we are critically interested in the socio-‐economic power constellation underwriting a practice. As power is an inherently relative concept (positional), its distributive patterns are of crucial importance. ‘Power’ is, therefore, the central notion to socio-‐economic justice. Whenever the distributive effects of a practice “is the result of power asymmetries, [it] gives rise to duties to ‘distribute’ or ‘balance’ power (more or less) equally and thereby generate distributive duties of justice” (Brandi 2011, 193). It remains, however, open how such ‘balancing’ ought to take place and ‘where,’ or to whom these duties ought to be ascribed. It is the purview of justice theory to answer to these concerns.
The justificatory demands following the analysis of the investment regime,
as will be argued in this Chapter, sit uneasily with current institutionalist approaches, as corporate public agency cannot be feasibly subsumed under an institutional imagery of perfect ideal justice. While the distributive nature of investment regime thus requires substantive corrections to the current background injustices, there is no obvious institutional route at hand to attain that goal. The claim therefore is that justice theory needs to include agency as a site of justice under these particular conditions, thereby subsuming the normative reflection on corporate responsibilities under the moral demands of reciprocity. In other words, the ‘publicness’ of corporate power as a distributive effect of the investment regime installs the corporate agent into justice theory. Given the importance of the notion of public power in this argumentative move, the next subsection will further outline this thesis understanding of (corporate) public power. 4.2.2. Corporate Public Power
O’Neill (2001; 2004) questioned the necessary primacy of state and state-‐based institutions in cases of acute deprivation. Her claim is that under such conditions, capable non-‐state actors ought to be considered primary agents of justice too. This thesis is an attempt to systematize this core insight of O’Neill. Where O’Neill takes corporate responsibilities of justice to emerge ‘situationally’ and makes them dependent on capability, this thesis argues that under current (global) practices corporate obligations ought to be conceptualized as of a ‘structural’ nature. This is claim is premised on the idea of corporate public power. So far we have merely used the notion of pubic power to articulate the distributive effects of the investment
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regime and have contended that in case the argument on corporate public power is convincing, an opening to considerations of justice is made. 146 We need to analytically fine-‐tune the meaning and import of the concept to sharpen this argument. The public is opposed to the private by way of liberalisms ‘art of separation’ (Walzer 1984). This ‘art’ of liberalism designates the state as the repository of public power, which means it holds the primary responsibility to provide for public goods, fulfill minimal levels of subsistence rights and welfare distribution to the state. Private, non-‐state actors do figure within liberal accounts but they do not hold any of the above, public, responsibilities. They are strictly separated from and conceived of as regulated by as well as legitimized through the institutions of the state. The idea of corporate public power is therefore anathema to the art of separation and will, successfully articulated, undermine it. Thereby corporate agents would not be “viewed merely as targets of state regulation; rather, they are treated as public agencies in their own right’ (T. Macdonald 2008b, 545). To successfully argue this claim, we first need to ask: What establishes public power?
A rather classical answer to this question is given by Buckinx (2012), recently
formulated an account of public power in which she defined the concept as closely relating to a republican understanding of the state. Most notable, to be qualified as public, according to Buckinx an agent needs to sufficiently resemble the state in its functioning as well as self-‐conception. To be considered a public power, a corporate agent has to have a self-‐understanding as being primarily a (global) public actor, i.e. that “[i]ts primary function is co-‐extensive with the human world and […] includes among its primary tasks duties of public governance, such as the administration and regulation of global affairs, and the distribution of global public goods” (Buckinx 2012, 540). Such a definition, which implicitly takes the state as a definitional model of the concept of public power, strictly limits the scope of application of ‘public
146 My argument thus does not develop along the lines of the ‘quasi-governmental’ function of corporate agents, even though that conception of a form of ‘publicness’ effectively describes the role certain corporations play in the service sector (i.e. water provision) or in cases where extractive industry companies take over large amounts of governmental responsibilities in providing schools, health clinics and so on in distant sites of extraction. My usage of ‘publicness’ should firstly be read in a more abstract and general manner relating to the power corporations have on the general governance of a state. It is on this level that the specific position of corporate agency plays out for the global justice debate as it establishes corporate agency as an actor exerting a form of power that cannot be simply reduced to the interactional level.
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power’ to other agents beyond the state. 147 The critical question is, however, whether this is a convincing way to define public power. Terry Macdonald (2008a) provides for an alternative. She operationalizes the concept of public power by severing it from its state-‐based connotation. As she stipulates, there are no reasons of a conceptual nature to limit public power to a state based notion, i.e. there are no necessary conditions contained in the concept of public power that tie its exercise to the notion of the state.148 In a co-‐authored piece, T.Macdonald with K. Macdonald therefore define public power without specific reference to its source. As the authors note, “we characterize as ‘public’ all social power that needs to be institutionally harnessed to serve public democratic values […]” (K.Macdonald and T.Macdonald 2010, 21)149 This understanding of public power can be complemented by I slightly different earlier comment of T. Macdonald, stating that public power “denotes all forms of social power within the global domain that are proper subjects of principles of global legitimacy” (T. Macdonald 2008b, 566). Conversely, private power is that form of social power not subject to these principles. While this definition does severe the conceptual link between public power and the state, it does not yet answer the question what the defining characteristic is of public power that makes that it is subject to principles of legitimacy. To K. Macdonald and T. Macdonald, social powers become subject to these principles as they prospectively limit the autonomy of other agents, or their ‘equal autonomous entitlements’ in problematic ways (2010, 21). The nature of the limitation of autonomy is problematic when it is sufficiently extended over time and space, and it influences the most fundamental forms of social organization that the affected individuals engage in with one another. ‘Publicness’ thus constitutes a certain type of exercise of power that is not conceptually (‘internally’) related to the 147 I see Buckinx 2 criteria as examples of the common extrapolation of concepts taken from philosophical reflections on domestic issues to the global order. This leads to mishit at times or brings unnecessary baggage into the study of a categorically different realm, which might need its own conceptual apparatus. One side-effect of Buckinx account is that it becomes a challenge to actually define many a weak governance state as actually fulfilling a public function – even though that might in cases be the correct rendition of the clientilist nature of a regime. 148 I will not rehash T. Macdonald’s arguments (2008a; 2008b) against the link between public power and the institutional practice of law-making, centralized decision-making structure, and legitimate use of force. The traditional view shares its premises largely with the type of state-oriented thinking already left behind in the introductory chapter. Also, Macdonald’s arguments are convincing as they stand. 149 In her original contribution on public power, T. Macdonald provided a different definition. Public power is “that power which must be institutionally constituted (enabled) to serve some ‘public’ liberal purposes, and institutionally restrained to protect these ‘public’ liberal values from the potential abuse of power” (T. Macdonald 2008b, 548). As I have my doubts on the first part of this definition, I prefer the later correction.
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notion of the state. Lastly, and crucially, however, for a corporate agent to be a public power, “it is necessary to demonstrate that the power giving rise directly to these outcomes [problematic limitation of autonomy] is not itself subordinated to the power of a responsible public agent – such as a sovereign state – empowered to regulate these specific forms of corporate power” (Macdonald 2008a, 29-‐30, italics in original). If this would be the case, the ‘art of separation’ simply comes back in through the backdoor as the state remains the primary bearer and thereby responsible agents for the public realm.
Corporations can, under this understanding, thus, exercise a type of power
that equals the exercise of power traditionally only accorded to the state. This is not say, however, that the corporate agent will in such case be ‘like the state,’ as would be an implication under Buckinx definition. Within the account of the Macdonald’s, ‘public power’ does not define an agent but is a characteristic that an agent ‘circumstantially’150 holds as an effect of its ‘role’ within a specific context. The corporate agent therefore does not become state-‐like, or solely a public power. Such a conclusion reflects a common fault in analyses of corporate agency, which effectively have barred corporations from serious consideration in for instance justice theory. As Ruggie notes, “[t]he place of non-‐state actors and movements remains poorly understood in the mainstream literature, largely because they tend to be viewed, implicitly if not explicitly through the lenses of an ‘institutional substitutability’ premise. That is to say, if other institutional forms at the international level do not have the potential to replace the territorial state they tend to be regarded as unworthy of serious consideration […]” (Ruggie 2008c, 104). The corporate agent can best be understood as a ‘hybrid’ agent under such specific circumstances, exerting both public and private forms of power but also at least still partially dependent on state-‐based institutions. Buckinx (2012) makes an important point in her contribution to the discussion on public power that mirrors Held’s reaction to O’Neill. While the public power of a non-‐state actor is dependent on the (non)existence of a higher-‐level form of public power (such as the state), the potential of creating such effective institutions, in case they are not in place, ought to hold us back from too quickly speaking of corporate public power. Not only the lack of existing higher order 150 ‘Circumstantially,’ because the role of the corporate agent and the exercise of its powers is, as is clear from the definition, dependent on the specific circumstances in place.
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regulation by state or state-‐based institutions, as Macdonald has it, needs to be established but also the lack of potential feasible creation/reform of the necessary institutions to provide such regulation needs to be accounted for in arguing corporate public power. To that extent, clearly the burden of the argument rests on those in favor of the idea of corporate public power. The ‘art of separation,’ the thesis is convinced, is in place for good reasons. The notion of corporate public power, therefore, within this thesis serves as a critical notion to draw out the necessity of understanding corporations under this perspective so as to clarify the normative consequence of the powers of corporations. I contend that in the case of corporations the ‘problem’ of impact has less to do with the plain power they can muster in their own right but rather that it should be defined in terms of an effect of two conditions: The constitutionalization of investors’ rights, i.e. the constitutive legal-‐institutional framing of corporate agency and context of weak governance structure within burdened societies. As there is a dearth of potential feasible corrections to the current regime, as argued in Chapter 3, the argument from investment law successfully undermines liberalism’s ‘art.’ In this thesis the notion of public power is, thus, used in a slightly different, more ‘negative’, manner than K. Macdonald and T. Macdonald (2010). This rendering makes the public agency of the corporation both independent and intricately dependent on state agency – particularly in ‘burdened’ societies (but not necessarily only)151 corporate power competes with the power of the state. The corporate agent is independent for fact that the public power is a constitutive effect of the investment regime. It is at the same time dependent because the re-‐balancing of powers between corporation and state, and thereby the reach of corporate powers, depends on the ‘developmental level’ of a state. Again, the ‘problematic’ impact of the corporate agent should be specified in terms of the legal-‐institutional grounds of corporate agency and the governance context of the host state. As such, the economic power of the corporations, which although private can be far-‐reaching, is distinguished from their institutionalized powers since it is exactly this position of the corporate agent within the structures of global governance that triggers the specific responsibilities of justice.
151 Cordelli, applying a similar argument to (affluent) domestic society, argues that in light of privatization “the aspects of delegating public functions and imposing new obligations on associations are inseparable” (Cordelli 2012, 151).
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This difference in meaning has important implications for the framing of the study of public power. To T.Macdonald public power is a question of legitimacy and explicitly not of justification. As she notes, “the regulative subjects of these two sets of norms differ in correspondence with the different social problems to which they are addressed” (T. Macdonald 2008b, 547). While legitimacy in T.Macdonald view has to do with ‘constituting and controlling’ the exercise of power’ and thereby subsumes corporate public power within its frame of reference, justice is “concerned with fair distribution of the burdens and benefits of social cooperation, and correspondingly to identify the subject of these norms as the social ‘basic structure’ or ‘institutional scheme,’ through which the distribution of these burdens and benefits is imposed” (Ibid) and thereby, yet again, excludes public power as exercised through agency. This is a somewhat odd conclusion. If public power is a specific exercise of relational (social) power that is defined by the problematic, long-‐ term impact on the autonomy of those implicated within the relation, can it then simply be defined outside of the scope of justification? More recently, in a piece co-‐ authored with Andrew Hurrell (Hurrell and Macdonald 2012), the distinction between legitimacy and justice is modified so as to mirror the distinction of ideal (justice) and non-‐ideal (legitimacy) standards. The distinction now reads as follows: “[P]rinciples of legitimacy set out the conditions under which political institutions will be worthy of compliance and support in the here and now as the best that we can (right now) achieve, as distinct from articulating ideal standards for orienting institutional evaluation and longer-‐term reformist aspiration” (Hurrell and Macdonald 2012, 556-‐7). I have my doubts to whether this reformulation is sustainable in and of itself let alone helpful in the discussion of public power. In any case, I do not think the clear distinction will be sustainable, particularly in light of the argument on negative public power and the lack of potential feasible institutional solutions. Legitimacy for T. Macdonald and Hurrell, it becomes clear (paralleling the ideal/non-‐ideal relation), is subsumed under the scope of justice, with the main difference being that justice additionally requires also the normative study of the constitution of sociological entities as such. Within the discourse of legitimacy these sociological entities are, on the other hand, assumed as part and parcel of the prevailing empirical conditions global pluralism. However, when this is so, what is the relation between the requirements of justice and requirements of legitimacy?
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Although the authors subsume the latter under the former and claim that their distinction parallels that of ideal and non-‐ideal theory, it remains unclear what their answer is. In light of the clear Rawlsian understanding of the guiding relation between ideal and non-‐ideal theory it is highly unlikely, however, that we should consider justice and legitimacy as separate normative realms. This thesis acknowledges the relation between the two realms and problematizes it. Our understanding of corporate public power stresses the institutional-‐legal grounds of this power, the weak governance context in which it flourishes and, lastly, the existence globally of an ‘entrenched pluralist structure’ (Ruggie 1993) that lingers in between a Westphalian order and a world state. As such, it will be argued under Consequence 1 that corporate public power cannot be assumed away from justice theory. The conceptual loosening of the notion of public power from the state and the condition of lacking feasible institutional reform seem to necessarily impact the debate on justice too as the ideal renditions of the real sociological entities themselves might become simply irrelevant under these conditions. 4.2.3. (The) State (Agency)
The role of state institutions in justice theory has traditionally been to ensure that background conditions are in place so as to provide for fairness in the regulation of socio-‐economic relations. In this light, the state is singled out as the agent with the capacity to ensure the fair delivery of public goods. This understanding of the role of the state is fully infused into contemporary international law, which premises state obligations on an account of the capacity of states to control the socio-‐economic activity within its borders. This thesis has questioned the validity of this perspective in the context of the evolution of transnational legal-‐institutional structures such as the investment regime. So far, the state and state agency have been assumed to be directly relevant to the emergence of corporate public power as a distributive effect of the investment regime. As Chapter 2 and 3 account for, the ‘burdened’ host state provides for the backdrop of the argument developed here. While the relationship between the state and the corporate agent has thus been extensively dealt with already, here I want to systematize the account differential state agency and its implication for justice theory. This should help to clarify in advance the premises of the argument developed under Consequence 2.
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The power of corporate agency as noted is always a relative power to state agency. State agency, however, cannot be considered as a singular notion as is already expressed in the usage of notions of burdened and affluent society. The differential nature of state agency sharpens when placed in the context of international legal and economic relations that trade-‐off with state sovereignty. While this is certainly not to deny the obvious ways in which globalization has allowed corporate agents to also amass public power within affluent states (See Cordelli (2012) for the impact of privatization), in general terms, these ‘strong’ states hold the institutional capacity and flexibility to manage the impacts of these new constellations of power – which in effect they oftentimes themselves actively enabled. Any sensible conception of ‘weak governance’ state or ‘burdened society’152 would precisely deny such capacities. These societies lack the ‘positive sovereignty’153 to control their own faith and are to a significant degree dependent on interfering ‘external’ forces – from NGOs, to global institutions and corporations. While this divergence in state agency seems clear, little has been done within liberal thought in explicating what it implies for theorizing transnational justice. Both in the practice of public international law and in international political theory the “traditional state-‐based liberal model for rights protection” which “relies on empirical background conditions under which states – or state-‐like cosmopolitan institutions – have sufficient institutional capacity to deliver rights protection and control public political decision making” (T. Macdonald 2008b, 561) is dominant. In other words, the model used to understand state agency and the burdens the state ought to carry is premised on a singular notion of the state; so too are proposals for development and poverty abatement. This thesis contends, however, that there is a singular truth to Jackson’s statement that “[a] world containing both states and quasi-‐states is different from one containing only states” (Jackson 1993, 164) and 152 While Rawls understands burdened societies to be in such condition because of its political culture, this thesis’ argument does not built on that claim. Burdened societies are just but a formal rendition of empirical quasi-states (Jackson) and/or (poor) developing states. It need only draw out the existence of limited regulatory capacities of the institutional structure of the state, the existence of extreme and endemic forms of poverty and, opposite outlaw state, a presumption of minimal human rights obedience. 153 Jackson (1993) understands ‘positive sovereignty’ to refer to the acknowledged standing of a state as an international reciprocating partner. The Quasi-state has mere ‘negative sovereignty,’ i.e. is free from outside interference but dependent on nonreciprocal aid. It is thus “in law independent but in substance materially dependent on others for its welfare” (Jackson 1993, 43). Particularly the postcolonial developing countries of sub-Saharan Africa fall shows signs of this category. Quasi-states are not collapsed or failed states (who completely lack any source of authority); close to burdened societies; they do not have deliberative (institutional) and action-generating capabilities but these are not fully absent either.
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that, in as much it is true, its normative implications should be drawn. In other words, in reflections on the expectations to be assigned to states (and to corporate agents by implication) the state of state agency is of crucial importance. The implications hereof will be drawn in the following paragraphs; here we merely want to tease out some issues with the liberal state model. Commenting on Jackson (1993), Toni Erskine (2001) has argued that the distinction between states and quasi-‐states is to “inform practical policy-‐making in international relations (Erskine 2001, 68), for “one cannot assume that all institutions deemed to be moral agents are in a position to exercise this agency” (Ibid., 74).154 It follows that “[a]ssigning a duty to an institution that is incapable of discharging it is not only an exercise in theoretical incoherence and policy-‐making futility, but it also results in certain prospective responsibilities being unaccounted for” (Ibid., 81). ‘Burdened societies,’ therefore should not be simply assumed to be ‘containers’ of the public power to fulfill required socio-‐economic duties. This is so, however, not only for reasons internal to the organizational status of the burdened society but is as much a consequence of what has been called the interloping legal-‐ institutional relations within which their agency is caught. As argued, the investment regime ‘locks-‐in’ a certain ideology of the regulatory state and market liberalization that reflects the historical standing of the agency of well-‐developed states. ‘Weak governance,’ developing nations have lacked the institutional prerequisites to benefit from promised ‘reciprocity’ of this regime. The reason hereto, however, is as much the limited capabilities of these states as well as the fact that the novel international legal-‐economic regimes “limit the ability of governments and local firms in developing countries to take actions which are to their advantage” (Stiglitz 2006, 104) and “unduly constrain experimentation with the optimal mix of policies required for globalization to be socially benign” (Howse 2008b, 1537). Developing countries, thus, lack a welfare function in the first place but are accordingly externally limited to further such function curtailed by interloping legal-‐institutional relations within which corporate agents have thrived. Theorizing the investment regime, a model of the state emerges that sits uncomfortably with the liberal model of the state.
154 Erskine’s account is based on Peter French’s (1984) work on collective moral agency, and qualifies ‘quasi-states’ further based on criteria such as unity and continuity over time, decision-making power and (self-)identity as constitutive of its limited moral agency.
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Patterson and Afilalo (2008) have done most in developing a formal account of differential state agency that is instrumental in making sense of the notion of divergent types of state agency subsumed under universalizing international regimes. Their argument is premised on a simple dialectical logic: The ‘state’ appears in different forms of Statecraft, i.e. under different operational paradigms. The dominant Statecraft, fitting the victors of political-‐ideological ‘war,’ 155 will be “complemented by a particular trade regime” (Patterson and Afilalo 2008, 3). However, the dynamics of such trade regime, in its own rights, feeds back into and alter the contours of Statecraft. As they argue, the Bretton Woods trade regime contained “a built-‐in tension: It advocated regulatory comparative advantage at the same time as it protected regulatory sovereignty” (Ibid., 93). Policies of trade openness, privatization and commodification eroded the aggregation of nation-‐ states as the “ontological centerpiece of the global trading order” (ibid, 6), while interloping forms of ownership of production undermined the idea of ‘national’ products. Instead, “industries with global, diffuse goods and cross-‐border associations of economic interests [outlining] a global market divided along industrial or sectorial, rather than national, lines” (ibid, 7) have evolved, requiring modifications to the model of the modern state. As the authors note, the modern state characterized by regulatory control and a principle of welfare entitlement is slowly replaced by a post-‐modern or market state that instead operates on principles of “[o]pportunity, efficiency and consumer choice” as its “central organizing features” (Patterson 2003, 234).
The evolution of Statecraft, however, should not be read as reflecting a
universal phenomenon. Where the affluent nations move forward along these lines, burdened societies are still caught in a race to ‘modernize.’ Crucially, the implication of the dialectics of Statecraft is that developing countries are caught in a conundrum: Where these countries strive for the strong domestic institutions that are necessary to create beneficial feedback loops from international trade regime, the ongoing shifts in this regime undercut “the ability of the nation-‐state to erect regulatory and redistributive institutions” (Rodrik 2007, 195). In a world that increasingly moves away from Bretton Woods system, developing countries are thus still playing catch up with to the modern Statecraft underwriting Bretton Woods. The 155 ‘War’ does thus not imply necessarily actual military battle. Following Bobbitt (2002), the authors take the ‘long war’ of the 20th century between communism, fascism and liberalism as their main reference.
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lack of recognition of this problematic of differential state agency within current debates on trade and development is what underwrites Patterson and Afilalo’s critique on the Doha Round. As they comment, Doha’s ‘real sin’ “is the lack of recognition that the very countries that it sought to integrate into world markets are not similarly situated;” as “the domestic political and economic system [in burdened societies] is such that world trade would be unlikely to benefit anyone beyond the trading classes that already exist” (Patterson and Afilalo 2008, 107). The argument reaches farther however: The paradox of institutional necessity to cope with the exigencies of free-‐market globalization is paralleled by the constrictive impact of the new realities of transnational law on the possibility to erect these institutions. As Patterson and Afilalo summarize “[t]he problem here is not that regulatory welfare has become obsolete, but that the structure of the international order of states requires that its implementation be realigned to a post-‐modern, cross-‐border system that will supersede and subsume the national welfare systems of the modern era” (Ibid., 65). Erskine too captures this crucial point that burdened societies are defective but not in the sense that they “simply lack the capacity to act […] but rather that they are deprived of the conditions necessary to realize this capacity” (Erskine 2001, 80 my italics). What the argument on Statecraft in extremis communicates with regards to the investment regime is that the process of constitutionalization does not merely reflect a ‘disembedding’ of markets, corrigible by a Polanyian ‘double movement’ of re-‐regulation (Polanyi 2001; Ruggie 1993 and 2008c).156 If we follow through on the differential notion of Statecraft, the intense and interloping legal-‐institutional relations, of which the investment regime is the most evident, have constituted a ‘negative’ form of embeddedness, i.e. it is not that rules are taken away (under-‐ regulation or a lack of regulation) but rules and practices have enabled the corporate agent to escape from domestic regulatory frameworks. As such, the development of burdened societies premised on a model of the liberal state becomes problematic. Corporate public power, born where the practice of investment overlaps that of the burdened state, represents exactly that type of social power that curtails the institutional reforms that the liberal model prescribes. 156 I should note that this is where Scheiderman himself ends his account as he writes that “what the investment rules regime signals is the demise of the postwar compromise of ‘embedded liberalism’ – the ‘collectivist’ reaction of many states that fused legitimate political authority to a shared social purpose regarding the domestic, social and economic role of the state” (2008, 14). While this is true, I draw further conclusions.
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4.3. Consequences for Theory: Institutionalism, Ideal and Non-‐ideal Theorizing The three concepts explicated in the subsections to paragraph 4.2 inform the challenge the peculiar distributive consequences of the investment regime poses to global justice theory. This challenge, global justice theory cannot confront without ‘opening up’ to reflections of corporate agency within justice-‐considerations. And it is in that manner that a first step towards the end-‐goal of establishing an account of corporate responsibilities to abate poverty that reflects the corporate agents’ institutionalized powers. Traditional liberal institutionalists that my account is mistaken on the goal of justice and merely affirms the status quo by undermining the structural changes only possible under institutional reform. Instead of battling the effects (public power), an account of justice should articulate the ideal character of the corporate agent as a ‘sociological entity.’ It should be clear, however, that the argument developed here is not that institutions should drop out of the equation but basically that non-‐ideal theory cannot rigorously distinguish between the interactional and the institutional and thereby allows for an understanding of corporate agency as a site of justice. Whether subsequently implementation is served best by institutional reform or by agency-‐relative moral duties is at best an instrumental issue of ‘best option’ and feasibility. The two Consequences draw out this ‘negative’ argument and thereby questions the potential contribution of the current dominant framework within global justice theory. There are, then, two relevant consequences for justice theory relating to our account of the investment regime and the emergence of corporate public power. The first consequence concerns a challenge to the idea that justice prescribes institutional solutions both under ideal and non-‐ideal perspectives. The investment regime exposes the methodological limits to liberal political theory’s ‘pure’ institutionalism. The second consequence is derivative of and complementary to the first: The questioning of the analytic value of the liberal state model in poverty abatement debate. We can situate this second consequence within the debate on the onus of poverty abatement obligations. Together these consequences should provide for sufficient reasons to open up attention to developing a political philosophy of corporate responsibilities.
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4.3.1. Consequence 1: Corporate Public Power and the Limits to ‘Pure’ Institutionalism
Institutionalism has been a common reference within the conceptual apparatus central to the debate on justice beyond borders. However, while ‘idealized’ understandings of justice can assume institutions to be the sole site of justice, this assumption is misplaced under non-‐ideal theory. Such assumption would, namely, imply an unwarranted transfer of ideal-‐theory’s de-‐politicized and coherentist understanding of the basic institutional structure into non-‐ideal theory. Non-‐ideal theory cannot assume away the empirical challenges of feasibility, efficiency, stability, path-‐dependence, and (in)vested interests. One effect of institutionalism has been a gap in reflections on the place of non-‐state agents within justice theory as their agency by definition cannot be an element of the subject of justice. This subsection argues against the tendency to uphold institutionalism within non-‐ideal theory. Within the context of the above empirical challenges, institutionalism can only be understood as a ‘best means’ approach to eradicate injustices. This, however, implies that pragmatic considerations under certain conditions 157 may require non-‐institutional sites of justice. If this argument can be successfully made, however, the status of ideal theory in its guidance relation to non-‐ideal theory becomes questionable too. The case of the investment regime developed in the foregoing chapters provides a perfect backdrop for this theoretical argument. The serial multilateral nature of the regime, the ‘obsolescence bargain,’ and the current political incentive structure regarding the regime make institutional solutions unlikely, technically problematic and possibly undesirable. The investment regime has propelled the corporate agent in a position as an advocate-‐general quite unique in history, endowing it with disciplinary powers over the political spheres in which it operates. In effect, the emergence of the investment regime creates new global circumstances of injustice (Bohman 2012) that beg normative inquiry – possibly into non-‐ institutional agency. Not only, thus, the type and extent of principles is impacted by the shift from the domestic to the international, as the debate on global justice has established (T. Macdonald and Ronzoni 2012). These changes also impact the question of what and/or ‘who’ triggers demands of justification. The article of faith
157 For instance those conditions under which we also want to speak of public power of a non-state actor, i.e. where no regulatory state or state-based body is or will expectedly will be in place.
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of liberal philosophy that institutions present the sole site of justice becomes problematic under these circumstances. The scope of justice has been a main topic of debate within global justice theory; on the site of justice, on the other hand, it has remained silence. The issue of the site, however, has been raised within debates on domestic justice. The challenge to this idea was sparked by G.A. Cohen (1997) who set out to debunk the internal coherence of Rawls’ Institutional Division of Labor as the premise to the idea that the basic institutional structure is the sole site of (social) justice. To Cohen the division into an institutional and an ‘interactional’ moral regulatory realm was incoherent.158 His argument against Rawls can best be understood, therefore, as an internal argument, specifying the flaws in the latter’s account. Cohen’s insightful arguments are complex and challenge Rawls’ theory in different ways. He remains unsuccessful, however, in convincingly undermining the Division of Labor. Very shortly, Cohen develops two main arguments: The incentive argument and the Basic Structure Objection. The first argument questions the institutional application of the difference principle as incoherent for it results into dubious understanding of the moral position of the ‘talented.’ This group would, on the one hand, ascribe to the difference principle, maximizing the position of the worst-‐off, as the organizing principle the political order. On the other hand, it would demand incentive pays to utilize their talents to grow society’s cake. 159 The Basic Structure Objection asks on 158 I will not seek to contribute to this specific debate, which attracted many commentators for the fundamental interpretative questions concerning Rawls work were at stake. The minimal account developed here loosely builds on the contributions to the debate See Estlund (1998), Williams (1998), Murphy (1998) and Pogge (2000) for some of the earlier contributions to the debate. 159 I will leave this point to the side since it is only indirectly relevant to the debate on global justice. The point to make against Cohen’s representation is the following: the basic structure is a highly demanding arrangement that reaches deep into the human psyche – providing an indirect way in which Rawls’ controls for certain excesses among the talented that Cohen fears within Rawls’ framework. Individuals, thus, should not, in general, treat them as guides to personal decision-making. But that is not to say that the principles of justice should have no impact on individuals’ motives or that the basic structure cannot in turn enforce rules that apply to individuals. On the contrary, one of the most important tasks of the basic structure is to influence people’s wants and aspirations. Scheffler (2006) makes much of this point, providing textual support for the idea that for Rawls the applications of the difference principle to only institutions still was intended to have deep impacts on individual psyche and morality. Contra Cohen then, Rawls certainly did, and convincingly so, build-in limits to egotistic behavior of the ‘talented’ by stating that institutions should be “creating and fashioning” citizens wants and aspiration, shape “desires” (Rawls 1971, 259), and “discourage those that conflict with the principles of justice” (Rawls 1971, 261); all in accordance with “some view of human good” (Ibid., 259). Besides, the distinction between the two realms does not imply that the institutions cannot regulate individual or associations behavior. Especially Joshua Cohen has stressed Rawls insight that institutions cannot be taken as “fixed or given” (Rawls 2005, 269). According to Scheffler this role of the basic structure, in what he terms the moral division of labor, is a core reason to attach primacy to the basic structure since an ethos of individuals is developed while at the same time people are not
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what basis Rawls can claim a special status for the basic structure as the site of justice. The two possible answers – (legal) coercion and pervasive impact – cannot according to Cohen distinctively separate the institutional from the interactional. Without intending to discard the value of Cohen’s contribution, his internal argument does not succeed in undermining the Division of Labor. This is most notably so because of his misreading of Rawls main motivations behind proposing the Division. While Rawls can answer to Cohen’s two-‐prong argument under the Basic Structure Objection,160 the main point is thus that neither engage the main reason for Rawls to take the basic structure as a “special case of the problem of justice” (Rawls 1971, 7): Background Justice. To ensure that, over time, the organization of society will treat all its members fairly, Rawls claims that a basic structure has to be in place organized and constrained by regulatory principles of justice. The basic structure refers to the organization of the “major social institutions distribute the fundamental rights and duties and determine the division of advantages of social cooperation” (Rawls 1971, 7).161 Among these institutions Rawls includes the political constitution and the principal economic and social arrangements, i.e. “the legal protection of freedom of thought and liberty of conscience, competitive markets, private property in the means of production, and the monogamous family are examples of major social institutions” (Ibid). The basic institutions then as a singular system, i.e. the main political and socio-‐economic
overly burdened and can still find reward in extra effort. The distinction between the two realms however is still of value as the institutional principles of justice cannot subsume those of an interactional kind. To set apart the realm of the basic structure for those principles that regulate the most general and pervasive organizational element of life, is part an expression of methodological modesty. 160 Against Cohen’s presumptions that Rawls cannot distinguish between those institutions that are legally coercive and those that are not it can be noted that Rawls’ separates out elements of an institution as either legal or non-legal. For example, ‘the family’ consists of institutional elements part of the basic structure and elements that fall within the category of ‘mere’ custom. The ‘pervasive impact’ argument is understood too directly. The basic institutional structure must regulate the “inequalities in life prospects between citizens that arise from social starting positions, natural advantages, and historical contingencies” (Rawls 2005, 271). In other words, it is to regulate the morally arbitrary factors throughout a person’s life. In this respect the impact of institutions stands out. 161 The connection to ‘cooperation’ within the specification of the role of the basic structure is important but often misunderstood. As Abizadeh (2007) has shown how liberal nationalist in their quest to forestall global justice consideration have been guilty of mixing ideal and non-ideal theoretical premises. As he writes, “[b]y using the ideal of social cooperation to specify (and restrict) the scope of application of the ideal itself, the crude interpretation perversely implies that demands of distributive justice arise only between persons whose social interactions are already conducted on fair terms, i.e., that demands of justice would not arise for persons whose social interactions are unjust” (Abizadeh 2007, 330-1). As cooperation specifies an ideal so does the basic structure that ensures background justice.
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institutions as fitted “together into one system of social cooperation” (Rawls 2001, 10), ensure background justice in society. The argument in favor of the basic structure as the site of justice can be further strengthened by looking into Rawls’ answer to why the regulatory principles should not apply equally to individuals and associations. Firstly, Rawls understands associations to have final ends, i.e. a core feature of associations is that they are ‘ends-‐pursuing’ (Cordelli 2012, 135). An important reasons for the Division of Labor from the perspective of agency, thus, is that the establishment of a suitable institutional framework leaves individuals and associations free “to advance their ends more effectively within the framework of the basic structure, secure in the knowledge that elsewhere in the social system the necessary corrections to preserve background justice are being made” (Rawls 2005, 269). Secondly, private, singular agents “cannot comprehend the ramification of their peculiar actions viewed collectively, nor can they be expected to foresee future circumstances” (Rawls 2005, 268). While the first reason is to ensure relevant liberty of pursuing end-‐goals, the second reason is of a more systematic nature. Since Rawls is after a conception of a just society, interactional rules that provide for guidance on one-‐off transactions do not suffice to ensure fairness conditions beyond that one transaction. Most notably, the agents that would have to act on the principles of justice lack the epistemological capabilities to understand their actions within the context of wider society and over time. In other words, they lack the capability of “gathering the extensive information and performing the complex calculations on which background justice depends (Scheffler 2006). Interactional rules therefore cannot ensure background justice since “there are no feasible and practicable rules that it is sensible to impose on individuals that can prevent the erosion of background justice” (Rawls 2005, 267). Concluding, it is the “differences in the structure and social role of institutions that is essential” and that accounts for “the appropriateness of different principles” (Rawls 2005, 262); “unless this structure is appropriately regulated and adjusted, an initially just social process will eventually cease to be just” (Rawls 2005, 266). There is one last important note to make on the meaning of the notion of the basic structure. Rawls point is that “no society can be just if no suitable institutions protecting background justice are in place” (Ronzoni 2009, 235). The implication hereof is of importance: If the need for background justice justifies the basic
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structure focus, then it is not the existence of the basic structure in is own right that leads to certain obligations of justice.162 Instead then of the basic structure providing an existence condition for justice-‐demands to emerge, “the background justice argument is meant to show precisely the point of the basic structure: why we need it, and not what obligations derive from its existence” (Ronzoni 2009, 240). Understood in this way, the basic institutional structure is thus instrumental to background justice, not a condition for justice (Ronzoni 2008).
I claim that the issue is not with the specialized role of institutions as such
but with the idea that one can (or ought to) account for recurring injustices through institution building only. This, so I argue, is dependent on the circumstances under which justice-‐demands occur and the feasible option of reform at hand. As Chiara Cordelli has recently argued, “even those who uphold a normative division of labor might well recognize that, under certain circumstances, putatively private actors can acquire an institutional [public] social role and therefore be directly subject to principles of political justice” (Cordelli 2012, 133).163 The context of corporate public power under the investment regime, as explicated in paragraph 4.2.2 provides an example of circumstances under which agency becomes a site of justice. In as much, my account is not a theoretical, internal argument contra Rawls but a methodological challenge the institutionalist paradigm. Rawls provides strong reasons for the institutional division of labor and this thesis does not challenge the general value of the distinction, given certain conditions. Here, however, is the rub. ‘Pure’ institutionalism is rooted within ideal theory. While Rawls did not take institutionalism to be an idealization, as ‘justice’ is specified under ideal conditions so is its primary subject, the basic structure, in its task of ensuring background justice. 162 Which would imply that institutions would be considered an existence condition (See James 2005a). The above however is not to deny that coercive institutions can trigger certain (distributive) obligations themselves. 163 Cordelli’s inquiry has a clear overlap in aim with the argument developed in this thesis. She utilizes the case of the privatization of public functions to particularly religious civil society associations – who become “primary distributors of social benefits and implementers of distributive policies” (Cordelli 2012, 133) – to question the aptness of the institutional division of labor. While there are certainly differences in argument between the two projects, the end conclusions on the robustness of the division of labor argument is shared. Cordelli however sees a choice emerging from her challenge: “either we enlarge the political structure so that it comes to include certain associations, or we limit those modalities of primary distributors of social benefits and implementers of distributive policies” (Ibid., 132-3). The argument in this thesis can be read as a rendition of the first part of Cordelli’s argument since, under non-ideal, global circumstances of justice. The second part, however, is at least in the case of investment highly dubitable.
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To secure background justice, the basic institutional structure is conceptualized within the strict confines of a well-‐ordered, closed and self-‐sufficient society. As such, the basic structure constitutes a system in which all the basic institutions complement each other and fit coherently into one another as an indivisible whole, so as to ensure background justice. The basic structure conceptualized as such does not merely express the empirical fact of a range of existing regulatory and allocative institutions in place; it has to be conceived of as a constitutive element of the idea of the well-‐ordered, just society. Like the regulatory principles that ought to articulate a conception of background justice, it is within the context of the ideal theoretical search for perfect justice that ‘pure’ institutionalism, as the idea that the basic structure is the sole subject of justice, ought to be situated. However, here the question emerges how the institutionalist focus on the basic structure transfers into the realm of non-‐ideal normative analysis. Within the context, namely, of non-‐ideal theory institutionalism can only be assumed in an instrumental sense as expressing the idea that institutions are a best means to correct for injustices. Under the circumstance that conditions are such that ideal theory is unable to guide non-‐ideal theory on the specific empirical issues faced, the institutionalist comes under pressure. We should turn, however, to the relation between ideal and non-‐ideal theory before concluding this argument.
The relation between ideal and non-‐ideal justice has recently become a topic
of debate again (See Sen 2009; Valentini 2009; Ypi 2010; Lawford-‐Smith 2010; Simmons 2010 Bohman 2012). By now there is a myriad of interpretations of both forms of theory and of the relation between the two. Within its core, however, ideal theory can be said to be about principles (Ypi 2010), specifically, of a perfectly just society. It devises abstract and idealized argument in which all morally arbitrary information is bracketed so as to arrive at principles that express an idea of equality within an ideally organized society. Non-‐ideal theory, on the other hand, deals with agency, or the question how to correct for injustices in a context of non-‐compliance. Within the realm of non-‐ideal theory, “we would be concerned with the transformation of existing political institutions guided by politically sensitive criteria: feasibility, legitimacy, stability and sustainability” (Ypi 2010, 542). Although the two types of theorizing, thus, apply to different realms, to Rawls there is a direct relation of dependence as non-‐ideal theory “specifies the failures of existent institutional orders (‘injustices’) in light of ideal theory (Rawls 1971, 246). In other words, it
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specifies what is injustice only as a departure from as a departure from the ideally just, and instrumentalizes the (ideal) principles of justice to generate proposals to further approximate perfect justice (non-‐ideal theory is therefore also called ‘transitional’ theory (Rawls 1999b, 5 and 90; Fuller 2012, 370)). Without ideal theory, thus, “non-‐ideal theory lacks an objective, an aim, by reference to which its queries can be answered” (Rawls 1999b, 90). The end-‐state principles generated under ideal theory that are to guide non-‐ ideal practices, however, are themselves not directly dependent on the complex empirical relations that need to be accounted for in any practical normative proposal. Here the Rawlsian understanding of the relation between ideal and non-‐ ideal potentially runs into trouble as it already presupposes “knowledge or agreement about the content of the ideal [while] this is often precisely what is lacking when problems of political justice arise” (T. Macdonald and Ronzoni 2012, 530). The question is therefore how we ought to proceed in those situations where it is unclear what justice requires. This is a fundamental challenge to the Rawlsian distinction of roles of ideal and non-‐ideal theory within a global context. James Bohman argues that the Rawlsian method simply cannot “settle [non-‐ideal theoretical] questions of moral permissibility and political feasibility” (Bohman 2012, 99), as “it is at present not so terribly clear that we know what is just, much less see ideal justice as all we need to know under changing circumstances of justice” (Ibid, 109). The problem with the Rawlsian framework is, thus, not merely the ‘methodological’ point that a prior notion of perfect justice is needed for non-‐ideal theory to have meaning but also the ‘ontological’ point that the existence of injustices as such (under non-‐ideal theory) can only be meaningfully established under a conception of ideal theory. I take it that Sen’s much criticized notion of ‘transendental idealism’ is best understood to hinge on this idea that “once we know what is just, it is all that we need to know” (Shklar 1990, 19). In many cases we need to know “how to manage conflict and organize collective decision-‐making when we do not know (or cannot agree) what should count as an ideal end-‐state” (T. Macdonald and Ronzoni 2012, 530). The constitution of corporate public power as a distributive consequence of the investment regime represents such a case. Within the current entrenched pluralist
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global order, it seems that only through a methodology that prioritizes the overcoming injustices, strides to an increasingly justifiable order can be made.164 This detour into the discussion on ideal and non-‐ideal theory has direct implications for the question of transferability of ‘pure’ institutionalism into non-‐ideal theory. It raises the question whether the prescriptions of ideal theory can continue to assume ‘pure’ institutionalism as a guide to non-‐ideal proposals to overcome injustices. An answer to this question depends to a large extent on our understanding of the relevant ‘circumstances of justice.’ First, it is important to remember the high level of abstraction and demandingness of a conception of the basic structure underwriting the institutional division of labor. This has, as argued, not withheld theorists to project ‘pure’ institutionalism into the non-‐ideal. This is problematic but not because there is a dispute on the importance (fair) institutions to fairness but because within the current global context, ‘pure’ institutionalism might simply not transfer easily, even in cases the ideal organization of a practice can be argued. When such problem of transferability occurs, (pre)selecting the basic institutional structure as the sole site of justice becomes questionable, leading to the suggestion that the interactional, under specific conditions, can become a potential site of justice as well. This challenge to institutionalism I call the institutional functionality challenge: While expectedly, under global circumstances of injustice, non-‐ideal institutions do not fulfill the function of background justice, they can also be relevantly curtailed in their functions by non-‐institutional agents (enabled through institutions themselves) and most importantly might not be most instrumental to overcoming specific injustices. Under such conditions the task assignment under non-‐ideal theory cannot simply depend anymore on a stringent institutional division of labor. The emerging investment regime exemplifies the institutional functionality challenge as it represents one of those developments creating (new) global circumstances of injustice (Bohman 2012) that beg novel normative inquiry. To Rawls ‘justice’ emerges only as an applicable category under Humean ‘circumstances of justice,’ i.e. the “normal conditions under which human cooperation are both possible and necessary” (Rawls 1971, 126-‐7; my italics). Justice 164 This is however not to say that ideal theory has become vacuous. There is much value in the motivational and aspirational function of ideal theory (Wiens, 2012), 62 fn.41) and in the conceptual clarifications of justice generative relations.
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under such conception is dependent on the existence of certain preconditions like a sense of community, moderate scarcity, and moderate inequality. For justice considerations to emerge under such a Rawlsian account a ‘lower boundary’ cannot be breached because, say, when dire inequalities are in place a cooperative venture is highly unlikely to commence as there is a lack of advantage for particular those benefiting from the arrangement in place.165 The circumstances of justice are not themselves part of ideal theory but provide a stylized understanding of empirical conditions that preface any theorizing on justice. By specifying the circumstances in the manner he does, Rawls for instance can make the abstractions needed within his ideal theory. One could argue, premised on the idea that the right circumstances ought to be in place, that justice beyond borders is merely a mirage. As Wenar notes, Rawls denies cosmopolitan global justice because “[t]here simply is no robust global public political culture which emphasizes that the citizens of different countries ought to relate fairly to one another as free and equal” (Wenar 2001, 87). 166 The question that is raised by Bohman is whether, under conditions of prevalent circumstances of background injustice such as institutionalized power-‐asymmetries, extreme poverty etcetera, it matters on a non-‐ideal level whether or not an idea of background justice can be realized? Does it not matter more that those rampant and evident injustices can be identified and corrected for? In other words, is the ‘necessity’ criterion of the circumstances under which justification is required not of overriding concern to the theorist of justice? If so, however, we might need to shift the methodological primacy from ideal theorizing on justice to the non-‐ideal theorization of injustice. The shift to background injustices equals a methodological shift as the object of justice theory is not so much the provision of principles articulating ideally just institutions but the articulation of injustices and the provision of moral ‘road maps’ for a realistic and feasible corrections to existing injustices.167
165 Brian Barry has criticized the Humean circumstances for it makes justice redundant as it applies where injustices are minimal and it excludes the direst cases from justification (Barry 1989, 156, 160-1). 166 Scheffler makes the point of the importance of the ‘possibility’ of justice for Rawls more generally. As he accounts, ”[t]he implication of Rawls’s argument [of the institutional division of labor] is not that, in the absence of a just basic structure, individuals would have to pick up the slack […] but rather that they would have no choice but to concede the injustice of their economic arrangements, at least until they were able to establish just institutions” (2007, 12). 167 Somewhat ironically I take this notion of roadmap from (T. Macdonald and Ronzoni 2012). In this article, Ronzoni is seemingly in agreement with my account.
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This shift, however, changes the parameters of the debate on institutionalism, as it has now become a question of instrumentality whether or not institutions are selected to further the goal of justice. What becomes of the aim of institution-‐ building to attain and ensure background justice under an ‘entrenched pluralist structure’? Legal scholarship on the pluralism and fragmentation in international and transnational regimes sketches a global order characterized by a lack of compliance, unjust and biased economic institutions driven by economic ideology, highly complex and fragmented (semi-‐)legal structures, horizontal authority structures characterized by at times colliding norms, as well as opacity in rule-‐formation within particularly (semi)autonomously developing (private or public-‐private) regimes and increasing adherence to informal norm generative structures (think: lex mercatoria).168 Under these conditions, it becomes questionable not only whether an idealized proposal of a basic institutional reform for background justice can be guiding at the non-‐ideal level. The conditions of indeterminacy, complexity and incoherency that these entrenched structures confront us with also undermine the (still) accepted idea that institutions are the sole focus of justice theorizing.
This is, evidently, not to say that institutions are not crucial importance in
normative evaluations, for they do also stand out as the preferred tool for problem-‐ solving in case of non-‐ideal complexities. It does mean that they are not the starting point of analysis anymore but rather considered instruments to overcome (as well as sources of) injustices. The implication however is that any approach of ‘practical’ political philosophy needs to be attentive to “the form in which these institutions are organized” (Pierik and Werner 2010, 4) so as to capture the path-‐dependencies concretized, and the divergent incentive structures ingrained, within a current instantiation of an institutional setting. In this context of changes of focus in injustice theory, the Practice Dependent Approach (PDA) provides the most promising way forward. By its very nature, the PDA-‐methodology can come “up with practically relevant recommendations which can be sensibly evaluated, because they apply to (idealized versions of) existing 168 Transnational legal regimes or functionally organized ‘issue-regimes, like the Lex Mercatoria or private regulatory frameworks, develop to a large extent in a formally autonomous way by corporations or their legal representation, interlinking and/or overlapping with other, oftentimes equally functional, regimes at specific nodes (or ‘network island’) (Teubner 1997). Legal analysis and practice have moved to considerations of soft law, far-reaching public-private transnational rule-formation coalitions (Callies and Zumbansen 2010) and international relations increasingly becoming a subject of expert groups administrating transnational affairs (Slaughter 2004).
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practices about which we have by definition enough knowledge to carry out this evaluation – otherwise the view in question could not have succeeded at the stages of identification and interpretation of the practice” (Banai, Ronzoni and Schemmel 2011, 55). While the question of the site of justice has eluded PDA accounts up to this point as well, the methodology does not necessarily bar the question of the site. Particularly, the steps of identification and interpretation of a practice allows the PDA to capture the particular challenges of a practice, including the challenges to institutional reforms. Banai, Ronzoni and Schemmel (2011) write that under PDA “attention will be given, not to unrestrained moral reasoning about the unfairness of the behavior of powerful transnational non-‐state actors, but rather to the way in which their behavior can be regulated in such a way as to no longer threaten the justice of societies in which they operate” (58). While there is some ambiguity in this statement concerning the meaning of ‘regulation,’ one way in which it can be understood is that an account is needed that can specify the normative issues pertaining to corporate agency, on the one hand, and provide for regulatory proposals based upon legitimate expectations of corporate agency, on the other hand. The ‘solvability’ of (corporate) agency-‐related problems under institutions, thus, is not necessarily assumed within PDA but becomes a secondary question of implementation, dependent on the complexities of the practice. The loose application of the PDA-‐methodology to the case of the investment regime shows how institutional uncertainties and the highly politicized nature of the regime color potential normative proposals for its reform. In other words, it is highly uncertain what provides for the most conspicuous institutional way forward as there is neither consensus nor clarity on what an ideal investment regime would look like. The serial multilateralism characteristic of the regime is not conducive to restructuring the regime in a piecemeal fashion, thereby allows for two alternative options: Abolishment of the regime as such (or more specifically BITs and investment chapters in FTAs and regional treaties) or the establishment of a proper (conference form) of multilateralism. The abolishment-‐argument is still in need of a convincing argument in favor of it169 and travels in the opposite direction of where the regime is 169 The academics that signed the Osgoode declaration come closest to this position. In any case, no matter ones perspective of the BIT system, it fulfills certain tasks that will need to be accounted for first under any other proposal. The depoliticization of conflict, protection of companies for the obsolescence bargain and redress in case of nationalization play out on what side. On the other side, large-scale investment in developing countries needs to be maintained, contracts will need deepening and broadening of their function, while they’re complete opacity and the large information asymmetry between corporate and state agent needs correction.
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currently heading. The same goes for a proper multilateralism, which after many failed attempts, most famously with the OECDs attempt to establish the Multilateral Agreement on Investment (MAI), the deadlock at the WTO and the rapid growth of FTAs, little can be expected here either. The focus within the field is therefore unsurprisingly on technical improvements to the system such as increasing transparency in hearings, the setting up of an appellate body and minimizing conflicts of interest. While these proposals promise improvements to the regime, they do not tackle the normative implications of the power distributive effects of investment law. In the context of the investment regime, it might be more astute, thus, to take the distributive consequences at face value and develop on the basis of the expectations that follow the current positions of power. This does, however, not imply a shift to ‘unrestrained moral reasoning’ as an institutionalist might think. Instead, it promotes in-‐depth modeling of the role of corporate agency in the existence of background injustices and the articulation of concomitant expectations that are informed by the corporation’s position within the practice of investment. Such a moral account is first and foremost critical and interpretative and only secondarily interested in the specific manner in which institutions provide ‘best means’ forward. The claim defended so far in this Chapter is that the institutionalist methodology adhered to within global justice theory creates a blind spot concerning the crucial role of corporate agency regarding background injustices. In as much, it suffers from a disciplinary or ideological blind spot. This subsection has argued against this disciplinary bias, opening up space for reflections on corporate agency as a site of justice. In chapter 5 it will be further clarified what the importance of this shift is as it shows that justice theory’s disciplinary bias is paralleled by the bias present in current accounts of corporate responsibilities. The gap that exists between these disciplines limits our potential to grasp the public power of corporate agency under the current global power constellation. In other words, the imbalance between corporate right and obligations, and the normative explication of these obligations, is left unattended as a result of specific methodological choices.
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4.3.2. Consequence 2: The Liberal State/Limits to Domestic Institution Building.
In the context of reflections on poverty abatement, ‘who has to do what for whom’ is of crucial consequence. The second consequence questions the analytic value of the liberal state model in the poverty abatement debate. Whereas Consequence 1 provides an argument on the site of justificatory demands, Consequence 2 concerns itself more specifically with the question where obligations to poverty abatement need to be ascribed. It highlights a specific element of this question, namely, the role that the liberal state model plays in articulating these obligations. In debates on the causes of poverty and on (subsequent) duties to be assigned to overcome poverty this model operates in the background. Here it is argued that the liberal state model is, even in its most convincing articulation as operative in Matthias Risse’s argument, untenable a providing a sole guiding template for the ascription of poverty abatement duties. This is so not for the fact that it is mistaken tout court but because it blinds us to important facts about the circumstances of injustice. In the following, an in-‐depth analysis of Risse’s powerful account will be given to draw out the limitations to idea of the liberal state model.
Under Consequence 1 we extended (Bohman, 2012) claim that the
circumstances of injustice undermine ideal-‐theoretic justificatory approaches into an argument on the site of justice. The account sketched would rebut, in an obvious way, Rawls’ Duty of Assistance (1999) as the sole duty of the affluent countries towards the poor because of its skewed, ideal theoretical, depiction of the relation between affluent and burdened societies. A main premise to Rawls argument on the Duty is the idea that the political culture of a burdened society causes its predicament. A broader perspective that involves the global institutional order, as Pogge (2002) was the first to argue in-‐depth in his case against ‘explanatory nationalism,’ undermines this ‘political culture-‐claim’ To Pogge it is unmistakable that global institutions (and thereby ultimately the citizens of the affluent countries) are causally involved in creating the predicament of the global poor.
To develop Consequence 2, i.e. the idea that the investment
regime/corporate public power argument sufficiently undermines state and state-‐ based institutional theorizing on poverty abatement, we have to first acknowledge that even if Consequence 1 is granted then still, when it comes to the issue of poverty abatement, corporate agents could be let off the hook. Namely, if a compelling prospective argument is on the table that institutional change singularly
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provides for the ‘sources of growth.’ To recall, we have not argued against the idea that there is a priority of choice for institutional solutions but merely in favor of an openness to cases under which non-‐institutional solutions are to be introduced. Matthias Risse (2005a; 2005b; 2005c), defending and building upon Rawls’ Law of Peoples (1999) provides for exactly such a prospective argument. His account is convincing but, we will argue, not conclusive: Even if we accept his account of domestic institution building as the main duty upon the affluent world to abate poverty, there are crucial qualifications to be made to such a normative account following the empirical predicament of the burdened society captured within a network of interloping legal-‐economic relations. Risse’s main contribution is in the defense of what he calls the ‘Institutional Thesis,’ i.e. the empirical thesis that economic progress turns primarily on the quality of domestic institutions. To quote Risse: “Institutional Thesis: Growth and prosperity depend on the quality of institutions, such as stable property rights, rule of law, bureaucratic capacity, appropriate regulatory structures to curtail at least the worst forms of fraud, anti-‐competitive behavior, and graft, quality and independence of courts, but also cohesiveness of society, existence of trust and social cooperation, and thus overall quality of civil society” (M. Risse, 2005c), 355). This definition of the Thesis is effectively a defense of Rawls against Pogge. To see what it exactly implies, it is helpful to contrast it with Pogge’s comments on Rawls. 170
A main critique of the Law of Peoples concerned its ‘moral indifference’ towards
economic inequalities across societies. Pogge takes this as an effect of ‘explanatory nationalism’ (the fallacy of tracing development outcomes exclusively to domestic factors) and his subsequent support for the Purely Domestic Poverty-‐Thesis (claiming that the ‘burdens’ of a society follow from the domestic political culture). The Duty of Assistance postulated in the Law of Peoples is, to Pogge, nothing more than a mistaken consequence of a methodological flaw that ends up wrongfully representing the affluent world as beneficent ‘helpers’ to the poor. This critique sets up Pogge’s own account on the important role of the intricate global institutional structures that debilitate the economic conditions of developing countries by 170 This account is largely albeit not solely based on Pogge (2002)
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incentivizing malign forces within a burdened societies and impeding on potential domestic poverty abatement strategies. According to Pogge, therefore, we can "stop thinking about world poverty in terms of helping the poor" (Pogge 2002, 23) and be confident that world poverty could almost completely be ended by fulfilling our negative duties not to harm the poor. Critics have pointed out that Pogge’s claim puts “far too much emphasis on international factors and almost none at all on domestic ones” (Patten 2005, 23). Pogge’s own account, ironically, is criticized for the inverse reasons for which he critiqued Rawls. His analysis is said to downplay the role of domestic institutions in the poverty problematic, particularly by assuming a somewhat ‘miraculous’ translation of tweaks at a global level into successful changes locally (Patten 2005; Satz 2005; J. Cohen 2010; Howse and Teitel 2010). Pogge accordingly falls into an opposite trap of ‘explanatory cosmopolitanism’ (Patten 2005) or ‘explanatory globalism’ (Satz 2005).
Whereas Pogge was largely right on Rawls’ causal claim, so are his critics in
pointing out the simplistic mechanical transformations that translate changes at the global to the local level assumed by Pogge. It is beyond this chapter to further explore the exact value of Pogge’s work and how it holds up against this criticism. 171 I subscribe to the claim that Pogge in his work has had too little attention for domestic mechanisms, both as causes of in poverty and as necessary means to abate poverty. There is a causality notion at work in Pogge’s background theory of socio-‐ economic causation, which overestimates the role of global institutions as well as the effectiveness of the institutions of burdened societies in reacting to global change. This results in the presumption that minor tweaks to global institutions would translate ‘mechanically’ into poverty abatement at the domestic level. Risse’s ‘Institutional Thesis’ is best positioned at this crossroad between Rawls and Pogge’s position. He seeks to develop “an account of duties to the global poor that is informed by the empirical question of what makes countries rich or poor” (Risse, 2005b, 83). For him, the leading question is not whether a duty to 171 Now, for Pogge it is not necessary to defend such a strong claim, nor does he, at least in his own eyes, need to be susceptible to Patten’s further break down of his argument. Patten notes that Pogge is less strong in his claims on the amount of poverty that can be abated throughout his work. But here his ‘libertarian, proceduralist premise’ works against Pogge since if duties are dependent on causal factors, the affluent would have no duty towards poverty it did not cause. There are two answers to this: first, Pogge does clearly not only foresee tweaking of institutions as being enough; he also demands a form of ‘retributive’ aid as a type of payback to the poor (M. Risse, 2005a) actually claims that Pogge thinks this type of aid would end poverty. Secondly, (Pogge 2010) has argued that in his work he had tried to show that even under a libertarian premise duties exist towards the poor. Whether these 2 answers save Pogge from the criticisms is something not directly relevant here. At least it should be clear that his account is not singular in prescribing a solution to poverty issues.
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abate poverty exists but the empirical question how to most effectively discharge these duties. Answering this question presupposes, firstly, an understanding of the ‘sources of prosperity’ (Risse 2005b, 84). In as much, to do so, Risse builds on insights from the UN Zedillo Report (Zedillo et al. 2001) and particularly work done by Rodrik and colleagues (Rodrik, Subramanian and Trebbi 2004) on the importance of domestic institutions for development. Rodrik and his colleagues applied econometric analysis to test the impacts of geography, world market integration, and domestic institutions as factors of economic growth determination. Accordingly, institutions turned out to be the dominant factor in enabling growth, a result supported by a set of in-‐depth case studies (Rodrik 2003). Accordingly, Risse argues that the development of domestic institutions, as Rawls’ Duty of Assistance prescribes, is the most promising way forward to end poverty. Other than Rawls, however, in his Risse progressive argument is attentive to separating the claim that institution-‐building provides a best means to growth from the normative claim that domestic institutions are the prime causes for poverty to exist. 172
Premised on the work of Rodrik and colleagues, Risse argues, against
Pogge and in favor of Rawls, that “[t]he importance of institutions for prosperity itself rendered it plausible that equality across societies does not matter morally” ( Risse 2005b, 102-‐3). This is based on a) the fact that institutions are the core factor in successful development and b) that the Duty of Assistance does not necessarily have to discard the, negative, causal effects of the global order as irrelevant but can integrate them as qualifying factors to the Duty (like geography the level of integration into the world market).173 Understood along these lines, the institutional stance does not commit itself to a claim on the causes of institutional performance and poverty but only to the best means for progressive development. The potential causal role of global institutional impacts is limited to the manner in which they hamper domestic institution building. Subsequently, Risse can argue that the Duty of Assistance can incorporate the detrimental effects of global order on domestic 172 Effectively, Risse makes quite some work out of denying Pogge’s causality argument. His prospective argument, i.e. what is most important in light of poverty abatement, however is not dependent on the contribution of past events to current misery. Rawls on the other hand, by claiming the source of poverty to be the domestic political culture, closed off his argument from the question whether the global order harms and/or undermines the developing world. Pogge’s critique of ‘explanatory nationalism’ is thus correct in pointing out Rawls’ limited perspective. 173 The role of geography and world market integration both impact the quest for institutions creation. But as such they should not be singled out individually as triggering separate obligations; as limit-conditions they form part of the Duty of Assistance and thus qualifies the demands on the affluent states to assist.
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institutions, in effect reiterating Rawls’ original account. It, therefore, does not commit the fallacy of ‘explanatory nationalism’ (Risse 2005b, 96-‐7).
Risse’s claim on the inclusion of global impacts is premised on the idea
that the veracity of the ‘Institutional Thesis’ effectively invalidates further normative concern for the global order harming the poor. This claim seems to be a bit of a stretch. Risse argues convincingly for assigning obligations solely on a most effective ‘sources of growth’-‐basis but we would like some additional argument on the full-‐ blown exclusion of the global institutional make-‐up as a normatively relevant subject. Risse does provide such further defense against ‘globalist’ claims by discussing two opposing theses: ‘Uncompensated Exclusion’ (UE) and ‘Shared Institutions’ (SI) (Risse 2005c). The discussion of UE presents is a rendition of an argument against Beitz‘ (1979) and Pogge’s (2002) claim on the moral relevance of unequal access to natural resource and should not trouble us here. Under the second challenge, SI, the question is asked whether the impact of the existent, or the possibility of a more just, shared (global) institutional order has direct normative implications for a progressive approach to poverty abatement. If this question is answered in the negative, the Institutional Thesis stands strong.
Unfortunately, Risse is somewhat short in his treatment of SI and deals
with it throughout the four papers written in 2005 and 2006. He also downplays the potential strength of the challenge of SI. Nevertheless, we follow through on Risse’s argument against SI as it will allow us to show the limitations to the use of the liberal state model as a premise to normative theories on development. Risse sees SI as playing out, and engages it, on three different levels. Firstly, SI presents a challenge to the moral standing of the nation-‐state as such. Risse convincingly challenges Pogge’s proposal for a multilayered global democratic system utilizing the dictum that a realistic utopia “reconciles us to our political and social condition” (Rawls 1999b, 11). A realistic utopia requires a political vision of global justice that is relative to the current global political order. Since the world system is still largely a system of states (Risse 2006), Pogge would need at least to provide an outline of how to get from the current system to his ideal end-‐state for his meta-‐critique on the state as such to become relevant. Risse is, secondly, also less than impressed by Pogge’s claim that the global order is unjust. As he argues (confronting the reader, much like Pogge, with a substantial data) the global order is merely ‘incompletely just’ since “as far as we can tell, the global order has benefited the poor” (Risse
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2005a). Hereby he minimizes the value of any causal reasoning on harm that connects the global order to duties to help the poor. Lastly, Risse engages the way in which global institutions ‘thwart’ the interests of the poor. Here he takes on particularly the ‘feasible alternatives’ argument of Pogge that states that there is a moral prerogative for reform if alternative institutional orders are imaginable and feasible that allow for substantially less human rights violations. Risse sees only this latter critique as a direct and possibly convincing challenge to the ‘Institutional Thesis.’
According to Risse, SI can generate an argument on the interest-‐thwarting
nature of global institutions along 4 lines, ‘imposition,’ ‘feasible alternatives,’ ‘implication,’ ‘extra-‐social factors’ (2005c, 367). Each would trigger obligations towards the poor since the interests thwarted are the most basic needs. ‘Imposition’ and ‘extra-‐social factors’ are accepted as interest thwarting but are inconsequential with respect to the general argument.174 Since ‘Implication’ automatically follows if the case for another feasible alternative can be made, the focus is on, the discussion centers on ‘Feasible Alternatives.’ However, instead of engaging the range of arguments that can be found in Pogge’s work on this claim, Risse limits his argument to a caricature arguing that Pogge naïvely takes ‘feasibility alternative’ as “primarily a matter of allocating money to developing countries” (Risse 2005c, 371; see also 2005b, 90). Evidently, merely ‘giving’ will not in any sustainable manner provide for a feasible alternative global order. Since it is well known that aid stands in need of good institutions to have effect,175 SI does not challenge the ‘Institutional Thesis’ on this reading. However, Pogge is not a ‘crude’ utilitarian176 and even though he might have overplayed his hand on reverting obligations to reform global institutions onto the citizens of the affluent world, one cannot reduce his human rights based account for institutional reform to a question of resource transfer (Risse 2005c, 358). The argument against Pogge is, thus, somewhat confused. While Pogge does formulate positive duties, these are triggered by an account of negative harm, i.e. the under-‐ fulfillment of negative duties. Importantly, however, these negative duties are not 174 4. simply states that no non-social factors cause the existent of poverty. The acceptance of ‘imposition’ is somewhat of an empty gesture once feasible alternatives falls through, namely, once no alternatives are at hand the imposition of the current order becomes morally irrelevant. 175 The literature on the problems surrounding aid effectiveness is massive. See for a review of some relevant empirical considerations, see Wenar (2003). 176 Risse makes a point out of Pogge’s claim that we cannot assess the success of aid for it has through the decades been tight up to strategic considerations of the donor countries. This however is not the same as claiming that aid as such will be successful.
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‘bought off’ by the affluent citizen by living up to its positive correlate; a ‘Feasible Alternative’ primarily refers to the correction on the existence of institutional harm. While one need not follow Pogge’s argument to the full extent, his argument cannot be reduced to a question of sufficient amounts of aid provision. The force of Risse’s argument against SI becomes questionable then. The ‘Institutional Thesis’ certainly is a convincing template for a feasible path towards poverty abatement but he has not been able to rebuke the relevance of global institutional impacts. While we might want to concede that the global order does not harm the poor in the sense of (malign) ‘wrongdoing,’ Risse’s alternative that the global order is merely ‘imperfectly developed’ is hardly convincing either. This becomes particularly apparent once we understand harm as a form of exploitation as ‘taking advantage.’ Undeniably, exploitative relations are part and parcel of social interactions within the global order. These arrangements are not exploitative because they happen within a ‘not fully developed’ global realm but because they derive from a position of bargaining power-‐advantage. The evolution of the investment regime is an example hereof as it shows how certain historical mismatches in bargaining power and information asymmetry translate into an ongoing system that benefits corporations (mostly from affluent countries). This point on the continuation of power imbalances into institutional structures also undermines the significance of Risse’s claim that past injustices per se hardly make the existing order unjust. While this might be true, it is the case that these past injustices are oftentimes translated into skewed relations advancing the position of the powerful. It is not too adventurous to assume that these institutionalized relations could be directly relevant to any progressive account on poverty abatement. Risse’s argument on institution building is, albeit in no simplistic manner, dependent on an underlying liberal model of the state that neutralizes the particular dire conditions under which burdened societies ought to develop. While clearly aware of the ‘territoriality undercutting’ developments of the post-‐Westphalian world (Risse 2006), he remains attached to an idea of state institutions as relevantly autonomous. Can we, however, simply assume away in the case of burdened societies, the structural effects of these undercutting forces as mere qualifications to a Duty of Assistance? This assumption, I contend, can merely be made in the case that a liberal state model can function as a model for the autonomous development of the
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burdened society. Here we should think back to the dialectical notion of Statecraft introduced in this chapter. As has been noted, the implication of Patterson and Afilalo’s (2008) theoretical conception of differential state agency is not merely that burdened states have limited institutional capacities to be successful; the point is that the conditions necessary to even attain these capacities themselves (the ‘capacity for capacity’) are undercut by interloping legal-‐institutional regimes such as the investment regime. While Risse is to be applauded for positively engaging the issues, he clearly underestimates the constitutive of transnational legal-‐institutional forces that entangle burdened societies.
To capture Risse’s blind spot his account (Risse 2006) on the normative
peculiarity of the state as the sole associative context in which redistributive duties emerge can sharpen this point. 177 Building on the coercion-‐based account of justification of Blake (2001) and Nagel (2005), Risse stresses the importance of the ‘type’ of coercion in understanding the peculiar manner in which it is exerted by the state. State coercion is immediate, both legally (the directness and pervasiveness of state law enforcement for citizens (Risse 2006, 685-‐6) and politically (the profound importance of the environment provided by the state for the realization of basic moral rights (Ibid, 685).
It is this peculiarity of the immediacy, profundity and pervasiveness of
coercion that according to Risse separates the associative bond between citizens under a state and other associative relations beyond state borders. The rules that arrange for these legal-‐political relations between state and citizen are normatively relevant and distinguishable, and “should be justifiable to each person subject to them” (Risse 2006, 688). It might be true that states are potentially not the sole and ultimate source of authority anymore but “to the extent that political authority has moved to non-‐state actors [here meaning state-‐based global institutional schemes], it has done so only through explicit or implicit approval of states and at any rate [international law] still depends on state power for enforcement” (Risse, 2005b, 104).178
177 As said before, the notion of redistribution is somewhat unfortunate. I reckon that Risse maintains as a result of his constructed opposition with Pogge, who is claimed to represent the argument that the rich should give to the poor. 178 This answer is, however, built on a limited Austinian understanding of the hierarchical organization of law, thereby disqualifying the coercive force of international law, for the well-‐known reasons of lack of enforcement mechanisms. Risse does qualify his claim somewhat, by noting that the argument on the lack of enforcement under international law depends on what is understood by ‘‘means to compel.’
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Moreover, Risse claims that there are areas in which only states coerce.
Here he particularly singles out property law as the realm that “must be so justified” (Risse 2006, 679) as its enforcement primarily accounts for redistributive demands. Therefore, “redistributive duties that hold among fellow citizens are not a product of the presence of coercion per se, but rather of a coercive enforcement of property within an association shaped by these legal and political aspects of immediacy” (Ibid, 689). Even if we grant that there are coercive structures beyond the state, “[r]edistributive’ measures emerge naturally as components of a property regime justifiable to all participants” (Risse 2005b, 105). Since, besides to some extent TRIPs (as defining a highly limited domain of global property rights), no other associative body than the state defines and secures the realm of property rights, the peculiarity of the state has been confirmed.
What this argument on the peculiarity of the state, at first sight only
indirectly connected to the claim made here, betrays is his underestimation of external forces that not only sporadically challenge the domestic institutional order but that are structurally ingrained within the functioning of the burdened society. Clearly, for instance, one interloping legal-‐institutional regime that Risse underestimates is the investment regime. Unique in its transnational impact, under the investment regime the definition and regulation of property rights have to an important degree been internationalized. That core institution of the regulation of property rights, defining of the peculiarity of the state (Risse 2006), thus, is not merely ‘weak’ under burdened societies it is also ‘externalized’ under the investment regime.
The progressive argument that the ‘Institutional Thesis’ advances falters in
light of Risse’s lack of serious discussion of Pogge’s claim on harmful global institutions. While he might be right that there is no normatively relevant negative causal relation between these institutions and the existence of poverty, this does not imply that current regimes a) are not a furtherance of formerly unfair bargaining situations in current arrangements, and b) do not have a strictly limiting effect on the progressive development of domestic institutions. The claim that the Duty of Assistance is able to integrate these relations is little convincing as this would imply an very expansive reading of what it means to have a duty to build institutions, including curtailing and reforming all global and transnational arrangements that impede institution building but for which the normative issues of responsibility
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allocation are undefined as such. Even more to the point however, the argument on the peculiarity of the state in terms of the regulation of property law in a direct and pervasive manner enables us to see the that in effect the argument on institution building rests on a (although watered-‐down) liberal state model as it transfers this model of state peculiarity into the context of burdened societies. The question however is whether these societies are still positioned to develop such institutions. The affluent countries have pushed for the internationalization of the enforcement of investment claims under the investment regime, exactly because of the lack of effective or trusted institutions present in burdened societies. The internationalization, however, concomitantly has triggered a further pull-‐away from domestic institutions and a need for their improvements (Daniels 2004; Ginsburg 2005). The differentiation in state agency is critically important to our understanding of the normative implication of the investment regime.
To conclude this subsection, then, as the regime of investment effectively
defines and curtails that utmost peculiar institution of the state, are we not in this case under the stipulation of Risse’s own argumentation forced to broaden our understanding to the role of external forces play in the institutional make-‐up of burdened society and assess their normative role within the context of institution building. While institution building can thus be said to be a necessary component of poverty abatement, there are good reasons to not understand it as a singular normative project. Thus even to the extent that from a perspective of successful anti-‐poverty strategies domestic institutions are crucial, even then, in light of transnational legal ramifications of the investment regime, normative considerations of corporate agency towards poverty abatement are required.179 Once we relieve ourselves from the image of the liberal state model and articulate the relevant empirical considerations surrounding the lack of those necessary institutions under ‘burdened’ conditions, new challenges but also new opportunities for normative guidance emerge. 4.4. Concluding Remarks This chapter has by way of many words tried to tease out space for considerations of corporate agency under justice theory. The chapter commenced (4.2) by articulating
179 To be clear, once Consequence 1 is also accepted.
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three core concepts that were operationalized under the analysis of the investment regime and which play a defining role in the normative analysis presented here in general. Subsequently two consequences for justice theory that follow from our analysis of the investment regime were presented. It was shown that: 1. ‘pure’ institutionalism cannot be a premise of justice theory under non-‐ideal conditions. Instead, in this context institutionalism plays an instrumental role as a ‘best means’ towards justice. This conclusion, however, also implies that conditions can exist that undermine institutional solutions. 2. While domestic institutions are crucial to any attempt at poverty abatement under burdened societies, the interloping and undercutting forces that bind progressive developments of these societies cannot be underestimated in normative analysis of poverty abatement strategies. The investment regime provides a crucial example of how a mere domestic focus to developing burdened society is for pragmatic reasons not sufficient. The aim of this chapter was thus ‘radical’ in that it formulated a challenge to justice theory generally but ‘modest’ in what it actually wanted to accomplish: Analytic space for incorporating corporate agents within justice theory. This aim however, modest as it is, is of consequence with an eye at the right/obligations mismatch currently in place in normative debates on corporate agency. The main lesson to be drawn from the chapter then is the need for reflection on corporate responsibilities as premised on their rights and concomitant powers. With a lack of state or state-‐based institutions to tame the corporation, philosophy to be guiding cannot remain content with reflections on only these institutions. The importance hereof will only be confirmed by the currently underdeveloped accounts under the heading of Corporate Social Responsibility (CSR) and Business and Human Rights (BHR).
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Chapter 5 Conceptualizing Corporate Responsibilities: Two Models 5.1. Introduction Chapter 4 challenged the institutionalist bias of political philosophy so as to open up space for what can be called a political philosophy of corporate responsibility. As such, however, it has said nothing yet about the substantive implications our proposed understanding of corporate public agency have for the conceptualization of corporate responsibilities particularly regarding the socio-‐economic rights of those living in poverty within weak governance states. In this chapter CSR and BHR are introduced as 2, sometimes overlapping but divergent, models that articulate the normative expectations of corporations. 180 The question is whether they do so in a satisfactorily manner based on the argument on corporate agency developed within this thesis. The crux of the argument will be that neither of the two models can account for the normative implications of the ‘publicness’ of corporate agency sufficiently as their adherence to a limited and limiting ‘interactionalism’ premises corporate responsibilities merely on a private agency understanding of the corporation. Both will be shown, therefore, to remain underdeveloped in accounting for the implications of the reciprocal, relational basis of the investment practice as constitutive of this public power. To that extent, CSR and BHR do not (sufficiently) 180 This chapter does not claim to provide a full-blown analysis of either CSR or BHR. While the latter has become a truly booming topic since John Ruggie became Special Representative, the CSR literature can by now fill a library on its own. Besides, CSR has been such an ‘inconsistent’ concept within the literature that exploring it would take a volume in its own right and BHR has largely been part of a legal debate that is not our primary interest.
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incorporate a reflection on corporate responsibilities as premised on the powers corporations have been endowed with. Where the dominant varieties of CSR remain captured in a discourse of voluntarism, the legalistic mind-‐frame of the BHR-‐ approach is highly skewed towards addressing (direct) harms. In the final analysis this means that neither can satisfactorily make sense of the institutional type of responsibilities that follow from the notion of corporate public power. This chapter starts-‐off by sketching the contours of a dominant yet problematic CSR model, particularly once CSR is applied within a development perspective. Current CSR provides little in terms of a justificatory discourse for corporate public power as it remains largely tied to a voluntaristic perspective on corporate responsibilities premised on a notion of private agency. Subsequently the UN Guiding Principles, the end result of Ruggie’s fruitful years of engagement with the topic of BHR as a Special Representative, albeit providing an elaborate understanding of the issues at stake is shown to run into similar limitations, as he chose to limit corporate responsibility to respecting human rights, leaving the onus of regulatory control of and progressive evolution fully on the state. The obstinate public/private opposition, it is argued, is clearly at work in the normative underpinnings of both models and their subsequent understanding of the agency of corporations. CSR and BHR thereby hold on to an ‘interactionalist’ methodological predisposition that is the inverse of justice theory. Thereby, the chapter concludes, we are confronted with a disciplinary parallelism between justice theory (institutional), on the one, and CSR/BHR (interactional), on the other hand, which obscures the importance of the implications of the discipline-‐crossing hybridity of corporate agency in the normative assessment of our reasonable expectations of corporations. 5.2.Two Models In this chapter two currently dominant ‘models’ of corporate responsibility-‐ ascription, CSR, and BHR take center stage. The main aim is to understand the normative underpinnings of these models and whether they can provide for an adequate justificatory account of corporate engagement with the poor. An adequate account implies that a model of corporate responsibility ought to be able to generate reasonable expectations on corporate agents that reflect the type of power the agent holds and the position and influence it has within the practices in which it
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engages. In other words, corporate responsibilities are a function of the distributive effects of the institutional grounding, in our case within the investment regime, of corporate agency. The CSR and BHR model do not live up to this requirement but their weak (and strong) spots are interestingly quite complementary and provide for a helpful backdrop to develop a more adequate or well-‐rounded account. CSR for instance expresses sensitivity for the reciprocal nature of corporate responsibilities (even though it fails to capture its institutional basis), at the same time it lacks any recognition of the public power of corporate agents. BHR on the other hand is a ‘legalistic’
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model that offers few tools to articulate reciprocity-‐based
responsibilities. At the same time, it does allow for an understanding of corporate public power. Historically both discourses arose, in their current form, around the same time, pertaining to the same issues (such as business in South Africa and labor rights infringements in apparel factories). Surprisingly, however, there has not been much productive engagement between the two discourses. A conceptual mismatch between CSR and BHR could well be the source hereof. Where CSR has been conceptualized in terms of the supererogatory, (legally and largely morally) voluntary, lacking a “constitutive focus on people’s rights” (Wettstein 2012, 751), BHR engages legal and moral rights-‐based obligations but “has lacked the focus on the positive potential of corporations to be a part of the solution rather than only a part of the problem” (Ibid.). Both models compare however in that they articulate a mere interactional account of corporate responsibilities and thereby reinforce the parallel disciplinary tracks directly opposite the institutionalism of political philosophy. To that effect, these models are “‘not so new’ in the sense that current explorations of corporate social responsibilities and Human Rights obligations of multinational or transnational enterprises/corporations (MNEs/TNCs) hark back to historical contestations of the allegedly private nature of a purely profit-‐driven business enterprise” (Callies and Zumbansen 2010, 185). Where CSR fails to translate properly the idea of corporate public power as the basis for articulating responsibilities, BHR largely falls short for the fact that it fails to offer much on the side of ‘positive’ duties, thereby undermining the reciprocity demand distilled from the investment regime. 181 ‘Legalistic’ is placed between quotation marks for it is the language in which the principles are formulated that stems from legalistic frame of mind. This is not to say that Ruggie formulates legal duties for corporate agents – the lack thereof actually has been a critique on the UN Guiding Principles (2011a).
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The thesis so far has argued that corporate public power and the corporate agent’s position within the reciprocal practice of investment are two constitutive conditions for specifying corporate responsibilities. Neither of the two models thus, nor a simplistic combination of the two, can be said to fit the peculiar normative sensitivity that comes with the role the corporate agent plays in global governance. 5.3. CSR: Expectations and the ‘Ought’ of Responsibilities In the following sections we will look for answers to the following questions: First, what justificatory account of corporate agency underwrites this model? Second, how do current models of CSR translate the reasonable expectations upon corporate agents? Before going into the two dominant understandings of CSR it should be clear that we are dealing with a ‘contested concept’ that lacks clear-‐cut conceptual boundaries. A search for an exact definition might therefore be misplaced and unfruitful. Although CSR, thus, is not much more than a term of art, some general shared characteristics can be drawn out. CSR, in as much, can be said to be “an umbrella term for a variety of theories and practices all of which recognize the following: (a) that companies have a responsibility for their impact on society and the natural environment, sometimes beyond legal compliance and the liability of individuals; (b) that companies have a responsibility for the behavior of others with whom they do business (e.g. within supply chains); and that (c) business needs to manage its relationship with wider society, whether for reasons of commercial viability, or to add value to society” (Blowfield and Frynas 2005, 503). This definition is useful to grasp the basic idea expressed by the concept of CSR. Point (a), the comment that sometimes responsibilities are taken to go beyond legal compliance, is most significant to this thesis as it stipulates a conception of corporate agency towards society. 182 The idea of going ‘beyond the law’ has been the basis of the main contention surrounding CSR (and business ethics in general). Neoclassical theory denies that any obligations beyond the law exist. It is no secret 182 The classical debate on the corporations’ role within society unfolded in the early 20th century Berle-Dodd debate (Berle (1930); Dodd (1931); Berle (1931) and a rejoinder by Berle (1954)) in which the question whether ‘shareholder money’ could be legitimately be used for philanthropic purposes was debated. While the early Berle has been understood to defend the shareholder model in these debates, this is a mistaken reading of his position. First and foremost, because Berle did not consider a fiduciary relation between principal and agent to support his claim but the fact that corporate profits actually were very directly tied up with the savings of a large proportion of society. Berle chose ‘shareholder priority’ for the instrumental position it played in the welfare of society (Berle 1931; Sommer 1991). In other words, Berle’s thinking was deeply seated in an understanding of the role of the corporate agent embedded within society – a philosophy that inspires the current account.
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that proponents of this economic ideology favor unhampered markets and corporate agents that can engage with their sole maxim of profit maximization. CSR claims accordingly are refuted as ‘non-‐tariff trade barriers,’ obstacles to free trade and diversions of what really matters to society pace corporate agents: Development through value generation by the corporation (which would effectively translate into ensuring that the shareholder’ profits).183 Milton Friedman (1962) therefore called CSR a ‘subversive doctrine’ that undermines the fiduciary duty of the manager to the shareholder, allowing for managers to use company money for pet projects. The only ‘business of business’ therefore was to make a profit (M. Friedman, 2007). The Friedmanian account should be read as a normative outlook,184 albeit one that is outdated because of the assumption on which it refutes corporate responsibilities. It is not, however, that profit-‐orientation of the corporate agent is in and of itself unjust – profit orientation is, as the choice of value accumulation under liberal democratic societies, justified by the social benefit it creates (Heath 2006a). The point is that Friedman’s ‘moral’ prescription for the corporation is dependent on the fulfillment of the exclusive task of the state to provide for an effective and comprehensive regulatory framework. In other words, his account presumes the rules of the game as set (M. Friedman, 1962; 2007). For a myriad of reasons such as transnationally developing regulation (as under the lex mercatoria), privatized services, industry standard-‐setting and corporate agents undercutting states’ ‘internal sovereignty’ through lobbying (in a broad sense of the word), and so on, challenge the comprehensive rule-‐setting role ascribed to the state. Increasingly governance and even law-‐making has defied the classic public-‐private distinction (Braithwaite and Drahos 2000; Benhabib, 2007; Kobrin 2001; Kaul et al. 2003; (Scherer et al., 2006).
The neoclassical model thus misses one of the crucial constitutive features of
globalized markets: The existence of (extensive) gaps in state regulatory governance. In other words, a justificatory premise of the neoclassical model is, to say the least, 183 It was not Friedman however that grounded the principal-agent dogma into business ethics but Jensen and Meckling (1976) through their theory of the firm. 184 Friedman’s position is often equated with that of the shareholder model, prescribing profit-maximization. Whether or not this fully represents the position of Friedman is not of interest here. The idea however that managers should be held to their fiduciary duty towards shareholders still plays a foundational role within corporate law. The fiduciary duty to shareholders is made as a moral claim. It is questionable however whether the fiduciary relation is itself genuinely moral. Why would the relationship between the principal and agent void the managers’ role (as agent) from moral requirements? If morality limits what one can do in the pursuit of profit, these limitations cannot drop out simply because it now is an agent, not the principal him/herself, that acts (See Rodin 2004 for an argument along this line).
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under pressure. These gaps exist globally, through the footloosness of MNCs and are most prevalent in the developing world where governance is already underdeveloped. If governance denotes “the crafting and implementation of collectively binding norms and rules for the provision of common goods or the provision of common goods itself” (Börzel, Hönke and Thauer 2012), states with ‘limited statehood’ (T. Risse, 2011) and weak governance are obviously, by definition, incapable to provide what the neoclassical theorist assumes it to provide. In effect, the expectations that ground CSR are a resultant of these debilitated governance mechanisms of states and the lack of systems beyond borders that offers effective solace. Historically, the post-‐1989 wave of CSR can be interpreted from this perspective. Riding a human rights ‘wave’ on the one hand and the rapidly increasing corporate network linkages all over the globe on the other, a consistent stream reporting on corporate human and labor rights abuses or complicity in such abuses, corruption scandals and environmental catastrophes as effects of governance gaps, outsourcing practices and/or competitiveness first-‐type business thinking, lead to strong civil society reactions (Naomi 2000; DeWinter 2001; Hertz 2005; Clapham 2006; Schouten and Remmé 2006; Benhabib 2007). The focus of civil society was on what corporation should not do, or, the negative duties of corporations not to harm. Nike became the archetypical example within this early wave of companies confronted by these new demands. Under high scrutiny for the bad labor conditions and the levels of pay to laborers in their supply chain, Nike’s progress from initially denying accountability for not controlling the subcontracted factories, then seeking to solve issue on its own terms, to finally understanding the need to ‘politically embed’ (Scherer, Palazzo and Baumann 2006) within the networks of affecting and affected has been called the exemplary case of corporate ‘civil learning’ (Zadek 2004) and has placed Nike at the forefront of fair supply chain management (Locke, 2007). Where ‘public shaming’ (Hendry 2006) first moved Nike to take action, eventually the company understood that ‘signaling’ good behavior could pay off as well. The advent of CSR can be interpreted as a reaction to the ‘gaps’ developing within governance structures, in the sense that it describes the changing expectations of corporate agency to responsibly operate where these gaps exist. Looked at this way, CSR’s emergence arguably already implied a shift on the
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public/private divide upheld in the Friedmanian example of economic thinking (Kobrin 2009; Scherer and Palazzo 2011). It also highlight that criticism of CSR claiming that its discourse is merely to escape from regulatory demands (Lipschutz and Rowe 2005) might just betray a simplistic understanding of the extent and meaning of these governance gaps, as more direct regulation is not evidently at hand. Moreover, such criticism can also be said to underestimate the ‘dark sides’ of the state that undermines ‘good governance’ and to which CSR could be an answer, such as patrimonial structures that reduce common goods to ‘club’ goods only serving their constituencies (Börzel, Hönke and Thauer 2012). Under conditions of weak governance institutions, then, even when the state has the capacities it cannot be assumed that it is the “superior provider of governance” (Börzel, Hönke and Thauer 2012, 29-‐30). Factually of course companies have been extensively contributing to public goods provision as a consequence of lacking or limited governmental action185 and have also set up, either through public-‐private schemes and/or in cooperation with NGOs or even solely among business leaders, regulatory schemes (Haufler 2001; Hall and Biersteker 2002; K. Macdonald and T. Macdonald 2010) that have contributed to dispersing norms and principles throughout the transnational spheres that make up sectorial supply chains. It is not surprising therefor that the critical CSR literature has shifted course and moved to questioning CSR as a ‘political’ concept. ‘Political CSR’186 acknowledges the shifts in the governance sphere and focuses on the newly emerging questions of democratic legitimacy. As corporate agents become increasingly involved in public deliberation, in defining standards and norms (even of the codes that are to regulate them as with the German corporate governance code (Callies and Zumbansen 2010)) or even provide a regulatory structure where none was before (Zadek 2004; Scherer, Palazzo and Baumann 2006; Scherer and Palazzo 2011), political CSR questions the conditions for democratic legitimacy of corporate political agency.187 185 The case of comprehensive anti-HIV/Aids programs by the carmaker MNCs in South Africa is a telling example (Thauer 2013). 186 See Scherer and Palazzo (2011) for an overview. The authors are themselves two of the driving forces behind this development. 187 There is a clear overlap between the premises of political CSR and the approach outlined here. Where political CSR wonders about the legitimacy conditions of global rule-setting and guaranteeing of individual citizen rights by corporate agents, the current thesis delves into the normative premises upon which corporate agency in its societal relations need to be justified. Where political CSR then wants to built democratic legitimacy around corporate agency, this thesis articulates what the normative implications are in terms of responsibilities given changes in the agency position of the corporation.
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Whether or not certain elements of corporate agency today can best be implemented through ‘legally voluntary’ or legally enforceable measures, through soft law or hard law,188 is a question of implementation and depends among others on the type of governance gaps in place, the means at hand and the democratic implications of an extrajudicial system.189 We are not concerned here with these questions and will not venture into answering them. This thesis engages the underlying ethical questions pertaining to corporate agency; questions that are of a conceptually separate nature from enforcement (Penz et al. 2011) How these can then best be ‘locked-‐in’ in their own right is a further question of enforcement, accountability and, crucially, feasibility. This is not to say, however, that the ethical question that is central to a normative account is disassociated from empirical considerations. The critical inquiry into CSR targets the linkage between the corporate rights and powers as the grounds upon which responsibilities have to be formulated. Engaging the empirical conditions of corporate agency is the only way to specify these rights and powers. Therefore, accounts of corporate responsibilities need to start by articulating the empirical and conceptual premises of corporate agency, which in its own right forms the basis of any informed understanding of corporate responsibilities.
Once we look at the current dominant thinking on CSR from this perspective,
certain elements of Friedman’s thought still play an important role in CSR-‐talk. While the academic CSR literature has developed largely in a reaction and seeming outright opposition to Friedman, as (Vogel 2005) notes, many of the CSR proposals on the table do not go much astray of this model, all “implicitly acknowledging the predominant and uncontested economic role for the firm” (Scherer, Palazzo and Baumann 2006, 513; my italics). 190 Corporations are ‘private’ agents that, as economic organs of society, have little more than a ‘no harm’ duty. No analysis in 188 The blurring of the lines between hard and soft law as a result of stronger corporate accountability mechanisms and the advent of voluntary CSR commitments in legal documents (enabling their legal status) is a central conclusion of Ruggie’s 2007 Report. 189 The evolution of a wide range of public and private (voluntary) codes in its own right has been said to provide for a selfconstitutionalization of corporate obligations by corporations (Teubner 2011). 190 The debate within business ethics, which traditionally has pitted shareholder against stakeholder theories, further exemplifies this. Both theories however provide models of professional ethics, i.e. they give an interpretation of the obligations a manager has in his/her function as manager. As Heath notes, these models articulate “a code of conduct already implicit in structure of corporate law and best practices of managers. Not an alien code, imposed from the outside by ethicist” (Heath 2006, 534-5). With respect to others-relating consideration they remain mostly instrumental.
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terms of power or of the set of enabling rights is undertaken. The liberal, neoclassical assumption of the private agency of corporate agents places the corporate agent conceptually fully within the private sphere, “the boundaries of which are circumscribed by state regulation” (Ibid. 514). Private actors under such a model are largely rights’ holders and not bearers of duties. 5.4. Variations on a Theme: 2 Dominant Readings of CSR Two models have been dominant in the CSR-‐debate: The business case to CSR and CSR as ‘Noblesse Oblige’. The following two subsections show how these models in their own way fall short of providing a suitable normative account of corporate responsibilities: The business case effectively lacks a notion of normativity to specify corporate engagement beyond legal compliance and Noblesse Oblige does not articulate the ‘ought’ of corporate responsibilities, thereby largely limiting itself to the realm of beneficence. 5.4.1. Responsibility and Profit-‐Making: A Business Case for CSR
The following quote sums up the business case concisely: “[it] is concerned with the primary question: What do the business community and organizations get out of CSR? That is, how do they benefit tangibly from engaging in CSR policies, activities and practices?” (Carroll and Shabana 2010, 85) While the business case has been the dominant framework to understand corporate responsibilities, as such it is but an oxymoron for it provides an instrumental instead of a normative logic. In other words, the business case simply aligns two different goods to be achieved – economic and social value. It has therefore been widely endorsed by business as it provides a blueprint for quelling negative coverage, while profitably seeking social engagement. In effect, contemporary “CSR emerged among leading firms and business schools as a public relations tool, a way to deflect criticism, engage critics and potentially capitalize on emerging business opportunities associated with doing, and being seen to be doing, good” (Newell and Frynas 2007, 670). CSR thereby is seen as a tool to competitive advantage, as responsible behavior could improve worker’s mentality and identification to the company, improve outside perception, keeping employees happy and ensuring an ongoing license to operate within a community. The extent of which such strategies are reasonable and potentially
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successful is dependent on the sector, the importance of brand recognition and oftentimes whether there has been prior negative media attention. Interestingly, the business case has lead certain companies to become seriously engaged with the poor within their CSR-‐strategies. To that extent, this logic has shown its potential in moving companies from a mere ‘no harm’ philosophy to positively and actively engaging with social issues.191
However, while the business case for CSR can positively impact poverty and
development, they are not per se happy bedfellows. At their core, the logic of business and development are in tension with one another. Business often needs short-‐term targets, tangible results of the impact of singular activities of the company, while development is a structural process that takes a holistic approach to initiatives.192 Most importantly however, the potential scope of this model directly depends on the size of the ‘market for virtue’ (Vogel 2005). At some point the ‘market’ expectedly catches the corporation in a continuous limbo between cheap products and high profitability on the one hand and contributions to societal welfare on the other. The instrumental logic of the business case-‐framework cuts further normative reasoning short at this point, while in actual fact “the real crunch questions in CSR concern what to do when the business case does not hold because it is not economically wise for a particular economic unit or business sector to ‘do the right thing’” (Campbell 2007, 531). Skepticism concerning the potential of CSR to be more than the reductionist approach of moral obligation into the managerial categories of efficiency and profitability arises at this junction (Karnani 2010). The inherent weakness of CSR becomes clear: it does not answer the ‘ought’ of responsibilities, i.e. the imperative of corporate responsibilities to abate poverty. Notwithstanding the tension in their logics, CSR has penetrated the discourse of development. To demonstrate exactly how the business case and development are merged into CSR, a few examples can be insightful: Firstly, as an example of a CSR 191 Different companies operate at different levels of social engagement. Van Tulder (2010) provides a scale of four types of corporations ranging from inactive to pro-active companies, i.e. from pure shareholder focused to actively engaging with social issues. To be sure, the point here is not that all companies in Van Tulder’s scheme are holding on to the business case. Particularly the more proactive ones will identify themselves more with the Noblesse Oblige interpretation of CSR. The point here is merely that the business case logic can and has lead corporations to become positively engaged with poverty issues. 192 That the business case dominates the ‘development case’ in the balance of things is clear by the fact that we know much more about the effect of CSR on the bottom line then on the social aims it is to fulfill. The danger of CSR, formulated as such, as an instrument of development alternative to state-based (or aid-based) development programs, is that it re-orients structural evaluations to business efficiency criteria (Blowfield 2007).
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approach that engages corporate profit incentives to ‘doing good,’ Product (RED) serves well. The brainchild of U2 lead singer Bono, Product (RED) is exemplary for what could be termed a simplistic and blatant utilitarian approach of ad hoc/add-‐on CSR. Its campaign integrates the poor and ill as cogs in the corporate branding machine as it operates on a simple algorithm of selling products under the (RED) brand-‐label, opening up a niche in ethical and ‘compassionate’ consumption. Companies on their side promise to donate a fixed amount or percentage of the profits of these sales to the Global Fund. The Fund will invest the received donations in antiretroviral medicine to combat HIV/AIDS, and in medicine to stop tuberculosis and malaria.193 The rationale behind the approach is that corporate engagement to CSR-‐guidelines is only sustainable if and only if it is profitable. In fact Bono has denounced any qualification of RED as being a kind of philanthropic cause;194 it is a ‘hard commerce’ model that generates new profits and secures markets for antiretroviral medicine. Unsurprisingly then the initiative full-‐heartedly subscribes to the ‘doing good, by doing well’ mantra. In an incisive work of criticism (Richey and Ponte 2011; see also Richey and Ponte (2008) and Ponte, Richey, and Baab (2009)) dissected RED as an extreme form of ad hoc and disengaged CSR that veils corporate’s strategic operations. As the corporate contribution is thus mere profit redistribution, the (RED) initiative is actually much more like traditional philanthropy in its aim although it operationalizes the vulnerable in a manner the latter never did. It deals neither with the effects that the ‘direct’ operations of a company have on suppliers and labor, nor on societies in general: “RED improves a company’s brand without challenging any of its actual operations and practices, and increases its value and reputation” (Richey and Ponte 2011, 124). RED thus radicalizes the idea of a business case for CSR through its full-‐blown ‘commodification’ of morality, cynically turning CSR’s promise to ‘socialize the market’ into a ‘marketization of the social’ (Richey and Ponte 2011). Prahalad’s Bottom-‐of-‐the-‐Pyramid (BOP) (S. Hart & Prahalad, 2002; Prahalad 2004) approach is a second example of the application of the business case logic to questions of development. Prahalad’s now famous insight was that corporate managers had missed out on exploring the market possibilities at the BOP, i.e. the 193 By now (RED) has raised, as of December 2010, 160 million dollars for the Global Fund and is the second largest private contributor after the Gates Foundation It is important however not to overvalue the contribution of (RED) to the Global Fund. The RED contribution totals less than 1% of the Funds total. 194 See www.joinred.com.
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poor constitute potential consumers in a large market. While this is not a CSR-‐ approach in the strict sense but more a business model, as a strategy it promises however a profitable corporate engagement with the poor. Targeting the poor through markets, is the idea, has the potential to improve the lot of the poor since corporate investments will lead to the construction of a much-‐needed ‘market-‐ oriented ecosystem’ in poverty-‐stricken countries. At the same time, corporations profit from opening new markets. This approach raises some obvious questions, for instance, whether those making less than 2 dollars a day195 are actually ‘marketable’ or whether the poor actually benefit beyond being able to consume.196 This thesis is, however, not so much interested in the approach potential on the ground, nor are is to criticize corporate engagement with the poor as such. What is of interest however is what the BOP-‐rationale excludes. Firstly, like Product (RED), the BOP solely focuses attention on the consumption and not on the production side of the market (Karnani 2006). The production and supply chains of corporations, however, are of most consequence to poor populations. The BOP does not tell us anything about these. Certainly it cannot simply be assumed that targeting poor populations for consumption will, automatically, trickle down into improvements on the side of labor standards and the like. A second question relates to the highly fragile and underdeveloped markets in many poor countries. While fully supportive of the idea of business for development, Hubbard and Duggan (2009) challenge the core question behind BOP. As they put it: “Prahalad asks, ‘Does your business target poor people?’ A better question is, ‘What is the effect of your business on the domestic business sector’” (Hubbard and Duggan 2009, 103). This latter question has the contours of a structural development-‐oriented strategy. Prahalad’s approach, on the other hands, remains captured in a business opportunities strategy that does not break free from the type of corporate-‐oriented logic that is instilled in the business case. While there certainly is room for improvements through investment targeting of the poor (think mobile phones in rural Africa), as long as the effect of MNC-‐
195 The absolute poverty line is drawn at either 1 or 2 dollar a day (purchase power parity). This category already includes over 2 billion people. Those living of 1 dollar or less as a category even make up over 1 billion people already (these are the true ‘bottom billion’ (Collier 2008). It is even hard to imagine how companies could market these people, especially since a relatively large percentage of the ‘bottom billion’ live in relative desolate rural areas. 196 Questions pertaining to the BOP’s practical success have also been raised. As Richey and Ponte (2011) note Prahalad himself has been hard pressed to identify 2 among his 12 examples as having a positive impact.
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investment on local economies in general remains unclear, we must remain cautious in celebrating these behemoths investing in the developing world.197 Porter and Kramer (2006; 2011) have, in a way, taken the BOP-‐approach a step further, largely covering for the weakness of Prahalad’s proposal. Their core idea is that corporations should strategize on a double value-‐platform, i.e. economic value and social value to create shared value. Their approach is termed Creating Shared Value (CSV) and likens to ‘integrative CSR’ (Porter and Kramer 2006) as it makes CSR an integral part of corporate operations. According to the authors CSV, societal model as much as a business model, promises nothing less than a ‘cultural revolution’ that legitimizes capitalism and makes it viable towards the future. Their model is a modification on both the basic shareholder model and the type of ad hoc and ‘add-‐ on’ CSR that is little more than a marketing technique. With CSV, social value is importantly included as a goal into the core strategic operations of the corporation. At the same time, the approach modifies the shareholder model by allowing for a perspective that aims for long-‐term, sustainable profits and not necessarily maximum profit. Without wanting to rehash the examples provided by the authors,198 it is safe to say that this model is probably the most promising one premised on voluntary actions by corporations. Notably however it is in this voluntarism that the limits of the approach lay. CSV ultimately remains a business strategy. While some ambiguity remains in terms of the integral nature of corporations to society, CSV is ultimately conceived as a strategy to benefit those that own the corporation (i.e. the shareholders). In as much CSV, like shareholder models before, sees corporate responsibility as limited to obedience to the law and the ethical principles of society. Porter and Kramer, therefore, do not provide for a novel normative account of corporate responsibility but a social conscious and sustainable model for profit making. Thus, while CSV certainly deserves to be recommended as a forward-‐looking modification to capitalism, as a normative model it is flawed for it lacks an account of justificatory grounds of corporate responsibilities.
197 Frynas observes this sore spot in relation to the oil sector. Having become heavily involved in CSR, many facets of its contribution more broadly, such as “their contribution towards the decline of non-oil producing sectors of the economy” (Frynas 2005, 587) were completely off the agenda. See also Blowfield (2005) and Arnold and Valentin (2013). 198 To name only 1: Where Fair Trade coffee pays a top-up to coffee farmers, a CSV approach engages the farmers production methods, techniques and resources. By improving on the farmers’ abilities (social value) CSV seeks out to benefit economically (Porter and Kramer 2011).
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A commentary to the above may be that these initiatives do not claim to fully answer all issues surrounding corporate agency and that it is somewhat unfair to criticize them for not doing something that they do not claim to do. Here the answer is however relatively clear cut: While it is true that I stretch these accounts by holding them up against the issues raised within this thesis, it is also true that these approaches themselves articulate their approach within the context of poverty-‐ abatement strategies and make a claim of correctness to the conceptual nature of corporate responsibilities. Thereby they select a specific, relevant problem and in as much select the language within which to capture the problem. This choice of language is crucial in explicating where the normative issues emerge. Although all of a different ‘quality’ in this respect they do share a rather clear choice: The language is that of the private corporate economic agent. From a normative perspective, an important gap remains between the rights and responsibilities of corporate agents, which are not only absent from business case reflections but even upheld through the legitimizing language of CSR. It is this discrepancy that is at stake here and to eradicate it, the language in which the justificatory claims of corporate agency are formulated needs changing. 5.4.2. CSR and development: a noble ethos
Where the business case to CSR effectively reduces a normative logic to an instrumental one (premised on corporate benefit at its core), CSR as Noblesse Oblige is non-‐reductive but conceptualizes CSR within the realm of the ethical supererogatory. 199 While the business community increasingly accepts a general moral responsibility for corporations towards wider society beyond legal compliance, that moral space itself has largely remained un/underspecified. This model then is certainly not without its benefits, contributing to self-‐reflection by, if not behavioral changes of corporations. At the same time, it stays far from articulating the normative premises upon which responsibilities ought to be determined. 200 In other words, under this interpretation the position of the corporation is understood to trigger moral responsibilities but it does not include a 199 ‘Endangers to end up’ instead of ‘end up’ to reflect the peculiar nature of the model. This should become clear below. 200 Certainly, history has its fair amount of examples of well-intentioned CSR initiatives that have at times have been successful but often have had mixed or limited results. See Frynas (2005; 2009) on the attempts of large oil MNCs resulting to empty schools, unstaffed hospitals and even parallel roads through the Niger Delta, one built by the Development Commission, the other by an oil company. I will refrain from discussing empirical examples of companies ‘doing good.’
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reflection on the reasons or grounds for the ascription of responsibilities. The claim then forwarded concerning CSR is that, while it provides for enviable lists of prerequisites, corporate policy advice and ‘closure’ of governance gaps in weak states, it ex ante excludes corporate agency from the realm of justification: CSR is articulated as an issue of beneficence not as a moral obligation. Under CSR as Noblesse Oblige the relation between CSR and development is still rife with tension. The opposition in this case is not per se between corporate incentive structures/visibility and structural complexities but between coherent, structural contributions to poverty abatement and idiosyncratic and singular corporate contributions. Colin Crouch (2010) coined the term Noblesse Oblige to stipulate the unique normative character of CSR. A notion common at the French courts of the Ancien Régime, Noblesse Oblige entails the recognition of responsibilities to be born by the powerful. However, what the content and scope of these responsibilities entails is a matter to be decided by the responsible agent (certainly in the case of corporations today, under contestation of NGOs and civil society). As an ethical model for understanding responsibilities, the Noblesse Oblige is thus rather minimalist in its solipsistic approach. Interpreting CSR, however, through this lens does not fully void the idea of CSR of binding force: There certainly rests something of a ‘sensed’ moral obligation upon corporations to ‘reach out’ to society. In this way the voluntariness lays less in a full moral discretion to do something or to refrain from it but in the large discretionary space in terms of content and scope of the responsibilities assumed. In as much it answers to the sentiment that greater power comes with greater responsibility, while at the same time forgetting to reflect how those conditions of power translate into responsibilities. It thereby reiterates the gap that exists between corporate rights and subsequent responsibilities. The oddity of this rendering of corporate responsibilities is evident. Conceptually there certainly is a relationship between voluntariness and morality more broadly since only in cases of voluntary action would we qualify an action as responsible/moral. However, to qualify the exercising of an act of responsibility one holds as voluntary seems to misconstrue our common sense notion of responsibility by ‘translating’ it into the language of praiseworthiness. This is seemingly however not the intent under the model. Wettstein (2012) is therefore somewhat off the mark in articulating the Noblesse Oblige in terms of Kantian ‘imperfect obligations’,
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which would imply that these may be fulfilled on occasion and at full discretion of the corporate agent. There is a real sense in which CSR under this interpretation is however not only praiseworthy, in that not bearing responsibility can be considered as blameworthy. The Noblesse Oblige, for its dual status in prescribing un/underspecified moral responsibilities, has all the characteristics of imperfect duties but with a sense of initial obligation built in – prescribing action without articulating the content or scope of the action. Because Noblesse Oblige does not provide reasoning that links power (rights) to responsibilities, a crucial element to any justificatory account, it cannot but remain silent on the specifics of the responsible action. 201 To provide an example of the Noblesse Oblige model in practice, the UN Global Compact, initiated by Kofi Annan in 1999, renders a relatively clear-‐cut case of institutionalization of the Noblesse Oblige and the limitations that come with it. From a perspective of regulatory governance, the Compact’s potential looks meager for its conceptual (an underspecified notion of ‘sphere of influence’ demarcating corporate responsibilities) and practical limitations (limited guidance and lack of enforcement mechanisms) (Arnold 2010). The Compact is not set up, however, to be a regulatory institution. It can best be characterized as a concretization of a “global public domain, an arena of discourse, contestation and action organized around global rule making – a transnational space that is not exclusively inhabited by states, and which permits the direct expression and pursuit of human interests, not merely those mediated by the state” (Ruggie 2003, 104). In its capacity as such it is to be a pragmatic instrument to enable a new ‘embedded liberalism’ that integrates corporate agents in global governance for the benefit of the people. To become a member of the Compact a corporation has to subscribe to the ten basic principles (covering human and labor rights, the environment and corruption) of the Compact, which are taken from the different human rights documents of the UN. These principles are not further specified nor are there far-‐ 201 While the formulation provided here remains on the side of the duty holder, a parallel argument can be made from the side of the right-bearer. Under the Noblesse Oblige the vulnerable do receive benefits from the affluent or powerful. This should however not be confused with there being a right-fulfillment. As Shue perceptively noted, “to enjoy something only at the discretion of someone else, especially someone powerful enough to deprive you of it at will, is precisely not to enjoy a right to it” (Shue 1996, 78). Only “[a] world with claim-rights is one in which all persons, as actual or potential claimants, are dignified objects of respect, both in their own eyes and in the view of others. No amount of love and compassion, or obedience to higher authority, or noblesse oblige, can substitute for those values” (Shue 1996, 15).
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reaching commitments expected of corporations ex ante. The Compact instead invites corporate leaders to develop instruments to live up to human rights themselves and through dialogue and partnership “to move towards ‘good practices’ […] rather than relying on their often superior bargaining position vis-‐à-‐vis national authorities, especially in small and poor states, to get away with less” (Ruggie 2003, 111).
Mirroring the outline of the Noblesse Oblige model, the Compact clearly
understands corporate agents to hold responsibilities to society. At the same time, however, these responsibilities are largely underspecified (except for relating to the 10 general principles) and gain content only through the dialogical structure wherein corporate leaders share best practices. While it might still be too early to draw conclusions with respect to the Compact, criticisms of the Compact offering corporate ‘blue-‐washing’ (Slaughter 2004) or of being no more than “a sophisticated attempt by business to stem threatening anti-‐corporate criticisms without making significant changes to the business environment” (Lipschutz and Rowe 2005, 164), were voiced early on already. These criticisms have found support in some of the early data. Statistics over the first 5 years for instance show that “86 percent of the compact’s signatories have not attended any international meeting, and six out of seven participants have yet to make any submission to its online learning forum” (Vogel 2005), 157). 202 Without further engaging these critiques, the source of their existence should be clear. Pending more elaborate articulation of moral responsibilities of corporate agents, the Compact remains an institutional translation of the corporate agents’ acceptation of the societal expectations that come with their general influence while controlling the normative agenda of what such expectations concretely ought to lead to in terms of the content and scope of responsibilities. The critical implication of CSR as Noblesse Oblige can be further specified through Sum’s (2010) critical notion of ‘new ethicalism.’ Opposite the constitutionalized rights and freedoms of corporations (the premise of corporate power in this thesis), an ethos of appropriate corporate behavior is stipulated under this interpretation of CSR. Opposite the politically ‘hard’ and enforceable investor rights, the corporate ethos is ‘soft’ and ephemeral in its essence. CSR as Noblesse 202 These numbers have led Global Compact to actively delisting and thus delinking corporations from the Compact. Updates hereof appear on the main website: http://www.unglobalcompact.org.
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Oblige is therefore not only ‘beyond’ law’ in the sense that responsibilities beyond legal obligations are accepted, it is also ‘beyond law’ in terms of the lack of reflection upon the legal, constitutive premises of corporate powers. It is in this sense that corporate responsibilities, as for instance institutionalized in the Compact, are nested close to the ethical supererogatory (O’neill 1996; Wettstein 2009a and 2009b). The ‘new ethicalism’ that CSR as Noblesse Oblige underwrites thereby blurs the important justificatory relationship between power and responsibility. This critical comment directly relates to an important discursive point to be made. CSR catalyzes the creation and diffusion of social norms and ethical standards. As a dominant norm entrepreneur on the global level, thus, corporations can be actively involved in the creation of new norms to fill legal and regulatory vacuums. As the critical perspective on the development of CSR above shows corporations play, or are enabled to play, a signaling game: Through codes of conducts and initiatives like the Compact they communicate their moral status (Vogel 2005; callies and Renner 2009) while furthering a positive, charitable normative discourse that underplays their relative standing in global power-‐relations. Most importantly, the discursive power that CSR grants corporate agents,203 mirrors, but is not connected to, the realm of norm entrepreneurialism by corporate agents through the investment regime. As accounted for in Chapter 2, through the set-‐up of the arbitration processes, dissatisfied corporate agents can directly engage the states, either through threats (the regulatory chill) or through outright arbitral challenge. In the case of a threat, corporate agents arguably can be said to further a specific (pro-‐ market) ideology of governance within public policy-‐making, while once arbitration unfolds corporate norm setting power is a result of the primacy of corporate interpretation in outlining the legal grounds, fact-‐situations and initial demand of reward. Both these structures, of CSR and of investor rights regime allow for corporate norm entrepreneurialism, but no attempt is made to articulate their necessary connection. The rights and freedoms the investment regime endows the corporate agents with are not followed by, or mirrored in, a set of demands to use those rights and freedoms responsibly. Allowing this parallelism to exist directly
203 The claim is not that CSR grants only corporate agents discursive power of course. NGO particularly are handed tools of contestation through the CSR discourse. In general however, along the two dominant models sketched here, corporate responsibilities largely remains defined within the boundaries of the corporate agents as s private, economic agent furthering good causes on a voluntary basis.
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implies allowing corporations to hold a strong grip on the normative field in which they operate. The structural characteristics of corporate agency have to be introduced into ethical evaluation so as to open up that grey area between institutionalist and interactionalist approaches. The solipsism of Noblesse Oblige is particularly pertinent in relation to poverty abatement and the socio-‐economic rights of the poor since it cuts-‐off normative engagement exactly where it is needed most: the societal embeddednes of the corporate agent. It is therefore “a far cry […] from constructing corporate strategies that are aligned with the pressing need to tackle poverty and social exclusion across the majority world” (Newell and Frynas 2007, 670). Corporate agency feeds on underlying legal, economic and political structures and processes like the investment regime. Any argument on reasonable expectations of corporations therefore must account for this legal-‐institutional background of the agency of corporations, instead of simply assuming that the corporations is a private agent for economic benefit only. The argument has to break out of this limited (since it only deals with individual private corporate agency) and limiting (it blinds critical research into the duties arising from the corporate agency-‐poverty nexus) discourse of CSR and seek out what can be justifiably expected from corporation towards the issue of poverty abatement. Thus, the type of CSR that this thesis is after is ‘transformative’ in nature, in the way Berle (1954) understood the role of corporations as institutional actors within and for society, which is unmistakably different from the ‘ameliorative’ type of CSR of today (Ireland and Pillay 2010). To specify the normative underpinnings, to articulate the ought of corporate responsibilities, an understanding of the powers of the corporate agent and the role it plays within wider (global) society is crucial. 5.5. The UN Guiding Principles: On Direct and (Largely) Negative Responsibilities
No matter one’s opinion of the final reports of Ruggie’s three mandates, his incessant work as well as that of his collaborators and the extensive stakeholder engagements have together unmistakably enriched the debate on the human rights obligations of business. The ‘model’ that I sketch here cannot do justice to the wealth of information, the broad scope of areas and subjects touched, and the
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implications as well as considerable uptake Ruggie’s work has had.204 The main aim is merely to understand the normative underpinnings of the model and whether it can provide for an adequate justificatory account of corporate engagement with poor populations. In the following it becomes clear that in relation to basic socio-‐ economic subsistence rights, Ruggie’s ascription of respect-‐only responsibility to corporations cannot do the required normative work within a context of weak governance states and intricate although indirect corporate impacts unto the regulatory and distributional abilities of the state. Following K. Macdonald (K. Macdonald, 2011) – albeit on different ground – here it is contended that the framework lacks in normative clarity in cases of indirect corporate impacts instead of direct harm. The model Ruggie proposes falls short of integrating the ‘positive potential’ (Wettstein 2012) as premised on the legal-‐institutional powers of corporate agency for its legalistic bias in favor of ‘negative,’ ‘no harm’ responsibilities that are captured in the sole duty to respect. Like the CSR model, this focus is largely a consequence of the simplistic understanding of the corporate agent as a private, economic agent. 5.5.1. Background: Two Influences Coloring the Guiding Principles
The UN Guiding Principles are the final set of standards to guide business on human rights, operationalizing the ‘Respect, Protect, Remedy’-‐Framework, that informed John Ruggie’s two separate mandates as UN Special Rapporteur to the Secretary General on Business and Human Rights (SRSG) over 6 years of work.205 Ruggie’s project was built upon two pillars: The existing legal framework, and scholarship, on corporate human rights obligations, on the one hand, and prior regulatory initiatives on corporate responsibilities, on the other. The choice of these two pillars is relevant for they color the outcome of Ruggie’s work. Firstly, by following the existent debates within international law on the topic of human rights violations involving corporate agents, Ruggie has set out his Framework on a legalistic footing. Like the earlier debate of the 1990’s following multiple corporate scandals (Avery 2000), in building on these debates Ruggie’s 204 The Guiding Principles that concluded Ruggie’s last mandate have been integrated or are to be evaluated for inclusion by the OECD, IFC Performance Requirements, and the European Commission’s strategy on business and human rights (Mares 2011). 205 Ruggie’s mandates resulted in multiple reports before the publication of the final Guiding Principles. I will not systematically deal with the separate report nor will I specifically deal with the progress through the reports except where directly relevant to the argument.
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focus is on the wrongdoings of corporate agents and the possibilities to curtail these. Anathema to traditional positive international lawyers, who merely recognize states as subjects and ascribe non-‐state actors only indirect obligations under international law, legal scholars in those years began to question this a priori position referencing the inclusive language of the main international human rights documents. 206 Generalizing, 207 the ensuing debate on direct corporate human rights duties has looked into options for host states to hold corporations directly legally accountable, has explored the option of extending extraterritoriality through the likes of the US Alien Tort Claim Act thereby establishing ‘foreign direct liability’ claims, or by enabling universal jurisdiction involving grave human rights violations. Arguably one important implication of Ruggie to contextualize the Guiding Principle within legal debates, is that the language of his Framework has been largely centered around such terms as ‘wrongdoing,’ ‘negligence’ and ‘complicity.’ To that extent, Ruggie has also favored capturing the debate primarily in terms the negative duties. As an example of this tendency, in his seminal article Stephen Ratner (2001) states to deal, for convenience sake, with civil and political rights only. While such a choice is of course legitimate for the sake of initial developments of a theory, there is no certainty that such initial reflections transfer easily into the socio-‐economic domain. A legalistic approach that fits the ‘negative’ duties of no harm may well betray difficulties to deal with duties based on socio-‐economic human rights, which often imply an ‘organizational’ requirement of the corporate agent instead of a mere refraining from an action.208
206 See for instance Article 5(1) of the Covenants: “Nothing in the present Covenant may be interpreted as implying for any State, group or person any right to engage in any activity or to perform any act aimed at the destruction of any of the rights or freedoms recognized herein.” 207 This is a somewhat caricature depiction of a very rich field of study. For important earlier works: Clapham and Jerbi (2000); Clapham (2006); De Schutter (2006); Alston (2005a); Mcbarnett, Voiculescu and Campbell (2007). 208 Rights as expressed in Article 25.1 of the UDHR will hardly figure in a legal account. The Article reads as follows: ‘Everyone has the right to a standard of living adequate for the health and well-being of themselves and of his family, including food, clothing, housing and medical care and necessary social services and the right to security in the event of unemployment, sickness, disability, widowhood, old age or other lack of livelihood in circumstances beyond his control.’ These ‘types’ of rights have of course been generally taken as debatable as generating duties and have been called ‘manifesto’ (O’neill 2000). I will return to the topic of human rights at the end of the chapter.
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Possibly the most important sounding board for Ruggie, albeit in a negative manner, have been the Norms209 that were developed under auspices of the UN Sub-‐Commission on the Promotion and Protection of Human Rights. The Norms had to unify the existent regulatory patchwork of standards “often with common themes but without consistency and adequate legitimacy in the eyes of the wider international community” (Jerbi 2009, 300). Up until the Norms, the most comprehensive regulatory schemes had been the OECD Guidelines and the ILO Tripartite Declaration, both of which did not much address human rights. Besides, their voluntary nature was also characteristic,210 with the OECD Guidelines originally conceived of as a set of promotional standards to home (OECD) state investors to maximize investment benefits and reduce risk (Gatto 2011). Another Code of Conduct that would have set rather comprehensive standards for corporate activity, decades in the making until it was eventually dropped, was developed at the United Nations Center for Transnational Corporations (UNCTC).211 The UNCTC Code would have contained far-‐reaching monitoring requirements on corporate social and environmental impacts but it had not yet included human rights within its framework (Jerbi 2009, 302). A child of the NIEO-‐era, the UNCTC itself was dissolved in 1993 (Broecker 2008). The UN Draft Norms were constructed based upon the above debates and initiatives but presented a distinctive initiative. As Arnold (2010) succinctly notes, it integrated and unified its predecessors into one document, instead of minimum standards identified a list of aspirational ideals, and articulated the presumption of a nonvoluntary set of standards. Moreover, while much attention was given to the negative duties of corporations and voluntary adherence of corporate agents was the rule, the Norms offered a new treaty regime premised on human rights that would also include far-‐reaching duties of a positive kind. Crafted by an appointed group of 5 experts under the Sub-‐commission (which supported the Norms), the 209 Fully, Draft Norms on the Responsibilities of Transnational Corporations and Other Business Enterprises with Regard to Human Rights (E/CN.4/Sub.2/2003/12). 210 The OECD Guidelines are voluntary promotional standards for home states and the ILO Tripartite Declaration, while binding on signatory states, i.e. they are obliged to promote the standard under the Declaration, but voluntary for corporations. 211 The Code was initiated along with the set up of the Group of Eminent Persons, to investigate corporations in developing countries. Both were a resultant of the 1972 resolution 1721 of the UN Economic and Social Council (ECOSOC), in which it formally requested the Secretary-General to set up a ‘group of eminent persons.’ The resolution itself directly related the power of corporations to the development potential of developing countries and stressed that “[t]he international community has yet to formulate a positive policy and establish machinery for dealing with the issues raised by the activities of these corporations” (Sagafi-Nejad and Dunning 2008).
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Norms were finally denounced by the Commission on Human Rights (now the Human Rights Council) – the UN body that could have allotted the Norms international legal status. The Norms were considered overly adversarial to the home states of MNCs to subscribe to, let alone the corporations themselves. Particularly threatening was the full scope of human right duties that corporations would have to adhere to within their ‘sphere of influence’ as legal duties. Ruggie’s Framework has to be understood both historically and intellectually in relation to the failed Norms. The (failure of the) latter both lead to Ruggie’s mandate and formed the intellectual stepping-‐stone and sparring partner in outlining the scope and content of the ‘Protect, Respect, Remedy’-‐Framework. Early on in his first mandate Ruggie already made clear that he strongly distanced himself from the Norms (thereby setting the contours for the debate to come on his own approach). 212 Calling the Norms ‘a distraction’ (Ruggie 2006, par.69) ridden by ‘doctrinal excesses’ (Ibid. par.59), ‘exaggerated legal claims and conceptual ambiguities’ (ibid.) the tone was set. Summarizing the important pillars of his critique, Ruggie writes: “[W]ithout a principled differentiation the allocation of responsibilities under the Norms in actual practice could come to hinge entirely on the respective capacities of States and corporations in particular situations […] as a general proposition [this] is deeply troubling. The issue is not simply one of fairness to companies or of inviting endless strategic gaming by States and companies alike. Far more profound is the fact that corporations are not democratic public interest institutions and that making them, in effect, coequal duty bearers for the broad spectrum of human rights […] may undermine efforts to build indigenous social capacity and to make Governments more responsible to their own citizenry” (Ibid., par.68) NGOs had mostly supported the Norms because, as its principal author Weissbrodt (Weissbrodt and Kruger 2003; Weissbrodt 2005) argued, they are legally bind business to promote, protect, secure, ensure, and respect the whole range of human rights (Mares 2011). The NGO-‐reaction to the denunciation of the Norms by Ruggie
212 See Kinley, Nolan and Zeral (2007) for an in-depth account on the debates surrounding the Norms.
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therefore came quickly.213 The fact that the Norms made human rights obligations for corporate agents under international law a reality, at least on paper, had been understood as a crucial step forward by these parties. Ruggie’s non-‐legally binding alternative was nothing less than a form of cowardice. However, to be fair to Ruggie’s position, many of the forward steps proposed under the Norms came with their own set of problems. The prior Codes integrated under the Norms either targeted states or corporate agents. Integrating them meant failing to differentiate between the roles, practices, and purposes of two very different agents. Take the inclusion of aspirational standards: Holding corporate agents to standards such as “the highest attainable standard of physical and mental health” (Norms par. 12) and other public goods, “implies that [corporations] must promote a range of social goods that wealthy nations such as the United States have difficulty providing for their citizens” (Arnold 2010, 374). The obscurity of its import thus – a set of legally binding but at times vague norms that are not comprehensively recognized under international law – was probably the most damning failure of the Norms, making “corporate compliance virtually impossible" (Arnold 2010, 375). Next to the ambiguity on the question whether the Norms ‘invented’ new obligations under international law, the claim that corporate agents were directly liable under international human rights law to fulfill their duties within their ‘sphere of influence’ added to further confusion. With the concept of the ‘sphere of influence’ the Norms applied a spatial metaphor that does not sit comfortably with the practical impacts of corporate activity and thereby creates uncertainty in legal meaning. Lastly, no fundamental differentiation was made in the Norms between the duties of states and corporate agents, particularly within the latters ‘sphere of influence.’ This does not only imply a lack of clarity concerning the allocation of obligations between state and corporation but also to overlapping duties in practice, opening the door to potential ‘endless strategic gaming’ on who ought to be held responsible for the fulfillment of a human right (Ruggie 2006, par.68). The language of the Norms was simply too unfocused and broad to be used to directly impose legal duties on corporations (Gasser 2007). Ruggie therefore distanced his Framework from the Norms as they would be a distraction, lead to confusion and finally form an obstruction to developing 213 Joint Letter from NGOs to John G. Ruggie, Special Representative on Human Rights and Transnational Corporations and Other Business Enterprises, Office of the High Commissioner for Human Rights (18 May 2006), available at http://www.amnestyusa.org/document.php?lang=e&id=engior500032006
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effective means to tackle human rights issues. As Arnold concludes, “the Norms fail to provide a plausible and defensible account of [corporate human rights] duties and in so doing undermine, rather than enhance, efforts to ensure that corporations contribute to the fulfillment of those basic human rights necessary for a decent standard of living for all” (Arnold 2010, 376). 5.5.2. Building Blocks: ‘Protect, Respect, Remedy’ Framework
Ruggie is careful not to fall into the same traps of conceptual opacity on the division of responsibilities between states and corporations. His tripartite framework consists of state duties to protect and secure human rights (as accepted under international law), an independent corporate responsibility to respect human rights, and the provision of effective means of redress. Other than the Norms, thus, a core implication of Ruggie’s tripartite model is that the corporate responsibilities to respect “exists independently of States’ duties or capacity” as it “constitutes a universally applicable human rights responsibility for all companies, in all situations” (Ruggie 2009, par. 65; see also par. 57). Herewith, all potential confusion and strategic gaming over who holds primary duties is foregone as the tripartite Framework stays far from “the slippery distinction between ‘primary’ State and ‘secondary’ corporate obligations” (Ruggie 2008a, par. 55). Other than under the Norms, the responsibilities of the corporate agent under the Guiding Principles are not legally enforceable. This choice of ‘legal voluntarism’ has been taken as an important weakness of Ruggie’s proposal. Among others, Weisbrodt (2008) accused Ruggie of derailing the ongoing process of standard setting, while Human Rights Watch214 sees Ruggie as simply re-‐affirming the status quo. Amnesty International, lastly, noted that as a voluntary tool, the Framework “speak[s] only to those companies that are willing to ensure their activities respect human rights […] A level playing field would be facilitated by States requiring human rights due diligence in clear terms.”215 Ruggie defends his approach as a form of ‘principled pragmatism’: “an unflinching commitment to the principle of strengthening the promotion and protection of human rights as it relates to business, coupled with a pragmatic 214 See http://www.hrw.org/world-report/2013/essays/112459. 215
See
http://www.amnesty.org/en/library/asset/IOR50/002/2010/en/44111ff4-44cc-47d4-8c6f-
7756a39c0eac/ior500022010en.html.
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attachment to what works best in creating change where it matters most -‐ in the daily lives of people” (Ruggie 2006, par. 81). Such ‘principled pragmatism’ builds first and foremost on an understanding of the problem at hand, namely, the existence of governance gaps that lead to a “permissive environment for wrongful acts by companies” and a legal vacuum “that bars adequate sanctioning or reparation” (Ruggie 2008a, par.3 and par. 50). At the same time, it seeks out ways to overcome those governance gaps that build on the current fragmented global legal order as well as the lack of political will among states to address corporate wrongdoing through legal means (for instance by promoting extraterritorial application of home state jurisdiction in human rights violations). In short, his pragmatism implies a search for the most feasible way safeguard the principles of human rights within a context of an inconclusive legal order and lacking political will. As a consequence of this approach, Ruggie convincingly explains why he does not favor the treaty route (Ruggie 2008b; see also Ruggie 2007, 838-‐9).216 As he notes, besides the fact that the treaty-‐making process would probably not get off the ground, Ruggie convincingly sketches how this route might end up as the worse option: While the urgency of achieving new standards is high treaties generally take at least a generation to conclude. Besides, to meet all the parties’ interests, treaties oftentimes articulate the low(est) common denominator instead of demanding duties. The main goal therefore should be first and foremost the bridging of governance gaps. This goal can be achieved by providing for a coherent set of state duties to protect their citizens from corporate abuses, developing coherent home state policies on human rights and economics, and by pushing corporate agents to integrate (full-‐scale) human rights policies within their management structures and everyday corporate activities.
To Ruggie, thus, priority lays with the pragmatic aim of closing governance
gaps primarily through the regulatory tools grounded in law (Ruggie 2008a, par.50), i.e. the state’s duty "to protect against human rights abuses by non-‐State actors, including by business, affecting persons within their territory or jurisdiction" (Ruggie 216 This is not to say that Ruggie’s framework for implementation is without potential improvements. Parker and Howe (2011) for instance stress Ruggie’s underestimation of the degree to which corporate agents are able to neutralize and make ineffective measures against them. And more concretely, Augenstein and Kinley (2012) argue that Ruggie has misrepresented the question of the extraterritoriality of home state duties to protect human rights (as a question of ‘permission’ instead of ‘prescription). As should be clear from particularly chapter 4, the implementation question is not dealt with in this thesis and therefore no further argument is developed on this issue. The point remains that Ruggie approach in terms of the relevant factors to consider in devising an approach on BHR or justice is very much in line with the one defended here.
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2008a, par.18). The role of home states and corporations in this model are additives to this primary objective. As a combination of these three levels to harbor the vulnerable from adverse corporate impacts, Ruggie’s tripartite framework is best understood as a problem-‐solving tool that seeks to establish “a multi-‐level system of polycentric governance” based on “a set of principles for the governance of economic actors operating within and beyond the state that is grounded on both public and private power” (Cata Backer 2010, 80). In practice however, and certainly in the shorter run, much will depend on the effect of the Guiding Principles on corporate agents and therefore the critique on his Framework has been focused here. It is too simplistic and little productive, however, to denounce Ruggie’s proposal purely on the basis of the legal/nonlegal dichotomy. The Framework is specifically developed not to create new international legal obligations but to instantly improve upon human rights governance (Augenstein and Kinley 2012). The ‘soft law’ approach to corporate duties provides a crucial element to the furthering of a normative climate in which corporate agents not only forego benefiting from governance gaps but also, through the requirement of due diligence under the Guiding Principles, proactively develop and internalize corporate strategies to forego potential harm.217 The due diligence requirement that the Framework attaches to the basic non-‐legal responsibility to respect of corporate agents, as Muchlinski has recently argued, can itself lead to legal enforceability of the Guiding Principles within existent cultures of both company law and corporate governance. Under domestic legal systems, namely, “due diligence mechanisms normally create direct duties of care upon the entity carrying out such an assessment” (Muchlinski, 2012), 146). It is thus mistaken to think that “no binding legal duties can arise for corporate actors under the Framework” (Muchlinski, 2012, 148), i.e. that the Framework provides a “law-‐free zone” (Ruggie 2009, Par. 66).218 However, these obligations will most probably arise first under domestic law and the Principles only perform a guiding task towards such domestic legal reform. 217 The direction of Ruggie’s work might not have come as a surprise however since he already articulated his philosophy of soft law and best practice-based view before he took up the role of Special Representative. See particularly Ruggie (2003), which reflects on the potential of the UN Global Compact. 218 See for a defense by Ruggie against HRWs (2013) critique, and examples of (legal) cross-fertilization of the Guiding Principles: http://www.ihrb.org/commentary/board/progress-in-corporate-accountability.html. See Mares (2011) for skepticism about the potential of the ‘duty of care’ to actually work these miracles as it cannot firstly not be found in many jurisdiction and where found is hardly enforceable.
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5.5.3. Moral Import: Justification and the Scope of Responsibilities
Sympathetic to the pragmatism of Ruggie’s Framework, little has so far been said about the moral status of the corporate agent or the type and extent of its responsibilities under this model. Getting clear this status is of course crucial to clarifying the justificatory basis of the corporate human rights responsibilities under the Guiding Principles. Two questions follow: What is the justificatory basis of corporate responsibilities under the Framework? And what is the scope and content of the responsibility to respect? In the sections on CSR we noted that two dominant interpretations of the model have a business case and a Noblesse Oblige respectively as their justificatory basis and we concluded that neither stands normative scrutiny. The Ruggie Framework provides a more adequate model for corporate responsibilities as it captures the extent and ‘depth’ of corporate impacts. At the same time, as will become clear, it remains underdeveloped at some crucial points. Cragg (2012) has pointed out that up to the Framework Report Ruggie seemingly reverts to ‘enlightened self-‐interest’ as the main justification for the corporate responsibility to respect. Fulfilling this responsibility was motivated in terms of avoidance of reputation risk and the ensuring of a ‘social license to operate’ (Ruggie 2008a, par.54). This would be a serious weakness in the justificatory strategy as enlightened self-‐interest “is not capable of sustaining the human rights agenda against competing business imperatives” (Cragg 2012, 110) – particularly not in relation to the rather far-‐reaching demands that come with the due diligence requirement.219 There remains an ambiguity concerning the grounds of corporate responsibilities, even in the discussion of due diligence (Ibid., par.56-‐64) as it seems to be the case that even this derivative positive duty remains motivated in a ‘self-‐ regarding,’ instrumental manner. An instrumental account will create indeterminacy in the business and human rights agenda. This becomes particularly clear in the contexts of ‘burdened’ states, with lacking law and regulation, and minimal resources for human rights policies. Here the challenging question emerges: “why should TNCs bear higher costs in order to respect human rights in states that do not make a concerted effort to enforce their own laws?” (Arnold 2010, 382) To withstand scrutiny the Framework 219 The Framework Report notes that "the responsibility to respect is the baseline expectation for all companies in all situations" and "to discharge the responsibility to respect requires due diligence” (Ibid., par. 25).
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would need a justificatory foundation that can withstand an argument based on bottom-‐line pressures of everyday corporate strategy and motivate decision-‐making. In the end, the success of Ruggie’s work comes with actual the implementations of the Guiding Principles into corporate strategy and not with the mere endorsements received so far. There are two core reasons to defy such a reading of Ruggie’s work as it at least appears in the final stages of the second mandate.220 Firstly, the justificatory basis of the corporate responsibility to respect should be read as to follow from Ruggie’s goal of overcoming specific governance gaps. More specifically, the responsibility to respect is one element of a tripartite framework to neutralize those governance gaps that allow for harmful corporate impact on the human rights of affected populations.221 Thereby, “the intrinsic moral significance of human rights” (Ibid. my italics) becomes a more promising motivational ground for corporate agents to engage ‘respectfully’ in case of governance gaps internally, implying that “[m]eeting human rights duties is to be understood as a necessary cost of doing business (Arnold 2010, 384, my italics). Such a moral justification provides the persuasiveness to engage corporate agents that a purely instrumental notion does not have.
The voluntary character of the Ruggie Framework should not be
misunderstood. While the corporate responsibilities are legally speaking voluntary, they are considered morally mandatory as a resultant of existent governance gaps that limit the control of negative corporate human rights impacts. Ruggie’s account, thus, operates on a moral understanding of corporate agency that is thus importantly different from the Noblesse Oblige as it specifies the human rights of individuals to provide a moral ought that not only motivates but also articulates the content of corporate responsibilities. In this case, then, “taking up the standard is not voluntary or a matter of corporate choice or discretion. The standard, respect for human rights, is not a voluntary ethical standard. From an ethical perspective it is mandatory and therefore a nondiscretionary corporate moral obligation” (Cragg 2012, 29). 220 Since Ruggie himself has not developed any coherent argument tying together the normative premises at work within the Framework, the following concerns my interpretation of the Frameworks grounds of responsibilities. 221 Cragg (2012) articulates a necessary condition for the corporate internalization of human rights responsibilities: A capacity to effectively do so – a “capacity to institutionalize rules governing their own human rights responsibilities” (Cragg 2012, 20). Cragg is correct that the justificatory claim is a function of such a notion of capacity; without the capacity it would be senseless to follow the prescribed route.
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Building on this justificatory account, secondly, what must be noted is the shift from a ‘self-‐regarding’ to an ‘other-‐regarding’ understanding of due diligence within the Framework. In the later Operationalization Report it becomes clear that due diligence requires ‘other’ or ‘society’ regarding considerations of the corporate agent, as it is “to include the risks a company's activities and associated relationships may pose to the rights of affected individuals and communities" (Ruggie 2009, par.81). The language utilized in this Report hints towards a shift from instrumental to moral grounds, as respect for human rights of stakeholders is required “whether or not doing so will bring material benefits to the company” (Cragg 2012, 25); or at least that motivational criterion has dropped out of the report. This reading of a shift evidently appeals to the argument that intrinsic human rights ground the responsibilities of corporate agents. Due diligence, therefore, as the tool to ensure that respect is given, needs to engage the conditions of those people whose lives the corporation impacts. Granting that Ruggie provides for other-‐ regarding, human rights responsibilities for corporate agents, a subsequent question is prompted concerning the type and scope of the corporate responsibility to respect. In other words, what does it mean from a normative perspective to respect human rights? In his answer to this question, Ruggie limits the responsibility to respect to a negative ‘no harm’ duty222 with a limited derivative duty of due diligence. This has lead commentators to criticize him for a much too narrow understanding of corporate responsibility (K. Macdonald 2011). Here it is important, however, to understand what exactly due diligence implies with respect to scope of respect. In Ruggie’s words, basically, “[t]o respect rights essentially means not to infringe on the rights of others – put simply, to do no harm” (Ruggie 2008a, Par. 55). Yet, since positive steps are necessary to forego potential harm, a derivative requirement of due diligence is formulated that extends beyond the simple ‘do no harm’ prescription. Principle 13 of the Guiding Principles (Ruggie 2011a) captures the two-‐sided nature of a full-‐blown responsibility to respect: “The responsibility to respect human rights requires that business enterprises: a) Avoid causing or contributing to adverse human rights impacts through their own activities, and address such impacts when they occur; 222 Ruggie, thus, remains conservative with the defining moral claim on corporate agents. ‘Respect’ represents “a standard of expected conduct acknowledged in virtually every voluntary and soft-law instrument related to corporate responsibility” (Ruggie 2010, par. 55).
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b) Seek to prevent or mitigate adverse human rights impacts that are directly linked to their operations, products or services by their business relationships, even if they have not contributed to those impacts.”223 Part a) of the Principles is rather straightforward in light of what we have said above. Part b), on due diligence, needs further specification. Concretely, under the due diligence requirement corporations are asked to pro-‐actively and preventatively engage (by means of an integral human rights policy, periodic assessments, control and reporting and grievance mechanisms) with potential and/or actual sensitive human rights-‐related situations. Within the Framework thereby due diligence is instrumentalized in a novel manner. As it has its provenance in investment risk assessment, where corporations use due diligence as a tool to safeguard themselves by assessing potential scenario’s with which their investment could be confronted, within the Ruggie Framework “it requires a shift form considering the risk to the company to risk to potential victims of corporate action” (Muchlinski, 2012, 156). This reading reaffirms the shift to the ‘other regarding’ nature of the Guiding Principles. Furthermore, under Ruggie’s Framework, due diligence is not an ad hoc instrument but has to be integrated in the core of corporate strategizing. The due diligence duties, as the implied steps necessary to take, are there to ensure that foreseeable human rights infringements do not take place.224 To that extent, the responsibility to respect and the derivate requirement of due diligence reflect a variant of the stakeholder model of business strategy. Articulated as a negative responsibility only, ‘respect’ turns out to require a positive type of responsibility for stakeholder engagement to ensure no human rights-‐infringements. After having drawn out the core moral ideas of the Framework, we can now turn to its critical evaluation. A first question engages the practical inclination Ruggie wanted to install into the Principles. Does this model stand scrutiny faced with the most pressing challenges of corporate impact? One challenge comes from the ‘blurring of corporate boundaries’ within networks and has been called insidious for 223 Importantly, the commentary to Principle 13 shows it to include both actions and omissions as part of the potentially harmful activities of corporations. The requirements of due diligence it further specified in the Principles 17 to 21. 224 That negative duties also imply a set of positive duties has been most forcefully argued in Shue (1996) in light of the negative-positive distinction applied to (human) rights. Shue’s argument however extends further. For him this implication breaks down the value (at least in moral theory) to uphold the dichotomy what so ever. In the UN Guiding Principles this is not the case.
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Ruggie’s conceptualization of the responsibility to respect (Mares 2011). As the intricate relations within (buyer-‐driven) corporate supply-‐chains blur the lines between separate companies in the chains, there is a need for internal disaggregation of institutionally mediated network responsibilities, which can potentially require a dominant actor within the network to take up a responsibility to ‘protect’ against harmful impacts of affiliates. The Ruggie Framework is however hardly capable of capturing the “corporate influence over broader relationships and institutions that shape and constrain the substantive realization of human rights” (K. Macdonald 2011, 549) as it is premised on an agent-‐relative liability/blame model. In a liability model, moral responsibility is not a question of the powers a corporation has or its institutional role but is conceptualized as a feature of agency. As such, “attribution of responsibility rest[s] solely on or at least primarily on facts about agents and their relations to certain harmful or favorable events or states” (Ibid. 550) and is thereby both too restrictive in scope to make sense of cases of ‘structural injustices’ (Young 2006). This shows for instance, in cases where harm is the result of ‘network causation,’ i.e. when human rights impacts are a result of the “emeshment of multiple business activities within complex institutional processes for which individual businesses are partially but not wholly responsible” (K. Macdonald 2011, 560). The indeterminacy of the Framework in these cases can be corrected from within but only by giving up on the negative/positive distinction that informs the respect/protect dichotomy at work in its philosophy and to include a ‘protect’ responsibility for the corporate agent that goes beyond ‘mere’ due diligence for the dominant firm(s) within such network.
While this cosmetic correction to the Guiding Principles might be convincing,
the agency-‐based conceptualization of responsibility remains problematic. A different challenge emerges once the Framework’s ability to engage corporate responsibilities towards basic human subsistence rights is considered. In such a context it is not common to speak in terms of harm or wrongdoing, particularly not in relation to a singular corporate agent. An expansive, positive reading, however, of the responsibility to respect can include the general impact of corporate agency within the realm of subsistence. Due diligence, which smuggles in both a derivative positive duty and a corporate sensitivity to context, would now include corporate action in relation to conditions in terms of contracting, economic impact assessments and so on. Ruggie’s elaboration of fair principles of contracting (Ruggie
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2011) and the commentary to Principle 11 (which states that “[b]usiness enterprises should not undermine States’ abilities to meet their own human rights obligations […]”) are seemingly in support of such a reading. The important consequence is that under this interpretation ‘normal’ business practices can potentially be considered a form of wrongdoing. Such an expansive reading of due diligence comes close to what can be said to be expected from the negative ‘publicness’ of corporate agency as teased out in Chapter 4. However, the notion of corporate public power articulates a far-‐reaching consequence of the regime of investment: The point to make is that the state function of public good provision has itself become co-‐dependent on corporate agency within the wider legal-‐institutional practice of investment. It is questionable therefore whether Ruggie’s proposal will carry far enough. Firstly, the language employed and the strategic construction of the framework does not sit well with this reading. The prioritization of negative duties, the focus on questions of ‘harm’ and the judicial terminology of remedy as the necessary counterpart of due diligence – which in effect is a derivative positive duty that encapsulate only those duties that are “clearly necessary to effect the negative duties” (Ratner 2001, 516)225 – do not bode well for extensive positive duties-‐talk. These are issues of interpretation and Ruggie’s Framework leaves room for it. More importantly, however, the co-‐dependency of state capacity and corporate agency within a practice such as investment poses a more elementary challenge to the Guiding Principles. As Ruggie is keen on remaining within the realm of current international law, he ascribes the primary state duties without regard of differential institutional strength of states. This is of course not in denial of existing differences between states but like the liberal theory discussed in Chapter 4, a liberal state model is held up as a type of functional reference point for understanding state duties. Concomitantly, the responsibility of the corporate agent is also generalized; only the potential effects of the exercise of agency are made dependent on context. In other words, the responsibility to respect simply reaches further in weak governance states because the governance gaps existent imply a lack of corrective measures to potential harmful corporate agency. Ruggie himself for instance is clear about the question whether corporate capacity ought to provide a basis for 225 In other words, these duties are ‘instrumental’ to servicing the negative duties ascribed instead of themselves creating specific action-demands.
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determining corporate responsibilities (Ruggie 2009, par. 63-‐4). The answer is unmistakably negative for it would trigger a potential unlimited set of duties for a corporate agent. The crux is that, according to Ruggie, by definition the corporation is an economic and not a political agent. As he further specifies, “[s]uch attributes as companies’ size, influence or profit margins may be relevant factors in determining the scope of their promotional CSR activities, but they do not define the scope of the corporate responsibility to respect human rights. Direct and indirect impacts do” (Ruggie 2009, par. 58) The understanding of the governance gap to be confronted plays an important role in this context. In the Framework Report (Ruggie 2008a, par. 2 and 3) clarifies the impact of corporate agents on countries: Corporations benefit society through investment and, within underdeveloped regulatory environments, it can have harmful effects on a society. The problem of the governance gap is specifically understood within the Framework as a problem of ‘lack of regulation.’ Premised on such analysis “it makes sense to regard the business and human rights governance challenge as essentially one requiring containment of abuses committed by ‘powerful global actors that some states lack the resources or will to control’”, (K. Macdonald 2011, 552, referencing Ratner 2001). However, this is not more than a partial understanding of existing governance gaps. The governance issues confronted by and within burdened societies are at least as much concerned with the coordinative and distributive function of governance. The gaps that exist regarding these functions are not dependent merely on a lack of regulatory resources on the side of the weak governance state but also on what I have called the ‘interloping’ legal-‐institutional structures that span the globe and effectively make state regulatory power co-‐dependent on corporate agency. In his Framework, Ruggie falls victim to what we have called a ‘reactive’ understanding of law and thereby misses out on the constitutive impact transnational regimes, such as the investment regime, have on the governance capacities of states.226
The implication of the constitutive role of the investment regime in particular
is that a rebalancing of agency has taken place. As corporate agency has become hybrid, its normative role ought also to change. Remaining content therefore with an agent-‐relative liability model that takes duties as primarily negative, offers an 226 I do not want to claim that Ruggie is unaware of the constitutive role of law but merely that under the model articulated under the Framework there is seemingly no place for it.
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astutely minimalist framework, as it cannot conceptualize the particularity of the role and position of the corporate agent from within a practice. From such a perspective of moral relationships, what is needed is a normative perspective on the corporate agent from a ‘societal’ or practice-‐based point of view. While we have allowed for an extensive interpretation of due diligence so as to stretch the applicability of the responsibility to respect, at some point a distinction will need to be made between ‘respect’ and ‘promote’/’protect.’ The critique on the lack of perspective on the constitutive role of the investment regime opens up to a theoretical limitation of the Ruggie regime. As noted above, within the Framework human rights provide the justificatory grounds for the corporate responsibility to respect. In other words, because human rights are intrinsically valuable corporate agents ought to ensure that they do not harm them. What is lacking within this justificatory account however is an argument for the mere respect function of corporate responsibility. This function is simply assumed on the basis that the corporate agent is a private, economic agent. In other words, the legal-‐institutional grounds of corporate agency, as extensively articulate in particularly Chapter 2 are – yet again – missed out on. As a model for moral responsibilities the Ruggie Framework falls short for it does not provide the conceptual tools to capture the corporate agent as a beneficiary within a reciprocal practice. 5.6. Contours of a moral approach to corporate Human Rights duties Before turning to the final chapter to work out our practice-‐based model of corporate responsibilities, a note on the used conceptualization of human rights is required. I do not contend to provide a developed account of human rights or to deal with philosophical controversies surrounding its foundations. Yet to link the debate of justice in terms specific generative relationships to a discourse of human rights, we need to specify elements of a ‘theory’ of human rights so as to enable the two discourses to meet. At the same time, the following outline should clarify how human rights could be understood outside of the limitation set by legalistic understandings of human rights. This is a direct complement and elaboration to the Ruggie Framework, which on the one hand takes corporate human rights responsibilities as moral responsibilities but on the other hand specifies them under a legalistic veil.
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Legal approaches to business and human rights necessarily need to frame, from a disciplinary perspective, questions of human rights obligations for corporations under existing legal limitations. Naturally this does not mean that law or law research is stagnant in any sense. However it does curtail the scope of our understanding of human rights. The main problem with the legal line of argument identified is that it unnecessarily narrows down discursive functions of human rights in the established practices, disabling reflections on the more ‘indirect’ socio-‐ economic rights which are in general hard to grasp in terms of ‘law.’ Let me shortly outline what can be termed a pragmatic understanding or practice-‐based approach to human rights as evaluative standards, building on recent accounts that have moved away from legalistic and foundational understandings (Chwaszcza 2007 and 2010; Sen 2009; Beitz 2011).227 ‘Practices’ of human rights today include different ‘functions’ most of which are of a moral kind: accountability, inducement, assistance, domestic contestation and engagement, compulsion, and external adaption (Beitz 2011, 33-‐40). This richness of human rights should be kept in mind so as not to fall prey to colligating the different functions under a single, juridical, depiction (Sen 2009). Human rights, for our purposes, can best be understood as a heuristic for evaluative standards to assess institutions and practices. The notion of heuristic should clarify that under such a notion of human rights, they provide a set of values through which we understand, organize and judge the organization of practices. This leads to a usage of human rights eerily close to that of ‘fairness.’ For lack of a better description, human rights then set a baseline for fairness within a practice or specific network, upon which specific duties can be ascribed premised on the (special) relational contours of the practice. In as much human rights as standards are well suited to make normative sense of injustices and duties to overcome these within a context of poverty abatement. It can provide this function without requiring necessarily a more 227 I write the somewhat bloated phrase ‘a practice approach to human rights as standards’ with a reason. Beitz specifically talks of the practice of human rights. His use is somewhat ambiguous however and can lead to some difficult questions to be addressed (see Besson 2010 in her review on Beitz challenging his notion of practice). Human rights as practice can mean two things namely: it can mean to take human rights as a practice in its own rights or it takes a perspective of the role of human rights within practices. Beitz does not make this distinction and often seems to be speaking about the first variation. But here he offers too little analyzes of the normativity of human rights as a practice as such especially in terms of the linkage between human rights and human rights law as normative. The notion of ‘standard’ comes from Chwaszcza’s work, who posits it against both foundationalist as well as Kantian and Rawlsian approach to human rights. Her work has a fertile overlap with Beitz’ establishing a more articulated idea of the practical application of human rights. The latter however offers more tools to think of the question of duties from within a practice approach. Sen’s work fits the general outline provided here.
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‘foundational’ or ontological argument that can ‘fix’ human rights on ‘extra-‐ contextual’ grounds. As a set of values that are part and parcel of global practices and discourses, they are widely recognized as valuable and because of their somewhat ‘minimalist’ and non-‐ideal character, at this stage of theorizing, they keep one at bay from more difficult and indeterminate questions correlating to ideal justice. Human rights then are considered a ‘currency’ by which injustices in the make up of practices can be understood and either corrected for or ‘balanced out.’ This practice approach seeks to understand and normatively assess the practical aim and function of human rights (Chwaszcza 2007 and 2010; Sen 2009; Beitz 2011). This approach combines two features:228 -
Human rights are not propositions of what is already legally guaranteed (Sen 2009), nor moral foundational notions, nor are they premised on specific foundational values (like ‘personhood’ or ‘autonomy’) nor are they a representation of an intercultural consensus (or at least, their value as a ‘currency’ for evaluation is not necessarily dependent on such a prior ground). Human rights are standards, ethical assertions, or moral touchstones or “norms of global political life.” (Beitz 2011)
-
Human rights duties are, in line with the above, often open-‐ended, indeterminate, imperfect and open for public reasoning. They offer “a set of norms for the regulation of [institutions and practices] together with a set of modes of strategies of action for which violations of the norms may count as reasons.” (Beitz 2011, 8) 229 These norms and strategies are abstract as standards but find their specificity, and contestation, in the applications to which they are put to use
230
. Chwaszcza speaks of human rights
‘requirements’ as distinguished from human rights ‘standards’ in the context of specification. 228 I combine the three accounts at will by distinguishing these two features. 229 The original reads as follows, human rights offer “a set of norms for the regulation of the behavior of states together with a set of modes of strategies of action for which violations of the norms may count as reasons.” (Beitz 2011, 8) Here the specific choice that I am challenging has already been made. 230 Human rights for instance offer us general ideas on justified economic interaction in terms of the minimal standard of living that people should obtain/preserve. This very general idea however will have to be specified in light of for instance WTO law in which it will contend with different rationalities.
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This interpretation of human rights provides a more abstract understanding of human rights as qualifying moral standards that are not necessarily rich in information (like human rights as claim rights would require). In other words, they do not per se specify the right-‐holder, the corresponding duty-‐bearer and content of the rights. Such an interpretation of human rights as evaluative tools allows for a wide scope of application and can incorporate the contentious character of human rights without dismissing it. Human rights are part and parcel of a large variety of discourses in which they play the role of moral touchstones. Not by providing clear-‐ cut requirements for actions, but by providing for a normative frame from which practices can be understood, evaluated and, concomitantly, amended. As Chapter 6 will further outline, this makes them ideal tools to specify corporate responsibilities in the context of justice generative practices. As such, this account does not reveal much yet about the application of human rights to corporate agents, and the authors built upon so far (besides Sen who is somewhat ambiguous about the allocation of duties)231 largely apply human rights solely to public institutional arrangements – with human rights having become little more than a minimalistic interpretation of the general global justice debate. From within the contours of his ‘practice-‐based’ human rights account, Beitz even explicitly denies that there is a current practice of (primary) corporate human rights duties (Beitz 2011, 124). But his account is empirically dubitable, somewhat confusing and potentially normatively limiting for it simply re-‐iterates standard judicial understandings of human rights, exactly those understandings that triggered Beitz’ reconsideration of human rights. The concept of corporate public power (chapter 2-‐4) should allow for a richer understanding however or at least shift the burden of proof to those arguing human rights duties only accrue to state or state-‐ based institutions. 5.7. Concluding Remarks This chapter has extensively dealt with two current models that articulate corporate responsibilities. To recap, this was done in a reaction to the openings created within the ‘pure’ institutionalism of the global justice debate in political philosophy. As 231 In the Idea of Justice (2009) Sen is perceptive of the new role of corporate agents, however, the strongly recipient oriented capabilities approach does not say much about the concomitant duties. Sen therefore does not continue specifying these.
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noted, under certain conditions the justice-‐generative relations that need to stand moral scrutiny in terms of reasonable reciprocity, cannot be fully articulated in institutional terms. The critique on political philosophy was that it unreflectively assumed away corporate agency, thereby downplaying the crucial role this agency plays within the context of poverty abatement today. In light hereof, a model for corporate responsibilities is needed that could integrate the two core characteristics of the justice-‐generative practice under scrutiny (the investment practice): corporate public power and the reciprocal requirements upon the corporate agent within the investment practice. A model namely of corporate responsibilities needs to qualify as reasonable under conditions of reciprocity in the sense that it can justify the distributive effects of the investment regime. To conclude, while particularly the Ruggie framework is promising, neither model provides an adequate normative framework to integrate the practice-‐based questions of fairness concerning corporate agency. This is largely so for the lack of provision of a justificatory grounding of corporate responsibilities (particularly CSR) and the consequence of a private agency-‐focus as the basis of responsibility ascription (particularly BHR/Ruggie). Interestingly, however looking forward these accounts can be taken as complimentary: Where CSR largely remains underspecified in terms of content and justificatory grounding of corporate responsibilities – something the Ruggie Framework largely provides for – CSR does however go beyond a rigorous delineation of the type of responsibilities corporate agents might have – exactly where Ruggie’s proposal adheres too strictly to a largely ‘negative’ function of respect. A successful model ought to fulfill the reasonable expectations concerning corporate agency provided the contextual and, crucially, institutional conditions. In effect, where the global justice literature is reticent to allow interactional elements to integrate assumed institutional questions of justice, these models of corporate responsibility largely refrain from understanding corporate agency within their institutional context. Hereby 2 parallel research tracks have seemingly emerged on a complementary theme, without much interaction. A grey area between interactional and institutional normative analysis of corporate responsibilities is thereby left unexplored. Chapter 6 seeks to outline the contours of a model that enables ‘closure’ of this gap by articulating corporate responsibilities under an institutional lens.
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Chapter 6 The Basic Structure Model: Justification and Guidance
6.1. Introduction On what grounds ought corporate agents to be ascribed responsibilities? Of what ‘kind’ are these responsibilities that such justificatory foundation require? This chapter, firstly, provides for a justificatory basis to corporate responsibilities that moves away from the premising responsibilities on a pre-‐defined understanding of the corporation as a private, economic agent. Instead, the account provided here integrates the reciprocity demands and implications of corporate public power, that have been articulated throughout Chapters 2 to 4, as premises for the ascription of responsibilities. The concept of ‘overlapping practices’ taken from the PDA, helps clarify that a satisfactory justificatory account grounds the reasonable expectations of corporate agents regarding the socio-‐economic rights of the poor within burdened host states on the distributed powers of corporate agency under the investment regime. These distributive consequence of the regime trigger justificatory demands on corporate agents both for the public power it endows corporations with and as a result of the demands of reciprocity upon the corporate agent as a constitutive actor within the practice of investment. The grounds of corporate responsibilities therefore have a relational (the reciprocity demands that follow the distribution of relative powers through the practice of investment) and a substantive component (the constitutive function of corporate public power within burdened societies triggers human rights duties). 187
Subsequently, these justificatory grounds need to translate into reasonable
normative expectations upon corporate agents. I propose, the Basic Structure Model (BSM) to do so as it matches the freedom and rights of corporate agents into a correlative set of responsibilities. In as much it is shown to provide for the necessary components of scope, aim and content of corporate responsibility in a way that satisfactorily reflect the institutionalized powers of the corporate agent without unnecessarily further upsetting the state-‐corporate agency balance by overreaching in the allocation of responsibilities to the latter. Certainly, the notion of reasonableness itself has an ambiguous meaning but can here be understood to translate into a relational and a substantive constraint on corporate agency as it reflects the justificatory grounds of basic (subsistence) human rights and ‘fair’ reciprocity as integral components of corporate investment strategies. The focus on the basic structure within the proposed model captures the impacts the distributive outcomes of one practice, investment, has on another, the state, and simultaneously underwrites the crucial instrumental role state institutions play as ‘hubs’ for goods provisions and political order within an ever increasing transnational context. To that extent, corporate responsibilities under this model are articulated as structural means to overcoming background injustice within the state. Thereby, corporate responsibilities are best considered, opposite Ruggie, not merely as self-‐standing but as complimentary to and dependent on those of the host state. This chapter starts by outlining 3 justificatory accounts of corporate responsibilities within the context of burdened societies. These accounts are to inform and contrast my approach. In dialogue with these approaches, subsequently, a novel account is proposed that takes the reciprocity and public power as it core constitutive features of our reasonable expectations of corporate agency within burdened society. Before concluding with the BSM, the standards that such a model needs to fulfill to be adequate are sketched. The BSM is argued to fulfill all of these requirements. Not only does this model provide for a solid justification of corporate responsibilities but it will also be able reorient corporate commercial strategizing in a more responsible manner. An exploratory account of ‘Fairness in Practice’ will be provided to sketch the reorientation pushed for by the BSM. 188
6.2. The Grounds of Corporate Responsibilities The aim of this chapter is to construct a model that crosses the divide between interactional and institutional accounts. A model is needed that can translate the moral status, or the constitutive rights and freedoms, of corporate agency into an account of responsibilities appropriately correlative to this status. The two models, of CSR and BHR, reflective of current conceptualizations of corporate responsibilities fall short in providing such correlative account. This is largely due to a lack of, or insufficiently developed, justificatory account grounding the moral claims upon corporate agents. Lacking such an account, no satisfactory argument can be provided on reasonable responsibilities to be ascribed in terms of type and scope. Secondly, to the extent that these models can be said to have a normative grounding, it is purely agency-‐based, thereby reinforcing the parallel structure of institutional and interactional analysis also present in global justice theory, underplaying the institutionally premised rights and freedoms of the corporate agent. The heightened, institutionalized status of corporate agency under a regime such as investment must be reflected in the justificatory framework of the corporate responsibilities. Only recently have philosophers attended to both these problems. They are, as an upshot to the account developed in this thesis, the topic of the next subsection. 6.2.1. 3 Justificatory Accounts
Mirroring the lack of attention drawn by O’Neill’s challenge to liberal institutionalist philosophy, there have been few contributions and limited debate on the justificatory requirements on corporate agency. Three recent contributions have been made by Hsieh (2004 and 2009), Wettstein (Wettstein, 2009a, 2009b, 2010 and 2012), and Arnold (2010 and 2013). 232 There is a clear overlap between these approaches and the one to be proposed here, both on justificatory grounds for corporate responsibilities and in terms of the type and scope of duties following 232 I single out these three for their argument is not on the fact that corporate agents have become ‘public’ for reasons of service provision and the like (such as T. Macdonald (2008a) and Scherer and Palazzo (2011)) but on a general question of the normative implications of the position of corporate agents within the context of burdened society. I will not deal with social contract approaches corporate responsibilities. While such accounts have some success in explicating corporate responsibilities within a home state, it is evidently problematic on a global level. This is not to say that no such account is possible nor that no informative insights could be generated. At this point there is no added value of tracing this route
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from such grounds. This is not surprising as all target corporate responsibilities towards the poor under conditions of weak governance states. As will become clear, there are also significant differences. A short outline of these approaches helps to provide an initial positioning of the account favored here.
Hsieh has provided for two, complementary accounts to ground duties of
justice for corporate agents. The first account (Hsieh 2004) articulates a derivative positive ‘Duty of Assistance’ for corporate agents from the affluent world operating in burdened societies. Although this is a thoughtful attempt of understanding corporate responsibilities towards burdened, host societies, the attempt is underdeveloped as it stands. Obviously, it is dependent on the convincingness of Rawls’ proposed Law of Peoples (1999) and the ‘Duty of Assistance’ ascribed to liberal peoples (affluent nations). Both of course have received their fair amount of criticism. Crucially, however, it remains rather unclear in the paper how and why the (home) state’s duty to assist should be taken up by corporate agents. The claim Hsieh makes is that these corporations benefit from the ‘burdened conditions’ of the host societies but this, while an important factor in evaluating the extent of corporate responsibilities, cannot, in and of itself, ground a positive duty to assist in building basic institutions. The second argument Hsieh has made is more promising.
In the later piece, Hsieh (2009) changes strategies and offers an argument
that derives a positive, corporate “responsibility to promote well-‐ordered social and political institutions in host countries that lack them” (Hsieh 2009, 251) from a negative duty not to harm. This argument, much like Pogge’s (2002) famous argument on harm mediated through global institutions, thus, sets to derive a positive duty from a purely negative claim. The question is whether this derivation is convincing in relation to corporate responsibilities. Arguing for his claim, Hsieh appropriately situates the problematic in the context of burdened societies without a functioning basic institutional structure. Under such non-‐ideal conditions where the appropriate institutional framework is missing to positively ‘manage’ corporate investments, common business conduct by large foreign corporations will have harmful effects. In other words, without the appropriate set of distributive and regulatory institutions, corporations merely acting as economic agents can still become agents of injustice. Thus by merely acting as a corporation does, the 190
negative duty not to harm is undermined. Combined with the fact that corporations will remain active in these societies, a positive duty is triggered to promote the minimally just background institutions. Interestingly, Hsieh correlates his account to that of Joseph Heath's (2006) account of ‘market failures,’ Heath’s position is that corporate agents are not to seek profits in a manner that “undermines the social benefits that justify the profit orientation in the first place” (2006, 551). The negative duty in this account, however, merely stipulates a negative duty to not actively seek profit opportunities where weak institutions are in place – a position very close to Ruggie’s ‘responsibility to respect’. Hsieh’s claim on negative duty seems to extend further however (and needs to, if it is to convincingly trigger a positive duty). Why would corporate agents, from the argument that they ought not to benefit from harming, be expected to contribute to institution building in a host state? There is an interesting twist to Hsieh argument here: It is not so much the direct profiting from the regulatory weakness of these states that trigger the positive duty but the “wrongness of participating in a system” (Hsieh 2009, 259) that allows for such profiteering. Being a part of a global (economic) system that either cause or retain weak governance in burdened societies, the negative duty comes not form singular actions of profiteering but of benefiting from the corporate role within the system. It is this role that triggers corporate responsibility towards burdened society. Seemingly thus, like Pogge’s citizen, who through his democratic voice, ultimately is responsible for the harmful global institutional order, the corporate agent is so too. According to Hsieh, ‘harm’ is, by definition (since it follows systematically), a part of any investment into a burdened society. Therefore, investing as such can only be done in a legitimate manner when the harm is offset by the positive contribution to institution building. Some elements of Hsieh’s argument are confirmed in this chapter, most particularly the systematic reading of corporate responsibilities. Hsieh’s proposal, however, is unconvincing. This is so due to the fact that his proposed principle of no harm cannot carry the weight that Hsieh wants it to carry. While his argument of ‘no benefiting from harm’ is convincing (and notably carries quite far in counteracting exploitative corporate behavior), the following positive duty beyond harm mitigation 191
is somewhat thin. It remains quite unclear why corporations carry such a hefty obligation to improve institutions. Are they like Pogge’s citizens in the end the main authors of the global economic system? 233 Maybe so but that question is not specifically answered. Also, without a more articulate notion of what constitutes ‘profiting’ from harm,234 and a further specification of the account of promoting institutions, 235 Hsieh’s proposal is unsatisfactory. Without answers to these questions it remains too generic and seemingly imposes heavy burdens on corporate agents without enough reasons to substantiate the burdens. The clearest voice in ascribing a wide range of human rights duties to corporate agents comes from Wettstein’s work. He underwrites Hsieh’s point that corporations have a responsibility to promote just institutions abroad as inherently correct but he contests premising it on a negative duty not to profit from harm. To Wettstein the duty to build institutions must necessarily be grounded in a positive obligation. He is unambiguous about his understanding: “[T]he normative ground and foundation for remedial obligations in my argument [is] the existence of human rights. The imperative deriving from human rights is what obligates in a first instance; capability is the criterion according to which to distribute this general, collective obligation among specific agents” (Wettstein 2012, 754). What is implied by this quote is that human rights indeed do not morally allow for under-‐fulfillment since they represent absolute minimal standards of a decent life, and that therefore the capabilities of corporate agents become the only, or at least the primary decisive ground upon which duties are ascribed to corporate agents. These duties can imply direct relief of human suffering and can include, in line with Hsieh, the creation or improvement of the background institutions of the host society. Wettstein is thus not dependent on an argument on a ‘harming’ system (which would carry a heavy burden of proof) but combines the under-‐fulfillment of human rights with corporate capabilities to 233 If so Hsieh will, like Pogge, need to say more on the way in which this order systemically harms burdened societies. 234 Is profiting as such from a system in which burdened societies participate truly always a form of harm? If so: In what sense? And how does one balance out harm of a corporate agent, which often also brings labor, infrastructure and so on? Cannot a corporation operate fairly within such system? 235 How does this ‘promotion’ offset harm? And why would ‘promotion’ take moral precedence over withdrawal, the seemingly more obvious candidate to follow from Hsieh’s harm argument?
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correct for it as the justificatory basis to ascribe far-‐reaching responsibilities to corporations.
As such, Wettstein’s argument is bold in the way that it does not consider the
relative ‘role’ and normative ‘position’ of different agents (such as the state or the corporation) in comparing capabilities. Remedial responsibility thereby becomes something merely expressed in terms of the strength of the capabilities of the agent. The problem with such an account is obvious: It cannot reasonably limit the duties of corporate agents. The capabilities argument takes Wettstein beyond the ‘market failure’-‐argument in both variants of Heath and Hsieh. If it is truly only capability by which obligations are ascribed then there is no a priori limit to what (as a demand of justice for Wettstein (Wettstein 2009b)), can be required of corporate agents. Although he does include constraining factors in this account –contributions of agents should also be consistent with the expertise and resource of an agent as well as dependent on the ‘connection’ or relationship between the corporation and the host society (Wettstein, 2012) – these are ad hoc constraints that have no intrinsic standing in the justificatory argument that selects capabilities as the principle for duty-‐ascription. There is another element to Wettstein’s account that is absent of the quote above. Wettstein subscribes to a notion of corporate ‘private political authority’ (Kobrin 2009), which denotes corporate agency as ‘quasi-‐governmental.’ Through this status, too, corporations are required to meet state-‐like human rights obligations. Interestingly, the duties of corporate agents are therefore at least not only derivative of the capabilities they hold. In this way, the importance of the role and position of the corporate agent within global governance is articulated. Quasi-‐ governmental agency of corporations however does not refer, like Hsieh’s and Wettstein’s above, to the general position of corporate power but to the specific role as for instance service-‐provider of the corporate agent as an effect of privatization. To quote Wettstein extensively on his understanding of the public authority argument: “Of those in positions of authority, we ask more than simply not to violate our rights; what we demand of them is to use their power for the common good, that is, to enhance the well-‐being of those subjected to their power— responsive and good governance clearly must go beyond the mere avoidance of 193
despotism. […] It is this new position of authority of multinational companies that makes the claim for a positive obligation to promote just institutions in host countries plausible (Wettstein 2010, 281).236 This line of argument is less bold than the capabilities-‐claim and has a stronger foothold into what reasonable expectations we have of corporate agents. It, however, is also less convincing as a general justificatory ground. Firstly, the positive dimension of the argument remains somewhat muddled. While we would refer to the public ‘authority’ of a mine company operating in remote lands as triggering positive duties to ensure welfare for instance, it is harder to see how this also applies to companies that have taken on privatized services. Here we would be inclined to constraint corporate profit incentives by stringent public service provisions but no further duties towards institutional reform seem to follow. Other than the human rights and capabilities account, the very specific argument of the quasi-‐governmental function of corporate agents cannot provide a general justificatory ground for corporate responsibilities.
Both lines of argument thus run into trouble. Wettstein’s argument firstly
runs into a definitive problem concerning the scope of duties ascribed to the corporate agent under the principle of capability and, second, it overplays the potential derivation of public, positive, duties from governance functions corporate agents fulfill in today’s world. I do agree with Wettstein that the role of corporate agents, sometimes mirroring that of the state, and their relative position within governance ought to inform the type and scope of corporate responsibilities. The reasons for this will be further specified but for now it should be clear that while the impact of corporate agents can be enormous they are not constituted as public agents, thereby fully lacking any form of democratic legitimacy or any demand for such legitimacy. Ascribing the expansive scope of responsibilities to corporate agents, Wettstein tends to brush over this fact of corporate agency.
236 Wettstein’s ‘second argument’ has much in common with the Cordelli's (2012) argument encountered in Chapter 4 and with Scherer and Palazzo’s notion of corporate political power (Scherer and Palazzo 2011). The quasi-governmental function namely refers to service provision undertaken by corporate agents through privatization and the almost ubiquitous impact extractive companies can have on the local communities in which they operate (Wettstein 2009b).
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The third account that provides further articulation of the justificatory basis of corporate responsibilities builds on two pillars: basic human rights and the existence of ‘special relations’ (Arnold, 2010). To Arnold, firstly, human rights following Shue (1996) need to be divided up into basic and, what he calls, ‘aspirational’ rights. It is only basic rights such as subsistence rights that ought to apply to the corporate agent; aspirational rights remain the responsibility of the state. Corporations, however, have a responsibility to foster such basic human rights, when special relations are in place. As he states, “[t]he obligations of basic subsistence rights are not owed to all people, but only ‘when certain relationships exist’ between the rights-‐holder and the rights-‐observer” (Amold 2010, 386).237 In correspondence to the argument developed in this thesis, Arnold introduces ‘special relations’ as the justificatory basis upon which to ascribe responsibilities to corporate agents. These ‘special relations,’ however, are rather ubiquitous: ”[W]henever TNCs do business they are already in special relationships with a variety of stakeholders such as workers, customers, and local communities” (Arnold 2010, 387), 238 according to what H.L.A. Hart has called the ‘mutuality of restrictions.’ This ‘mutuality’ prescription, prescribes that “those who have submitted to these restrictions [on liberties] when required have a right to a similar submission from those who have benefited by their submission” (Hart 1955, 185). As society (and its citizens) provides the necessary environment for the investment, even under burdened conditions,239 it is on the basis of this norm thereby entitled to far-‐reaching responsible corporate behavior, including institution-‐building. Before questioning the adequacy of this proposal, one crucial element of Arnold’s account needs to be stressed. Other than Hsieh or Wettstein, or Ruggie for that matter, Arnold reframes the function of human rights in a fashion very much in accordance with the short outline provided at the end of Chapter 5. By reading the 237 This is of course somewhat of an awkward way of putting it. The relation between the rights-holder and rights-observer cannot be established before there is a relationship. In other words, strictly speaking there is no relationship between a rightsholder and rights-observer, the there emerges a relationship which constitutes the two interdependent positions. 238 And if that is so, the gradation of reciprocating is dependent on what is received: The more one gives as a society the more one ought to receive in terms of corporate basic human rights duties. 239 Arnold’s argument is somewhat of a reversal of Hsieh’s. While the latter implicitly assumes that corporate activity under burdened conditions always harms a society for the lack of a system of law and regulation, Arnold holds on to the idea that no matter the governance gaps, corporate agents will always need and demand the state’s institutions to be able to invest.
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applicability of basic human rights claims as an effect of the reciprocity in the relation between corporate agent and the host society, human rights are no longer self-‐standing ‘goals’ to be achieved by the corporate agent, as the fulfillment requirement of Wettstein implies. Instead, “[b]asic rights take the form of side-‐ constraints that bound the moral space in which duty bearers may pursue ends without unjustified interference by other agents or institutions” (Arnold 2010, 386). As an effect of this shift in interpretation, the distinction between the ‘respect and ‘protect’ duties, so crucial to Ruggie, begins to breaks down. Although I am thus very sympathetic to Arnold’s model, it also faces its set of questions. The idea that a ‘bare’ relationship triggers weighty duties is problematic in an obvious sense for it undermines any limit on corporate engagement. ‘Presence’ alone can lead to hefty demands on the agent. At the same time, Arnold overreaches on the nature of the duties that corporate agents hold. As he writes, referring to Ruggie’s Framework, “TNCs have ethically grounded basic human rights duties that should be incorporated into the tripartite framework, and that these perfect duties are distinct from any imperfect duties TNCs may have regarding aspirational rights” (Arnold 2010, 384). The main problem of Arnold’s account thus becomes clear in the combination of these two points. In effect, it implies that Arnold prescribes that corporate agents bear perfect human rights duties in every relationship they maintain, be it through investment, sales, subcontracting and so on. 240 I agree with Arnold that from this type of relationship follows a certain duty to respect the basic human rights of those stakeholders. But is it possible to conclude, as Arnold does, from such relationships that corporate agents have an “additional obligation to ensure that subsistence rights are met”? (Arnold 2010, 387) An obligation, of course, that is considered a perfect obligation nonetheless.241 While such extensive corporate responsibilities might appeal to those that require the 240 The potential span is enormous: “At a minimum, then, TNCs managers have duties to both ensure that they do not physically harm or illegitimately undermine the liberty of any persons, and the additional obligation to ensure that subsistence rights are met” (Arnold 2010, 387). 241 Kant famously specified the stringent criteria of a perfect duty. In effect it implies that the duty-bearer, right holder, the content of the right as well as the manner in which the duty is to be performed are all perfectly specified. There is somewhat of a ambiguity in Arnold’s paper. On p.389 in relation to a concrete example (mining) he does not speak of ‘ensuring’ but only of ‘respecting’ the right to subsistence. The potential duties following respect are certainly much more limited than those following insurance.
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fulfillment of basic human rights on an indiscriminate basis, the bold argumentative strategy will not suffice to convince anyone slightly more skeptical. Is the mere fact of selling goods on a market enough to trigger duties, perfect duties, to fulfill subsistence rights for those within that market? 6.2.2. Towards a Novel Model: Justificatory Premises
All three accounts offer important considerations on the justificatory basis of corporate responsibilities. None of the three can however provide for a satisfactory account of the justificatory grounds of responsibilities, nor do they articulate a reasonable range of potential corporate responsibilities regarding socio-‐economic or, more specifically, basic human subsistence rights. Hsieh’s derivation, firstly, of a positive duty to promote background institutions cannot be convincingly grounded on the negative duty not to harm. We do recognize however the role that such ‘no harm’ account plays and should acknowledge the relevance of the systematic understanding of corporate agency he offers. Wettstein’s argument on capability as the ground of duty-‐ascription, particularly in the context of weak states, is of importance. It should also be intuitively clear that the wide scope potential of responsibilities that is implied by an account premised only on capability is problematic. Lastly, while theorizing perfect corporate human right duties certainly goes too far, this thesis is most sympathetic to Arnold’s account of the foundational role that the reciprocal basis of special relations plays in articulating corporate responsibilities. Furthermore, the further point that such relationship implies that foreseen impacts on basic human rights should function as constraints upon corporate agency is also acknowledged. Two problematic implications seem to be shared by all three authors. First, the scope an ‘depth’ of the responsibilities that they wish to assign corporate agents might backfire by motivating corporate agents to withdraw.242 The point is that without a convincing ‘duty to invest’ in burdened societies all proposed accounts will need to consider the option of corporate disinvestment. The moral constraints on
242 This argument applies less to Hsieh. His shortcoming lays more in the combination between the two points raised in this paragraph.
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corporate agents, namely, are moral constraints on incoming/ongoing investment and do not apply pre-‐investment. Secondly, the justificatory accounts all lack depth from a phenomenological perspective. In other words, they fail to (fully) convincingly articulate ‘what it is’ with corporate agents that can trigger self-‐standing corporate responsibilities that stretch beyond Ruggie’s responsibility to respect. To provide a bridge to outlining the theoretical basis of the model on offer in this thesis, a note on what is missing in Arnold’s understanding of the reciprocity requirement within special relations is helpful as this position comes closest to what I have in mind. An important aspect of Arnold notion of reciprocity is the ‘mutuality of restrictions’ it implies. Shortly put, the states restrictions within the relationship ought to be complemented by restrictions on the side of the corporate agent. However, he misses the implication of his conception of reciprocity as he sees the reciprocal demand on the corporate agent to follow from the host state offering of its legal framework (which technically speaking is not the type of reciprocity ‘mutuality of restrictions’ prescribes). The implication of this account is that as a result of the internationalization of the relevant regulatory frameworks corporate agents could be excused from contributing much to particularly burdened, weak governance societies as they ‘offer’ little in terms of the regulatory background they provide. The restrictions assumed by the host state, and to which reciprocity-‐based corporate responsibilities should be correlated to instead, are those that the state has taken upon itself by signing up to IIAs and by creating domestic law in accordance. It is this ‘cosmopolitan,’ market-‐oriented restriction that opens the field of opportunities, of freedom of choice, for corporate agents and limits the (regulatory) liberties of the host state. Thereby, it is this newly created realm of liberties that corporate agents are deemed to be required to utilize responsibly, i.e. according to reasonable moral constraints on their agency. Arnold thus misses the ‘institutional’ restrictions that burdened host states have taken upon themselves under the investment regime, enabling a ‘space of freedom’ for corporate agents to operate. More profoundly than the ‘mere’ special relations assumed by Arnold, reciprocity ought to reflect the ‘mutuality of restrictions’ grounded in the distributive consequences of the investment regime. This reciprocal, institutional relationship 198
can actually provide a convincing basis for corporate responsibilities that go beyond mere no-‐harm duties. To develop this argument, the methodology of PDA can be beneficially utilized and provide for the type of justificatory grounds of corporate responsibilities that we are after. So far, the prescriptions of PDA have been loosely followed. The thesis has argued that the practice of international investment, under a guise of an ‘indirect’ or ‘asymmetrical’ reciprocal relations, has had the distributive consequence of enhancing the powers of a third beneficiary, the corporate agent. In effect, the powers of initiation of claims and the operating liberties (as a result of regulatory liberalization) accrued by corporate agents under the investor rights’ regime together endow the corporate agent with a public form of power. This novel type of power, however, ought also to trigger novel (types of) responsibilities to accompany the powers and liberties assumed. It is this relation between (institutionalized) rights and freedoms counterbalanced by correlating responsibilities that is to be informed by a moral notion of reciprocity under. ‘Reciprocity’ translates the distributive consequences of a practice into reasonable terms of cooperation, in the sense that all reasonable participants within a relevant practice can agree with them. From within a PDA approach, however, the reciprocal relation stipulated here shows a critical complexity: It spans two regulatory practices, the practice of investment and the practice of the nation-‐state. In other words, we are confronted with ‘overlapping practices’ (Banai, Ronzoni, and Schemmel, 2011). How can we make out of a practice-‐based account that spans two distinct practices, i.e. two practices the justificatory principles of which ought to be articulated from within those practices? Before further developing the notion of reciprocity the notion of ‘overlapping practices’ within PDA needs further specification. PDA was introduced particularly in the introductory chapter as a methodology that allowed for a middle path between statism and cosmopolitanism in the global justice debate. Valentini (2011) has argued that the PDA is prone to confirm the status quo. This follows from the exclusive character of the methodology as it prescribes that the type and content of our principles of justice is directly depended on the nature and structure of the 199
practice to which they are to apply. The question thus is: How can such principles provide for a critical-‐normative challenge to the existent organization of a practice? This critique, if valid, would be damning since any methodology within normative ethics needs to enable a critical and progressive framework that can guide towards the realistic utopian. However, Valentini’s interpretation of PDA is too rigid in its understanding of the exclusivity of the internal nature of a practice as only guiding a conception of justice.243 Practices under PDA do not operate in vacuums but are understood to intersect and overlap, i.e. they are part of a ‘network’ of ‘overlapping practices.’
The notion of ‘overlapping practices’ is introduced within PDA to
methodologically enable progressive assessments of practices, i.e. to assess practices not solely according to their internal organization but also in its impacts, collisions and overlap with other practices. My understanding of ‘overlapping practices,’ however, differs from Banai, Ronzoni and Schemmel (2011): Where the authors remain attached to an internal understanding of principles of justices for practices and introduce the concept of ‘overlapping practices’ merely as an aside, as it were, to undermine the status quo critique (other practices merely impact the internal structure of a practice as an exogenous force, to be dealt with, yet again, within the singular practice) this thesis takes the notion of ‘overlapping practices’ as the core of the methodology.244 This effectively means that practices, at least but crucially so within non-‐ideal theory and under current ‘globalized’ circumstances, cannot be understood to be ‘closed’ practices. Where practices overlap it can be necessary to apply what could be termed ‘normative balancing’ between practices since the aim is not to assure practice ‘internal’ results, which under ideal theory would mean perfect justice, but rather to ensure that injustices are corrected for. Simply put, an 243 Part of the ‘rigidity’ comes from the fact that she wants to oppose the liberal nationalist usage of PDA to a potential cosmopolitan one. There is, thus, an escape route from this status quo-argument. PDA needs to be understood in functionalist terms, i.e. practices should be evaluated not or at least not solely in terms of the relations within a practice but in terms of the manner in which it fulfills the ‘function’ of justice: securing equal respect for individuals. One can wonder whether Valentini is correct in depicting PDA as ‘value neutral.’ From a liberal perspective, certain basic values are always implied in the evaluation of a practice (See (James 2005b). Valentini sees this as a weakness however, at least to social liberal accounts of PDA. 244 Do note that I do not imply that speaking of the ‘internal’ make-up of a practice (say, the state) is not possible at all. Nor that all practices ‘overlap’ in a meaningful manner. Here it suffices to claim that practices that relevantly overlap ought to play a constitutive role in the understanding of one another. Therefore, to understand state practice we ought to understand the practice of investment.
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imbalance in one practice can be corrected for in another practice; justice requires the ‘transfer’ of duties in between practices. In as much, making the notion of ‘overlapping practices’ central to PDA this thesis can acknowledge the normative complexity of the transnational agency of corporations within a theory of justice. Endowed with public power through a globalized regime, namely, the corporate agent reaps the benefits of the practice of investment only within the context of the host state in which it interlopes. How does this notion of ‘overlapping practices’ help to outline a satisfactory grounding of corporate responsibilities? To recap the argument, corporate public power is a constitutive effect of the investment regime. As a result of the large differences in economic power between states this regime is built up on a notion of reciprocity that is explicitly ‘diffuse’ and asymmetric, where investment protection and regulatory liberalization are required for the promise of FDI inflow and subsequent growth. This limiting regime of investment, which has developed premised on the regulatory powers of well-‐ordered societal systems, has enabled corporate agents to exercise public power, i.e. power of the legislative and regulatory choices of a host state. Shortly put, ‘fair’ reciprocity under this practice would require that the profitable and safe investment granted to the corporate agent is to be offset by development inducing growth. Reality, however, shows a different picture: Corporate public power and lacking (or limited) state regulatory control within burdened society has lead to an expanding reciprocity gap. As it is the corporate agent that is favored through these practices, provided the lack of reform opportunities to the investment regime as such, the ‘lack of reciprocity’ ought to become informative of our normative considerations of the expectation we have of corporate agency. In a critical vein, reciprocity requires the mirroring of the distributive effect, thereby integrating corporate responsibilities into the institutional context of transnational justice considerations. The justificatory grounds for ascribing corporate responsibilities are thereby found in the distributive effect of the investment regime upon the burdened state through the presence of the corporate agent. In a sense, thus, this argument traces Arnold’s account of ‘special relations’ as premising the reasonable expectations of corporate agents. 201
However, while reciprocity binds the beneficiaries of cooperation that stand in a ‘special relation,’ an important difference with Arnold is that these ‘special relations’ as such do not trigger the justification. They are merely ‘secondary’ to the institutional structure of the practice(s), i.e. the norms and rules that premise how the relationships are structured.
Having established the justificatory grounding for articulating corporate
responsibilities, the next step is to translate the reciprocity-‐based justificatory account for corporate responsibilities into a guiding framework and to articulate the moral implications for corporate agency of the distributive pattern spanning the practice of investment and the state. I will propose conceptualizing corporate responsibilities within the framework of the basic structure of the host society, thus coining the Basic Structure Model (BSM). 6.3. Expectations of a Model The BSM is a proposal to conceptualize, justice-‐based, corporate responsibilities that translates and enhances intuitions pertaining to corporate responsibilities towards the poor. To that extent, the Model has to bring together many strands of arguments developed in this thesis while at the same time remaining sufficiently reasonable for considered judgments. Before outlining the Model, for the sake of analytic clarity the following subsections will first articulate the expectations that such a Model has to answer to. 6.3.1. Expectation I: What the Model Needs to Provide
At a most general level, expectations of a normative model are conservative in kind. Not of course in the sense that it ought to mirror past sentiments but it is to say that corporate responsibilities are to be understood within the context of the corporations’ existing societal basis, a sentiment already articulated in Berle (1931 and 1954). 245 In as much, a model is developed that accounts for corporate responsibilities under a global pluralist order, reflecting the institutionalized powers and freedoms as well as the particular economic rational ingrained in the corporate 245 See fn. 182. The reason that Berle initially favored shareholder primacy is to be understood in exactly this context.
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agent in its normative ascriptions. In other words, the normative model needs to represent an act of rebalancing of rights and responsibilities, comparable but historically and contextually distinct from the Polanyian re-‐embedding tale. Such a model crosses the disciplinary divide between justice theory and CSR/BHR. A satisfactory model, thus, cannot to be at odds with commonly accepted ideas of corporate responsibilities (expressing a viable phenomenology), while it at the same time needs to inform and deepen our understanding of the normative background against which we ascribe responsibilities. To that extent, it can be read as an addition to the Ruggie Framework by providing a) a clear justificatory account to morally ground the responsibilities that corporate agents bear and b) a clarification of the muddled nature of the negative/positive distinction within the context of corporate investment in a burdened society. Lastly, a satisfactory model in the end should integrate (potentially with small amendments) different grounds for corporate responsibility. For instance, while I develop a normative account on corporate responsibilities based on the powers allotted to corporate agents under the investment regime, it would be a positive point if the BSM had the potential to integrate such contributions of Young (2004 and 2006) and K.MacDonald (2007 and 2011) on the normative implications of supply chains. The analysis of the investment regime showed practice overlapping, distributive effects that re-‐balanced the relation between corporate and state agency. While the transfers of power itself need not be problematic, these are bound by deontological and/or consequential standards and here frictions do appear. When these standards are not met, the practice of corporate investment is to be considered structurally unjust. It is on this basis that this thesis has argued that the distributive consequences of the investment regime, captured in the concept of corporate public power, needs to be reflected on the responsibility side. In chapter 4 and 5 we accounted for the lack of inclusion of the ‘publicness’ of corporate power in current normative accounts on justice or corporate responsibilities. The effect of this corporate public power upon burdened societies is unmistakable and stands in need of justification. The notion of the ‘burdened’ society draws out the fact that corporate public power concretizes when markets, regulatory systems and government capacity 203
failures emerge.246 It is in these contexts where most obviously ethical requirements are triggered for no ‘primary’ agent (the state, international organizations) is in place to ensure a fair engagement between the corporation and the host society. Worse still, while burdened societies are already limited in their regulatory and administrative operations, the power invested into corporations by the investment regime, subsequently can render improvements in these categories a costly affair. Where such improvements would negatively impact corporate profits a corporation can demand compensation for the loss of profit. This situation, which was presented as constituting corporate public power under the shadow of the law, disincentivizes states to implement progressive policies, ‘chilling’ social policy. At the same time, this conception of ‘publicness’ also highlights the fact that the harm to the socio-‐ economic rights of the vulnerable are oftentimes an effect of structural processes in which the corporate agent has increasingly carved out a constitutive role. What is needed is an understanding of corporate responsibilities that can overcome this obvious gap existent today; a normative model that can connect the institutionalist and interactionalist levels of normative analysis. In light hereof, particularly of the structure nature of corporate impacts on the poor, ascribing responsibilities premised on the distinction between negative and positive as well as respecting and protecting/promoting becomes tenuous. A normative account of corporate responsibilities should capture the structural role of corporate agency within a practice, thereby extending on the limited idea of respect and the substitutional (Kreide 2007) responsibilities premised on capability. The challenge to such a novel account of corporate responsibilities lies in the fact that it has to capture and balance both the ‘structural’ (the corporations as public power, its (legal) limitations and the requirements of reciprocation) as well as the ‘instrumental’ (the corporation as economic agent, providing (im)material resources and capital) side of corporate agency. In other words a satisfactory model assigns 246 See, again, Joseph Heath (2006) on ‘market failure’ as the basis of corporate responsibilities. Heath’s argument is that corporate responsibilities are triggered where no effective market mechanisms or regulatory mechanisms are in place to curtail corporate agency. The actions of the corporations in this realm can thus be said to be freestanding and only subjected to corporate morality. I subscribe to Heath’s account but where he clings to an account of corporate responsibilities from whet he calls a professional ethics position (implying that the corporate agent is a singular economic agent), this thesis has obviously directed its focus towards the public role of corporations.
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duties beyond the agential respect found under the UN Guiding Principles but without potentially eliminating operating space for the corporation as the economic agent it is. Besides the fact that there is a moral justification for the pursuit of profit in a market system (Campbell 2007) and since no ‘duty to invest’ has yet been articulated, the model needs to allow for hybridity of agency. What a moral argument on the limitations of profit-‐making tries to establish however is that such activity is, and can only be, legitimized if it creates societal benefit. Thus, what is to be expected? A satisfactory model functions as a ‘reasoned’ frame of reference against which the moral implications of corporate engagement with (socio-‐economic rights of) the poor. Such a frame internalizes three constitutive characteristics: a) An integrative account of possible corporate, moral involvement in poverty (‘content’); b) a normative domain in terms of which the concurrent responsibilities can be conceptualized (‘aim’); and c) an account of the range of applicable cases under which such demanding responsibilities are held (‘scope’). What is not to be expected from a normative model that articulates moral expectations: Such model does not specify how corporate agents should be held responsible; a demand often formulated by those that support stringent legal obligations. While these certainly can be called for under the implementation of the demands prescribed by a normative model, requiring such a claim within the ethical sphere is a sign of faulty prioritization that is dangerously reductionist and thereby potentially exclusionary, a danger sought to be averted through the analysis of ‘pure’ institutionalism in Chapter 4. As Wettstein notes, “[t]he systematic place of ethical reflection is thus not beyond, but prior to legal laws” (2009a, 146). 6.3.2. Expectation II: Balancing Corporate and State Responsibilities
The justificatory account allows for a wide range of potential corporate responsibilities within the context of burdened societies. However, any successful model under which corporate duties are ascribed needs to be able to curtail the range of duties for corporate agents. Evidently, the relation between the state and corporate agents is central to such considerations. As this thesis is an argument on
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integrating corporate responsibilities within institutional considerations of justice, the focus here will be on the question of ‘overreach’ in ascribing corporate responsibilities. The point to make is that a satisfactory model of corporate responsibilities should not overreach in ascribing duties to corporate agents. The reasons hereto will be sketched through an account of Wettstein’s ‘capability principle’ as the fundamental principle upon which responsibilities are allocated.
The danger of ‘overreach’ is underestimated in all three accounts
commented on under paragraph 6.2, Wettstein’s important argument however provides the most interesting as well as far-‐reaching thereof. Wettstein broadly builds on O’Neill's (2001) argument that lacking effective primary agents of justice in weak states the capability principle becomes a core heuristic to ascribe responsibilities to relieve human rights claims. As a reminder of O’Neill account, she doubts the veracity and analytic value of accepting, a priori, the institutional division of labor that premises liberal political theory (and we might now add, the UN Guiding Principles). O’Neill undermined such pre-‐theoretical division between primary and secondary agents of justice, arguing that such distinction is dependent on empirics of a case. Where we find a weak or unwilling state, incapable international organizations and very capable corporations, the latter could be said to hold primary duties of justice.247 O’Neill’s attack is successful within its context; the acute suffering and deprivation of the vulnerable within weak states. The ‘principle of capability’ seemingly is set to work, for her, solely in these contexts. To O’Neill the implication was therefore not that corporations have become genuine moral agents (Arnold, 2013) but (merely) that under certain conditions corporate agents ought to be considered contributors to justice as a consequence of the moral demands to remediate dire suffering.248 We could qualify hers as a ‘functionalist’ account of corporate moral agency. ‘Capability’ is a relevant principle that generates (partial) 247 Remember that for O’Neill the distinction between primary and secondary is crafted on the organizational capacity of the primary duty holder, who has the (technical) capacity to distribute and specify responsibilities to all other, secondary, agents. 248 Ruggie comes close to this understanding in his 2010 Report, as he writes that in situations “such as natural disasters or public health emergencies, there may be compelling reasons for any social actor with capacity to contribute temporarily. Such contingent and time-bound actions by some companies in certain situations may be both reasonable and desirable” (Ruggie 2009, par. 63). However, where O’Neill explicitly thinks of the corporate responsibilities in these contexts as an issue of justice, it is unclear how Ruggie would justify this claim upon corporate agents. It can be that there ‘merely’ is a claim of (strong) beneficence (Beitz 2011) in place.
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positive duties for corporations in a circumscribed set of cases (such as specified by O’Neill).249 O’Neill’s account in intended to have limited reach. Wettstein, on the other hand, extends her account to a full-‐scale theory of corporate human rights obligations as a consideration of global justice. While the imperative of remedial obligations derive from human rights for Wettstein, “capability is the criterion according to which to distribute this general, collective obligation among specific agents” (Wettstein 2012, 754). From an analytic perspective, the consequence of this move by Wettstein is that corporate agents can no longer be easily distinguished from states in their role as agents of justice.250 The downsides to this extension of the modest capability principle become clear when we realize that as an organizing principle, ‘capability’ is highly limited in that it does not in and of itself allow for a problematization of the relational or distributional balance between the state and the corporate agent. The principle under O’Neill’s account seeks to ascribe remedial responsibilities to set straight acute deprivations and therefore does not systematically interrogate the structural underpinnings of the corporate-‐state balance. The principle merely provides for a crude either/or logic to substitute state for corporate responsibilities and does not offer any mechanism for the admittedly complex case of distribution of responsibilities.251 249 It is an intricate question whether all corporate acts that are currently undertaken by companies within weak state contexts under the banner of CSR should be read as part of the corporate duties of justice. ‘Capability’ itself does seem to trigger obvious duties and it is highly dubitable to deny that the capability of corporations should not trigger duties of relief in dire situations. However, is the provision of medical care through the establishment of HIV/Aids clinics for personnel, their family and wider community a case of a duty of justice resulting from capability? (Thauer 2013) In effect, the pendulum swings both ways: On the one hand, given the fact that the corporate agent has to be understood in terms of its hybrid nature, the capability principle ought not to trigger unlimited duties for corporations. A threshold is necessary (even though it is hard to set) and one might argue that such medical provisions exceed corporate duties of justice (which does not mean of course that they are not to be supported, only that there is no morally stringent claim upon the corporations to do so). On the other hand however, from an understanding of corporate responsibilities within a basic structure argument, these private clinics can be said to undermine certain of the justicespecific targets of corporate responsibilities. Practically put, CSR initiatives have more often exceeded what could be demanded from corporations under most conceptions of justice, at times these have worked out well, at times not. A basic structure argument would lead to demand corporations to invest into developing public health care facilities that loses the direct linkage to the corporation in its operations. 250 For O’Neill it is exactly the break-down of the primary/secondary distinction that triggers the application of the capacity principle. 251 The analytic limitations of the capability principle are mirrored in the Norms intuitively convincing idea that corporate agents have legal duties to fulfill human rights within their ‘sphere of influence.’ Is there no difference between the duty of the state and the corporate agent even within such a sphere? How does the state as the primary holder relate to the corporate agent as
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The analytic limitations to this framework are directly responsible to the substantive issue of ‘overreach.’ Corporate agents, under the principle of capability, carry potentially unlimited positive duties towards the poor since, most particularly in weak states, their capabilities will often times outweigh the state’s.252 If it is the case that the capability of the corporation is much larger, what would it mean to say that corporations have to ensure human rights? Should the corporate agent exhaust its resources to make this possible? In a commentary on the Norms Ruggie’s already provided for an insightful critique on a capability-‐based argument that reflects on our question too: “[T]he proposition that corporate human rights responsibilities as a general rule should be determined by companies’ capacity, whether absolute or relative to States, is troubling. On that premise, a large and profitable company operating in a small and poor country could soon find itself called upon to perform ever-‐expanding social and even governance functions – lacking democratic legitimacy, diminishing the State’s incentive to build sustainable capacity and undermining the company’s own economic role and possibly its commercial viability. Indeed, the proposition invites undesirable strategic gaming in any kind of country context” (Ruggie 2009, par. 64). Wettstein tries to forego such a critique by building complementing his account with a ‘temporal clause,’ i.e. the idea that far-‐reaching corporate obligations towards the poor are temporary and that the contemporaneous strengthening state institutions should take away the burden over time (Wettstein 2009b). However, this implies that corporate agents, besides fulfilling human rights duties directly, also have a duty to promote background institutions (a duty Wettstein (2010) explicitly ascribes). In highly acute situations, where remedial duties are necessarily to be ascribed (Miller 2008), the argument might stick but as a full-‐blown theoretical understanding of corporate responsibilities it runs into problems.
a secondary holder of duties? (Alston 2005; Ruggie 2007) This is not to suggest that Wettstein’s position mirrors that of the Norms. The accounts are dissimilar but for the dependence on capability.. 252 As Shue noted, “[t]he suspicion that any account of duties put forward is unreasonable must remain until some limit upon the duties is specified in the form of guidelines for the assignment of duties to specific bearers.” (Shue 1996, 112)
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Since it is not only Wettstein’s capability account that runs into the problem of overreach, we should generalize the critique. Three consequential negative implications of overreach can be drawn out. Firstly, and most obviously, under conditions of already weak governance, overreach on corporate responsibilities by for instance making them dependent on capabilities only can simply further undermine the state’s capacities and disincentivize governments to be more responsive to their citizenry. Opacity in the allocation of responsibilities in such case merely leads to strategic gaming, with the potential effect that “[s]elf-‐regulation and corporate social responsibility […] could worsen the problem by encouraging governments to evade their regulatory responsibilities while placing greater social burdens on companies that may be ill prepared to deal with them” (Kapstein, 2006, 168).253 Secondly, overreach on responsibilities sits awkwardly with and undermines the common understanding of the corporation as a vehicle for economic value generation. The implication is that the economic function can be derailed by an overly broad set of responsibilities to be shouldered by corporate agents whereby investments in burdened society might simply end. Where there is no market-‐based reason for corporate agents to remain active within burdened societies, without a convincing ‘duty to invest’ the option of corporate disinvestment is always on the table. 254 Thirdly, there are evidently legitimacy implications and concerns of democratic effect involved in ascribing corporate agents such extensive duties. In this context, Bishop’s interestingly turns around the argument on corporate responsibilities and asks what corporate rights would premise such extensive responsibilities? An argument could be made that “the human rights obligations of corporations should be limited by the limits on the legal rights that should be extended to corporations” (Bishop 2012, 120). If we can establish what rights
253 One could also argue the inverse of this claim: Such overreach can effectively undermine the internal sovereign space of states in which they can articulate independently their developmental strategy. Under the notion of ‘progressive realization’ of the socio-economic rights for instance, “the international human rights regime recognizes the legitimate need of governments to exercise discretion in making trade-offs and balancing decision, and especially in determining how best to ‘secure the fulfillment’ of, precisely, the economic, social, and cultural rights on which corporations have the greatest influence” (Ruggie 2007). I am somewhat doubtful whether this argument is that pressing since it can hardly be said that development of burdened societies is an internal ‘affair.’ 254 Nor should we underestimate the possibility of ‘innovative’ ways of corporate agents to forego direct presence and moral liability.
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corporate agents should not be granted, the responsibilities that are premised on such rights should not be ascribed. It is unclear whether this would offer a general approach since it needs to be able to measure the net profit or loss of a possible corporate obligation, i.e. it needs to balance the potential human rights fulfillment/violation that come with both assigning an obligation to a corporate agents and the rights that come with that obligation. It does however articulate an important consideration for all accounts of corporate political power. While there is a strong case to understand corporate agency, as Hsieh correctly accounted for, as intrinsic to society in the broadest sense of the word, they should not however be taken as part of the public institutional framework of society. Because they are “specialized organs, performing specialized functions” (Ruggie 2007, 827), and “not democratic public interest institutions, they should be permitted to have such roles only in exceptional circumstances – for example, where they perform state functions” (Ibid, 826).
To explore this point a little further, there are deep questions of a democratic
and deliberative nature involved in capturing the role of corporate agents within the global political economy. While democratic issues will necessarily pop-‐up on the corporate agenda (in terms of consultation obligations with local communities and so on (Penz, Drydyk and Bose 2011)) the question is to what extent we want to allow such democratic discourses to integrated corporate agents. Kuper (2004) has argued for the inclusion of corporations within the global governmental bodies so as to engage them democratically, ‘political CSR’ (Scherer, Palazzo and Baumann 2006; Palazzo and Scherer 2008; Scherer and Palazzo 2011) also carves out an expansive role for a (deliberate) democratic model to reflect the legitimacy of corporate agency, and proponents of the concept of corporate ‘public power’ (K. Macdonald and T. Macdonald, 2010) have largely favored the institutionalization of internalized democratic legitimization into corporations. While there are serious questions to be raised here concerning the potential of implementing the required deliberative structures (Arnold 2013) – questions that have not received sufficient answers yet – Bishop’s argumentative reversal as well as the notion that the corporate agent has a specialized economic function in society provide important backdrops to further exploring these issues. It is imperative to recognize that while it might be true that in 210
terms of power, of impact on the lives of individuals, the corporation has been granted powers equaling or at least challenging the state, and while it can even be true that corporations hold capacities far beyond a single burdened society; none of this implies that these powers should be legitimated in a manner similar to the state. The ‘uniqueness’ of the state is not only in the simple notion of coercive and large impacts, as distinctive from any other agent. Its uniqueness lays in its function as the embodiment of politics in its broadest understanding and that sets the state as the single, indiscriminate public agent apart from other forms of agency.255 Wettstein’s ‘model,’ for instance, underplays the institutional context within which human rights duties for corporations are to be articulated. While there are arguably no barriers to corporate human rights duties from a moral perspective, institutionally and functionally states are the primary bearers of human rights duties and, as we have specified, there are good reasons to adhere to the division of institutional labor where possible. Corporate human rights duties beyond respect will in other words require further argumentation – as this thesis gives by way of the argument on corporate public power and reciprocity demands under the investment regime. One expectation of a satisfactory model is that it allows for a position that lingers in between the two extremes of pure private agency and overreaching. The key to such a model is to understand that corporate ‘public’ power denotes a ‘role’ played by the corporate agent, under a certain relative ‘positioning’ towards a state. Corporations do not turn into states or state-‐like actors but in a metaphorical sense (i.e. ‘quasi-‐ governmental’ as an explanatory term is somewhat problematic). Such a rendering would assume a mere instrumental value of the state in realizing human rights. States however under the current international order (at least formally) are the embodiment of political value, the agent constituted as such that citizens are capable of organizing and governing themselves under self-‐imposed mechanisms of democratic control. Corporate agents, unsurprisingly, completely lack such
255 Do note that this description does not imply an ideal understanding of the state. It merely states that the one agent that is constituted as a public body, no matter how faulty, is the state. Even in relation to rent-seeking elites that used the state as a tool for private wealth enhancement, the state is formally not turned into a private, economic agent. Exactly for this reason we speak shame of such practices.
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constitution since as an economic agent it is constructed merely to most efficiently create economic value. At the same time, however, we need to analyze where corporate agents are partially but relevantly implicated, through for instance the overlap in practice create by the investment regime that propels the corporation into the institutional structures of the political order of the state. The role/position of the corporate agent as a public power can therefore in the final analysis be best described as a ‘practice-‐effect,’ i.e. the manner in which corporate agents are institutionally enabled to act. In our case, thus, this ‘effect’ is the endowment of corporate agents with the ability to operate within a realm that is most properly defined as public. A satisfactory normative model needs the flexibility to, on the one hand, uphold the primacy of the state and the economic agency of the corporation, while on the other hand provide the ability to differentiate contexts under which the moral status of corporate agency requires further normative evaluation on its role beyond mere economic functionality. To conclude this part it can thus be stated that a model that serves to assign corporate responsibilities has to allow for a differentiated picture of corporate agency. Summarized from the above, this differentiated pictures needs to reflect three roles, and three subsequent powers, of the corporate agent: The corporate agent as 1) an ‘individual’, economic agent – with instrumental powers of job-‐ creation, capital access etc. –operating within a broader (state-‐based) institutional setting (the corporation as economic power); 2) a socio-‐political agent that provides public services and influences, through for instance its business associations and lobbying firms, the rules and regulations of the (global) institutional order (the political power of the corporation); 3) a ‘secondary’ public agent in terms of the power it exerts on rule-‐setting and capture of domestic regulatory processes through the ‘constitutive rules’ of the institutional order, i.e. the investment regime (the public power of the corporate agent). 6.3.3. Expectation III: What Responsibilities? Type and Scope
Corporate responsibilities are (thus) practice-‐dependent. To capture these responsibilities we need to understand the principles that can be derived from the
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practice of the investment regime. I propose the following two rather uncontroversial principles: 1. A principle of basic (human) subsistence rights fulfillment. 2. A principle of (fair) reciprocity. The first principle expresses the idea that there is a ‘floor,’ a minimum level that ought to constraint any practice. There are simply no moral grounds for allowing any activity that could undermine the rights to the most basic form of subsistence (Shue 1996) neither through direct actions or the indirect impact of the structure of a practice. Subsistence rights are a practice constraint that is independent of the relative relations in place within the practice; non-‐fulfillment of these rights as an effect of the practice at the same time represents by definition an injustice in the structural make-‐up of that practice. The second principle is a formal principle that articulates the special responsibilities that emerge under the practice as a result of the reasonable standards of cooperation under the practice. ‘Fair’ reciprocity expresses the fulfillment of these standards. Structural injustice 256 under this principle is thus relational and emerges in cases of lack of reciprocation.257 Taken together these principles articulate an idea of transnational (due to overlapping practices) background justice, not in a fully institutionalized manner but as a non-‐
256 This usage of structural injustice comes close to that of Iris Marion Young: “Structural injustice exists when social processes put large categories of persons under a systematic threat of domination or deprivation of the means to develop and exercise their capacities, at the same time as these processes enable others to dominate or have a wide range of opportunities for developing and exercising their capacities. Structural injustice is a kind of moral wrong distinct from the wrongful action of an individual agent or the willfully repressive policies of a state […] All the persons who participate by their actions in the ongoing schemes of cooperation that constitute these structures are responsible for them, in the sense that they are part of the process that causes them” (Young 2006, 111). 257 Do relations themselves draw out principles? This question has recently been answered in the negative by Sangiovanni (2012) . There is much to be said for this position. A difference should be made however between content-holding principles and formal principles. An account of fairness would hold both but they are not the same. The difference principle for instance is a formal principle, i.e. it does in itself not specify a specific content but merely a comparative state. The first principle, ensuring basic equal freedoms, on the other hand is a content-holding principle in that it specifies standards that ought to be ensured. Practice-internal principles, I agree, do not in and of themselves generate content-holding principles but only formal principles. No version of PDA however is convincing without it reflecting some basic (liberal) values, such as, as is argued here, subsistence rights.
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ideal derivation that countenances the practical distributive patterns of a practice under a requirement of reciprocity and human rights constraints.258 The inclusion of basic human rights to subsistence as a principle to the investment practice should be read in light of the account of human rights as moral rights provided at the end of Chapter 5. A subsistence right is a basic right that is necessary if one is to enjoy any other right (Shue 1996),259 to be contrasted by those rights that merely articulate relative goals, so-‐called ‘aspirational rights’ (Arnold 2010). For Shue, “[b]asic rights are the morality of the depths. They specify the line beneath which no one is to be allowed to sink” (Shue 1996, 18) and “everyone’s minimum reasonable demand upon the rest of humanity” (Ibid., 19). The right to subsistence is itself not a specified human right but refers to the “fundamental core of the so-‐called ‘economic rights’” (Ibid., 5). Lastly, the demand that this claim-‐right is “socially guaranteed is probably the single most important aspect of a standard right, because it is the aspect that necessitates correlative duties” (Ibid., 16).
Forceful and progressive in its own right, this articulation of basic human
rights has a farther-‐reaching implication for theorizing justice. The principle of basic subsistence right fulfillment is foundational to all practices, as a minimum requirement for justification. Under global circumstances of injustice, namely, the Humean assumptions Rawls introduced for a theory of justice to get off the ground become irrelevant. Not the possibility of full-‐blown justice guides the analysis of justification but the necessity of counteracting injustice. Shue (1996, 189, Fn.18 and 216, Fn.29) already criticized liberal theory for assuming moderate scarcity as a presupposition of justification, effectively undermining a global application not of a principle of humanity but of the realization of a minimum basis of subsistence as an integral demand of social interaction.
258 I write ‘transnational background justice’ instead of ‘global background justice’ for reasons specified in Chapter 4. The ‘transnational,’ as by definition a non-spatial but relational notion, expresses the implications of corporate agency enabled by a global investment regime and effectuated within the borders of the (host) state. The idea of transnational background justice thus specifies the adherence to the two principles not solely internal to the investment regime but also, ‘through’ the corporate agent, within the relation with the implicated state. 259 This definition has been questioned in the literature following Shue’s seminal work. Whether or not the notion of basic human rights survives the critique or not, I refrain from judging. The point remains that it can express a very rudimentary value without which a human life looses its dignity.
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Under a practice-‐based account, the answer to the question who has to guarantee the fulfillment of rights is, so to say, dependent on the make-‐up of the practice. Human rights within the international realm, from a moral perspective, can best be understood not so much as individualizable claims of a rights-‐holder on a duty-‐bearer but as a set of evaluative standards of practices. This does not change the fact that the rights that individuals have under practices are claim-‐rights, their function, however, now changes from articulating demands to requiring constraints (on practices). An implication hereof is that the constitutive agents within a practice, i.e. those that are primary in the creation, maintenance and potential reform of a practice, all become bearers of duties, constraint by the claims of subsistence rights. Opposite Arnold (2010), these duties cannot be understood as perfect duties anymore but they do not turn into so-‐called imperfect duties either. As constraints, they emerge for each agent dependent on the relative position and role the agent plays within a practice. These duties as practice-‐based constraints or, in line with Chapter 5, organizational duties, operate in between fully perfect duties and imperfect duties. Under our argument, therefore, the corporate agent endowed with public power holds a constitutive position both with the investment regime and the host state. As a consequence of this position, they are held responsible to ensure that the practice of investment does not violate basic human subsistence rights through the corporation’s role within the host state. The principle of basic (human) subsistence rights fulfillment is thus a complex principle but one that can, as an ‘organizational’ interpretation of human rights as practice constraints, provide a valuable function of articulating the moral basis for any practice to live up to. The second principle, of (fair) reciprocity, has been extensively dealt with earlier. Simply put, fair reciprocity under the investment regime would imply profitable and secure investment on the one hand and development inducing growth on the other. In the case that such reciprocity is not in place, a reciprocity gap is in place. Such gaps are often times, and surely so in the practice of investment, the result of exploitative relations underpinned by information and bargaining asymmetries that consequently give rise to a structural injustice institutional architecture regulating a practice. The formal principle of (fair) 215
reciprocity gets its content from the practice it applies to, as it articulates what can be considered a fair form of cooperation.
It is no surprise at this point that the principles will apply directly to the
corporate agent as an effect of its endowment with public power. It is this characteristic of the agency that makes it susceptible, as a constitutive force within the practice, to be relevantly implicated in the assurance of subsistence rights and to function as a ‘transmitter’ of the reciprocity requirements of the practice of investment, as its main beneficiary and agent that concretizes the regime’s distributive implications within a host state. Both these practice-‐based principles need to find translation into a model that can balance out how they are reasonably applied to a hybrid agent. 6.4. The Basic Structure Model for Corporate Responsibilities To tie together the expectations, I propose a Basic Structure Model (BSM) of corporate responsibilities. Such a model can provide for the focal point that brings the practice-‐based principle together into a structural understanding of corporate hybrid agency, mirroring both the rights and freedoms on which its agency is premised. The core idea behind introducing this model is that given the conditions specified, and the expectations articulated, it can provide for an adequate moral understanding of the transnationally operating corporate agent ‘interloping’ into the basic institutional structures of its host society. The proposal is to positively re-‐ embed the transnational corporate agent within domestic institutional structures, not premised on a formal idea of a social contract but premised on the power-‐ relations existent within the global order. Under Expectation I, it was claimed that a satisfactory model of corporate responsibilities regarding the basic socioeconomic rights of the poor answers to three constitutive requirements: It a) provides an integrative account of possible corporate, moral involvement in poverty (‘content’); b) a normative domain in terms of which the concurrent responsibilities can be conceptualized (‘aim’); and c) an account of the range of applicable cases under which corporate agents hold responsibilities (‘scope’). The BSM answers to these requirements in a satisfactory
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manner and can thereby provide guidance on reasonable expectations of corporate agents investing in burdened societies. To get a better understanding of the model it serves to provide an outline of each characteristic separately. Aim: A main shift under the BSM with respect to current CSR and the UN Guiding Principles is that the responsibilities of corporate agents become intrinsically tied to burdened (host) societies, and the functioning of its institutions. Herein it follows particularly Wettstein and Hsieh although the motivating reasons, as has been clarified, diverge. Provided the account developed, this is seemingly a quite intuitive idea: The exercise of corporate public power directly involves the normative relation between state and citizen as 1) the host state’s socio-‐economic regulatory and management capacities have become at least partially dependent on the agency of the transnational corporation, and 2) domestic actors (such as local companies) have become dependent on the agency of the corporation. From the perspective of justice theory, on the other hand, speaking of a BSM for corporate responsibilities is counterintuitive since it reintroduces into the discussion a Rawlsian concept that is anathema to, firstly, the idea that agency is a consideration in justification at all and, secondly, the idea that distribution of responsibilities can be conceptualized as existing through different regulatory practices. The original conceptualization of the basic structure, according to which it is not simply a reference to a set of basic institutions but has to be conceived of in holistic terms as the manner “in which the major social institutions fit together into a system” (Rawls 1996, 258), has been refuted as helpful under challenges within non-‐ ideal theory resulting from the interloping relations within which particularly burdened societies are captured. However, it was also clarified, underwriting Risse’s Institutionalist Theory, that as an empirical notion, the basic structure maintains a primary functional role of social buffer between outside forces and the citizenry, as a mediating mechanism between practices, necessary for development and to ensure the progressive realization (a fair) distribution of, among others, socio-‐economic rights. Instead then of being a rigid denominator under ideal theory, the basic structure was thus considered as crucial, although not anymore exclusive, normative ‘node’ to which questions of transnational structural injustice need to be tied. By 217
primarily understanding the responsibilities of corporate agency as intrinsically related to the basic structure of a host society, the BSM reflects the necessity of the institutions of a society for progressive development as well as the particular demands of justifications that follow distributed corporate public power. The basic institutions of a society are effectively functionally responsible for the fulfillment of basic human rights and management of allocative and distributive political and economic issues. Under burdened conditions these functionings of the basic structure are, although to different degrees, underdeveloped. A burdened society suffers by definition from a structural form of ‘basic structure failure.’ And it is this underdeveloped status that ought to inform the relation of external actors and the burdened society, constituting relevant limiting conditions and positive requirements. A conception of corporate responsibilities under the BSM takes its aim from the idea of basic structure functionings. Specifying responsibilities within the context of a host society’s basic structure makes the corporate agent, through its public power, a functional complement to the society into which it invests.260 Scope: Under Expectation II much has been made out of the need to have a way to limit corporate responsibilities in practice. The BSM does so but not in an overly restrictive manner, acknowledging both the private and public side of the corporate agent. The BSM builds in a firewall against overreaching on the scope of responsibilities on corporations. While the principal argument on corporate public power is set out to break open the distinction between state and corporate agency, a convincing model needs to be weary of overreach as it could have the adverse effect of corporations withdrawing from developing countries for being hampered in their legitimate goal to pursue economic value. On the side of the state it can comparably lead less than committed governments to retract on social policy or to ‘game’ on their own progressive duties to their citizenry. This consideration reflects 260 A note on Hsieh (2009). The aim of the basic structure cannot be simplistically understood as implying the construction of domestic institutions mirroring those set up over centuries in most currently developed nations (such as Hsieh (2004; 2009) proposes in line with (Rawls 1999)). In line with the argument on the ‘interloping’ economic and legal relations (See particularly Patterson and Afilalo 2008), we cannot simply assume such (re-)constructive work is optional or at least sufficient; the ‘externalization’ of the basic structure for functional reasons could, in general, well be a consequence of the current global economic order.
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particularly strongly on the capability principle, which arguably leads to ‘duty dumping,’ i.e. “assuming that some particular institution has a duty simply because it has the resources to fulfill it and no other actor is doing so” (Buchanan and Keohane 2006, 421). Opposite the limitation on scope, however, given the interlaced systems of transnational relations, the a priori distinction held onto by Ruggie between corporate respect and state duty does not withstand scrutiny. In other words, for the fact of practical challenges to the public function of the state by corporate public power, there is a need to consider corporate responsibilities that in terms of promotion and/or protection of subsistence rights reflect a public-‐institutional role for the corporate agent. However, other than a capability based model, the BSM is not a substitutional model but a complementary model. While responsibilities to respect can, under the BSM, be assumed to apply to the private agency of the corporate agent, the corporate public power triggers duties that are intrinsically linked to the basic structure. This could imply in practice that a corporate agent plays a constitutive role in institution-‐building (for instance through the provision of technical know-‐how and training for complex administrative tasks related to the investment) or, again, to complement the basic structure functioning in cases of ‘basic structure failures’ (by for instance servicing remote communities in which they operate). As such it requires, as a question of scope of responsibilities not of beneficiary offers, more than what Ruggie’s notion of respect provides for. A critic still might object here that the idea of complimentary duties could still potentially allow for costs of doing business that will be too high to carry for corporate agents, leading similarly to withdrawal.261 This critique is valid, as ‘costs’ will be involved. Two important qualifications should be made to this point: Firstly, ‘complementarity,’ thus, never implies that corporate agents need to carry the full burden but requires direct engagement with institutions and other actors, most prominently the host state.262 Other than under a substitutional model, thus, under
261 Similarly, in the context I sketch there clearly is enhanced space for gaming on the side of unwilling governments. The following argument applies on overreach will also answer to this comment. 262 Another agent to potentially engage could be the home state of the investor. The normative role of the home state is left out of the equation in this thesis but it is clear that in relation to burdened societies, the duties of the home state and the host state can
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BSM corporate responsibilities are never self-‐standing and absolute but rather always relative to the other relevantly implicated actors. Secondly, the critic is mistaken to take corporate human rights obligations and reciprocity-‐based duties as ‘costs’ or ‘expenditure’ of corporate resources (Bishop 2012) as if they were an extrinsic demand – such as a capability account would imply. The BSM as an expression of the embedding of corporate agency does not rely on a re-‐distributive principle but builds on a distributive principle premised on the comparative power-‐ relations articulated through the investment regime. What the BSM prescribes is a form of ‘restriction’ of corporate agency as to ensure the mutuality in the cooperative relation. Adherence to the BSM is an issue of morality, of not wanting to benefit from certain background injustices, not a demand on corporate resources. As such thus corporations are integrated into an evaluative framework of public power that traditionally has only reoccupied itself with states. The BSM underwrites the importance of domestic institutions within the context of poverty abatement; corporate responsibilities that emerge through the reciprocal relations are best conceived of as applying to contributing to the build up of basic institutions or the (temporary and partial) fulfillment of the function of these structures. In the end, the extent to which corporate agents fulfill this complimentary duty depends on the ‘strength’ of a state in terms of the public power it can amass. The demands of corporate agents are thus made dependent on the regulatory and capacity failure of a burdened society. Hereby the responsibilities of a corporate agent in China for instance with a rather strong and controlling state and broad capacity for industrial policy has different implications for corporate responsibilities than a poverty-‐stricken sub-‐Saharan country. Context thus matters to scope but – at the level of abstraction this thesis engages – only to set out that the type and extent of complementary expectations that can reasonably rest on
very well be aligned. How such an alignment would work out in practice and what normative balancing is required is a question of implementation that I cannot deal with here (as I can also not deal specifically with the concrete balancing of duties between host state and corporate agent).
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corporate agents depends on the concrete societal context in which the agent operates.263 Content: Speaking of the ‘content’ of the BSM does not imply talk of tailored obligations as should be clear by now. The content as specified above refers to the possible corporate, moral involvement in poverty constraint by the 2 principles formulated. In other words, when we speak of content we seek to address the manner in which the distilled practice-‐dependent principles find application to corporate agency under the BSM. The basic structure as such is the realm of application but we want to be more specific. What specific types of relations can trigger the responsibilities of corporate agents? The engagement of the corporate agent with the poor can best be presented as tripartite: through creation, perpetuation and potential abatement of poverty. These provide the types of
263 This is to say that the argument presented here is not blind to the fact that the notion of the ‘burdened society’ lacks the differentiation needed to test applications of the BSM to concrete cases. This thesis is interested in articulating how best to conceptualize corporate responsibilities. This is a question that is answered through the analysis of the legal-institutional grounds of the corporate agent since it are these grounds that, firstly, constitute the agency of the corporation and subsequently premise their responsibilities. The notion of ‘burdened society’ is utilized to articulate the idea that the implications of the power with which corporations are endowed plays out particularly in the context where a) governance is weak and b) progressive policy to abate poverty is most pressing. While it fulfills this function it does not however serve well in obtaining the goal of specifying concrete situations confronted by corporations. For such an account we need to, as it were, to a step down the ladder of abstraction. This is a necessary step to take but unfortunately not one I can take here. A second point needs to be made concerning context and the choice for working with the concept of ‘burdened society.’ In the thesis there is no mentioning of regimes that themselves violate human rights and what the impact thereof is on corporate responsibilities. Such an account is certainly crucial for practical usage of the BSM but I also note that it does not in any way undermine the model as such. We simply need additional argumentation to establish what is required in what context. The BSM can provide further guidance here but does not answer for the concrete case what will be expected. It has to be noted that the choice for the concept of ‘burdened society’ has to be understood to also limit the type of questions to be addressed in the thesis. As is well known from the Law of Peoples (1999), Rawls used the notion of ‘burdened society’ opposite to the ‘outlaw society’ to describe those impoverished society that are in such dire situation as an effect of their political culture and not their aggressive nature. This opposition plays out in this thesis too and is one main reason why widespread human rights abuses by the state are not integrated within the theory. I have to submit, however, that the lack of attention to the willing un-fulfillment of the basic subsistence rights by the state probably should have played a more important role in the thesis as this constitutes a pressing problem particularly in resource rich countries. Given the argument developed here, the BSM would prescribe that there is a duty on the side of the corporate agent to simultaneously relieve some of the consequential suffering within their communities and to challenge the government on their unwillingness. I would refer to Transparency Amendment to the Dodd-Franck Act as an example under which corporate agents do provide such a challenge (although largely unwillingly as the opposition to the Amendment has shown). By publishing their payments to governments on an easily discernable basis, extractive industry companies under this transnational regime become part of an attempt to improve on the accountability of the host state governments. I thank Rainer Baubock for pushing me on these points. I hope the following pages will provide some further legitimacy to the choices made in this thesis.
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relations that potentially trigger responsibilities for corporate agents to correct injustices. They are importantly however oftentimes not direct but institutionally mediated. By modeling corporate responsibilities within a basic structure account this mediation is captured. ‘Creation’ in this sequence of engagement should not only be seen as actual (past) harm inflicted causing impoverishment but refers to the potentiality of creating or being complicit in the creation of poverty (by for instance being responsible for forced relocations of local communities, against insufficient pay-‐offs). The demands on corporate agents as a consequence of the potential of ‘creation’ of poverty are thus less backward looking, as requiring the rectification of harm, and more reflect demands of constraint on future actions (much like the due diligence principles of Ruggie requires forward-‐looking adjustments to corporate strategy). While it is not blind to such backward looking questions of contribution, as an organizational account, however, the BSM in general is largely a forward-‐looking model for distributing and ascribing responsibilities. The relationships of ‘perpetuation’ and the ‘potential abatement’ of poverty are difficult to fit into Ruggie’s Framework. The corporate contribution to the abatement of poverty for Ruggie can only be underwritten by a notion of beneficence,264 i.e. a largely freestanding moral demand on the corporate agent. Under the principle of fair reciprocity, the biased distributive consequence of the regime of investment, however, triggers a positive duty to abate poverty as stringent demand of justice. The BSM encrypts these potentially extensive duties within the context of the existent basic structure, i.e. corporate agents, as Hsieh and Wettstein also argued, have a duty to contribute to institution building. As noted in the section on justificatory grounds for corporate responsibilities, public power is not a definitional characteristic of the corporate agent but a ‘practice-‐effect.’ This implies, however, that the responsibilities of corporate agents are not (anymore) dependent merely on an analytics of contribution or negligence but as a consequence, special demands dependent on the role and position of the corporate agent emerge. 264 See also (Beitz 2011) who argues against a proper human rights duty for non-state actors on the basis that such a practice is not developed past any significant threshold. Beneficence or even ‘strong’ beneficence can still in contexts of vulnerability trigger moral demands upon non-state actors.
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The most intriguing relationship concerns ‘perpetuation’ since other than ‘creation’ and ‘abatement’ none of the other particular principles, such as ‘harm’ or ‘capability’ is in any obvious way at hand to provide the normative analytics of the type of responsibilities that follow the role of the corporate agents in perpetuating poverty. The corporate responsibilities in light of perpetuation are by definition to be understood as institutional responsibilities, i.e. responsibilities of the corporate agent within a wider network of agents and institutions that together, through possibly non-‐malign actions, perpetuate poverty. It is therefore with ‘perpetuation,’ even more evident than with ‘abatement’ that the importance of the (power) distributive framework of the investment regime plays out most evidently. It is therefore also not surprising that particularly on this point Ruggie remains silent. This is directly related to the lack of developing an account of the moral status of the corporate agent as a legal-‐institutionally constituted form of agency. As such, he underplays the moral relevance of forms of harm such as ‘taking advantage’ (Miller 2010) or ‘mutually beneficial exploitation’ (Wertheimer 1999). These categories, however, are crucial to the assessment of the broader socio-‐economic human rights context in which corporate agency engages the poor. Provided the current global political economic order, so favorable to corporate agency, a richer interpretation of corporate human rights responsibility, as articulated here, is necessary. In as much, corporate agents ought not only forego harm but also the perpetuation, either direct or through the institutional networks in which they operate, of poverty. As the notion of ‘Fairness in Contract,’ introduced below, will further specify, concretely this responsibility relates directly to the core aspects of doing business. To shortly come back to the idea of guidance: The provision of a model for responsibility ascription at this level of abstraction is open to a particular type of critique. A model such as the Basic Structure Model cannot by itself articulate the extent of a specific agent’s responsibilities nor the exact balance within the distribution. It cannot, thus, point fingers in concrete cases. David Miller (2008) has criticized underspecified models of responsibility ascription: “Responsibility that is widely dispersed is no good, because then everyone will attempt to hang back in the hope that someone else will step in first, no one will be particularly liable to censure 223
if the bad condition is not remedied, and so on” (498-‐9). There is certainly a truth to this critique although it would be somewhat mistaken to take it at face value. Miller’s argument operates at a level of acute cases of need and the remedial responsibilities to be assigned. The BSM on the other hand seeks to provide for a normative understanding of corporate agency in general terms. To sidestep the critique then, I would argue that both are complementary. Since this thesis is to establish a model that, while not guiding on a per case basis, can provide for a set of maxims that can be relevantly distilled under case-‐specific conditions. 265 Other than in the specific cases in which a remedial duty under conditions of acuteness needs to be pointed out, within a practice-‐based account such stringency is not possible. The BSM is an abstract model that integrates complex relations and demands into a relevant simple prescription: Corporate agents, in their investment into burdened societies, are, firstly, constraint by the demands of the safeguarding of basic subsistence rights and, secondly, by the reciprocity demands that follow from the public power they are endowed with under the investment regime. In the end, as noted, the idea articulated is that the corporate agent in its investment practice cannot cut itself loose from its intrinsic relations to societies – neither the subsistence rights of the people of burdened society nor the reciprocal promise that it embodies through its role as beneficiary in the investment regime can be excluded within its investment strategies. 6.5. ‘Fairness in Contract’ The BSM thus provides a very differ approach to understanding corporate responsibilities from still dominant CSR approaches that are either understanding corporate responsibilities as instrumental, i.e. translating moral responsibilities into an economic logic of the business case, and/or see corporate responsibilities as a non-‐specified, semi-‐philanthropic contribution to society. The latter lacks urgency, remaining largely stuck to the supererogatory; the former misconceives of morality 265 It is important to distinguish maxims from axioms. As Jonsen and Toulmin (1988) elaborate, the medieval casuist referred to ‘common’ principles – often religious – to assess the problematic moral situations they were confronted with. Other than using these principles as axioms that thus present an ideal to which society has to live up, they took the principles as axioms that good help to make normative sense of the fine-grains of moral problems.
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as a notion reducible to economic standards. The BSM oppositely integrates justice demands at the core of corporate operations. It thereby inverses CSR in that it specifically engages the structural nature of corporate agency, which in turn has remained largely of the CSR agenda (and even under BHR has received minor attention except from the fact that they to some extent are implied in the due diligence requirement). The BSM under its tripartite understanding of the corporate relation to the poor, main topics of responsible corporate behavior become issues such as tax evasion/avoidance and holidays, market power effects or even abuse, regulatory impacts, and debilitating transfer pricing. I cannot discuss these complex and important topics and how they BSM exactly play out in relation to them in this thesis.266 Yet, take an obvious example such transfer pricing. Enabled by the market pressures, supported by international institutions, for financial openness of countries, transfer pricing – the adjustment of prices and costs within the multinational conglomerate enabling them to shift the highest value added to the geographical places where fewest taxes will be paid -‐ in actual fact can lead to a negative impact of investment (particularly when non-‐economic costs such as the environment are taken into account). This ubiquitous activity of corporate agents is hardly found in the CSR discourse nor can it in any clear sense be conceptualized as an issue of respect for human rights. On the other hand, the BSM would clearly challenge such forms of transfer pricing as injustice activity as it, if not create, at least perpetuate poverty through the exploitative usage of corporate power. Instead of going over the separate problems summed up here, a more generic concept that should provide for an idea of the direction of the BSM is introduced: ‘Fairness in Contract.’ In effect, many of the pertinent issues relating corporate agents to burdened society are related to contracts because for a large part it is the contract that determines the risks, costs and benefits of an investment for both investor and country (Cotula 2011). As such the contract, thus, articulate to a large extent the conditions upon which corporate agents engage with a host society and thereby it constitutes an important realm for the stipulation of corporate responsibilities under the BSM. The contract has remained largely of the agenda,
266 See for an intriguing glimpse of the world of offshore, Shaxson (2011).
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both in theories of justice, for it plays out on the interactional level, as well as in CSR–discourse as contracts are exemplary of the idea of free engagement of private economic agency. Under the BSM this is understood as a misconception for the now evident reason of corporate public power and the, more pertinently, reciprocal responsibilities that follow the distributive effect of the investment regime. Instead, thus, the contract is the proto-‐typical site for the corporate agent to fulfill its distributive responsibilities. ‘Fairness in Contract,’ as a moral conception under the BSM, extends outside of the narrow boundaries of the procedural understanding of fair contracting into a distributive one.
Under a plain procedural notion of fairness in contract, there are certain
basic criteria to follow. Ronzoni (2009) provides for an informative outline of these formal criteria. A contract needs to be a free agreement, void of coercion or deception on either side. Further, the circumstances of contracting (i.e. the background conditions) are fair “when both contracting parties have some effective freedom to refuse or renegotiate the deal.” In other words, both parties “(1) enjoy sufficiently adequate material conditions; (2) and/or have an adequate range of alternative options available to them; (3) and/or have sufficient bargaining power […]” (Ronzoni 2009, 239). 267 When these conditions are reasonably met, from a moral point of view the contract is considered fair. Where these conditions remain unmet, the contract agreed is considered morally void. The question of ‘Fairness in Contract’ under the BSM however concerns itself with the manner in which potential correction to skewed background conditions ought to be translated. When the condition of fair circumstances of contracting are not upheld, as has been and still largely is the between corporate agents and a burdened society, there is a requirement to correct for the unbalanced initial situation through the contract. As this thesis has argued, under non-‐ideal theory the stringent distinction between institutional and interactional analysis is loosened, as it becomes a non sequitur under conditions of global circumstances of injustice. No conceivable notion of background justice can be assumed as correcting the wide array of singular transactions. This is particularly so with respect to the transnational relations 267 Ronzoni provides this sketch to bring home the claim that background justice can only be achieved institutionally. This argument itself has been questioned in Chapter 4. At this point we are merely interested in her formal account of the contract.
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involving burdened society since these societies are captured within globally spanning regimes informed by the norms and interests of a well-‐ordered society that do not reflect the interests nor the capacities of the burdened society. Opposite to undermining any type of justice-‐considerations within the global order, however, this situation reinforces the demand for justice-‐considerations pertaining to corporate agency. As O’Neill has noted, “just transactions demand most where institutions are still unjust” (2000, 141). In this context “justice in transactions cannot be only a matter of respecting institutionally required outward forms of contract, bargain and negotiation, or other legal requirements” (ibid.). Contracting, thereby, that act of economic freedom, cannot be merely procedurally fair in the context of structural imbalances. Fairness of contract is to be contextualized within the wider existent relationship, in our case under the conditions of corporate public power and weak governance under burdened society, and be infused with the distributive responsibilities that correct for the background imbalances of contracting under the investment regime. The distributive consequence of corporate public power implies that corporate contracting needs to morally reflect the skewed institutionally background against which the contract is made to be deemed fair. This implies shortly that it constraints its economic strategizing by considerations of basic subsistence rights as well as the reciprocity requirements that follow the institutionalized rights and freedoms enabling the corporations. These demands of justice at the transactional level of contracting are, as said, not of a perfect for they are dependent on the many variables including the state’s institutions and the type of investment involved. This does not make the demands less stringent, only more dependent on contextual analysis. The main implication of the idea of ‘Fairness in Contract’ under the BSM is that it infuses institutionally grounded corporate responsibilities into contracting. In other words, contracting, an activity largely seen as being for private gain (mercantilist by default) becomes a moralized activity. Lastly, a caveat is to be made on how to read the notion of ‘Fairness in Contract’ in relation to the implementation of its requirements. Clearly there is a level of demandingness that will strike corporate managers as being unrealistic, particularly 227
in the context of collective action problems. I have stressed however that the BSM is itself agnostic as a moral model with relation to the mode of implementation. ‘Fairness in Contract’ has to be seen as an example hereof. It stipulates a moral expectation that ought to be fulfilled. Hereby the thesis sidesteps a main debate within the CSR field whether corporate agents should voluntarily fulfill moral obligations or ought to be legally compelled. This opposition is a false one at the level of moral analysis that operates prior to the implementation question. The starting point has to be within reasonable expectations. Only in the second instance, as a question of implementation, do we ask whether legal or voluntary (or more to the point nowadays, ‘hybrid’ and then in what balance) solutions are needed. ‘Fairness in Contract’ certainly is an example of a case wherein discussion opens up as to how and by whom implementation of our expectation should be ensured. What is the role of host and home states and international organizations in enabling the distributive responsibilities of corporate agents to concretize? These are questions beyond the scope of this thesis.
6.6. Concluding Remarks
In this final chapter we have tried to articulate an account of corporate responsibilities that can complement institutional theories under non-‐ideal conditions. The chapter has respectively debated and provided for justificatory grounds for corporate responsibilities that correct for structural injustices. A discussion of three accounts present in the still very young literature that combines justice theoretical investigations with business ethics has shown that for different reasons these are not satisfactory but constructive in building our case for an argument on the justificatory grounds for corporate responsibilities. Premised on a non-‐ideal reading of PDA as a methodology, the chapter distinguished firstly the reciprocity of the investment practice as applying through overlapping practices as institutionally undergirding the relationships between corporate agent and host state regarding the socio-‐economic rights of the impoverished. Secondly, as a practice-‐effect of the investment regime, corporate public power was distilled as a second ground upon which corporate responsibilities should be founded.
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The justificatory foundation in place, the second challenge of the chapter,
was the articulation of a model that could satisfactorily capture corporate responsibilities based on the justificatory account. Instead of arguing directly for a model, the general expectations (3) that come with a model that can both ‘fit’ intuitions and expand our moral horizon were first articulated. This subsequently created the possibility to focus solely on the description of the core elements of what is termed a Basic Structure Model of corporate responsibilities. The importance of this abstract model is not to be underestimated: It is the first in its kind that can convincingly breach the disciplinary parallelism of institutionalist liberal justice theory and interactionalist CSR/BHR literature, to provide guidance in terms of reasonable expectations upon corporations in their engagement with the poor. The idea of ‘Fairness in Contract’ provided a sketch of a possible transition from the abstract model to more direct guidance on establishing institutionalized corporate responsibilities.
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Chapter 7 Concluding Remarks
7.1. In Sum In its essence the Basic Structure Model (BSM) upholds that corporate agents have a responsibility to structure their investments into burdened societies in a manner that will positively enhance the socio-‐economic impact of their presence. This is a responsibility that is negative as well as positive. Negative, for it prescribes not to ‘harm’ basic subsistence rights through investments, nor to (unreasonably) impede on state duties to progressive realize these basic rights. Positive, for the ‘reciprocity gap’ under the investment regime informs responsibilities to contribute in the promotion of basic subsistence rights either directly or through institution-‐building. To that extent, the BSM proposes to understand corporate agency as always being an integrative part of the society in which it operates instead of an exogenous agent to it. In as much, the BSM provides for a renewed articulation of an idea of corporate social responsibility geared to those corporate agents that operate beyond the borders of their home state. However, subsuming BSM under a general model of CSR could lead to a misinterpretation of its character. Where in the mind of many CSR refers to supererogatory responsibilities corporate agents undertake either for the sake of profit or praise, the BSM uniquely articulates the expectations that corporations must fulfill as direct consequences of the demands of justice. It is in this light that the thesis is considered an attempt at a political philosophy of corporate responsibilities that articulates a range of corporate responsibilities as responsibilities of justice. In other words, these responsibilities are the basic moral expectations that must accompany the powers granted corporate agents under the current global legal-‐economic order.
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The BSM is introduced in this thesis because of the existence of a ‘grey area’ between two disciplinary tracks relevant to the normative analysis of corporate agency. On the one hand, justice theory has a liberal bias in the sense that it caters nearly exclusively to institutional analysis only. That this bias is in place does not need further argumentation, nor does this thesis contest that institutions make up a crucial building block for any normative account. Still, at least to the extent that it is an article of faith, institutionalism betrays a mistaken bias as it assumes away any non-‐institutional relevant site of justice. On the other hand, as the ‘grey area’ exists as a space ‘in-‐between,’ CSR and BHR in parallel both allow for its continued existence. Opposite to justice theory, these approaches adhere to the flipside of the liberal bias: Where institutions are taken as the sine qua non of justice theory, CSR and BHR subscribe to liberalism’s ‘art of separation’ (Walzer 1984) by defining the corporate agent as a ‘purely’ private, economic agent. In between these two parallel lines of distinct disciplines a lacuna of relevant normative and ethical research opens up once the limits of the mentioned disciplines are breached. This thesis has sought out the limits of application of justice theory and CSR/BHR by specifying corporate agency as a form of ‘constituted’ public power within the investment regime.
The investment regime provided the perfect backdrop to challenge the
currently dominant ways of conceptualizing corporate responsibilities. Premised on the understanding that corporate agency has no fixed conceptual boundaries (e.g. it is an economic agent), the investment regime was employed to argue for the emergence of a form of corporate public power as constituted through this (near) global regime. In as much, the serial multilateral regime of investment has profound distributive consequences across borders making it a prime subject for justice-‐ considerations, particularly since it does not in its current form pass basic legitimacy demands. The uniqueness of the investment regime however plays out at this point: The regime, on the one hand, primarily benefits a third benefactor, the corporate agent, while as a serially constituted multilateral regime it is highly ‘sticky,’ making any claim of justice informed reform highly path-‐dependent. To that extent the investment regime present its challenge to institutionalist justice theory, as there is no viable institutional alternative to the current investment regime that has illegitimately distributed power, in a non-‐reciprocated manner, to the corporate agent and away from the state.
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The thesis subsequently sets out to argue that while institutionalist (ideal) theories cannot provide for much guidance in this case, this ought not to lead to resignation. As the ‘pure’ form of institutionalism under non-‐ideal theory – one causal factor in creating the ‘grey area’ regarding the normative analysis of corporate responsibilities – is but a mistake of methodology, it is argued that justice merely prescribes a ‘best means’ approach within non-‐ideal theory. When institutions are functionally incapable, for instance for the stickiness of their current state, non-‐institutional agents like the corporation ought to be considered as potential agents of justice. The necessity to do so is buttressed by the intricate impact the transnationally operating corporation today has on both the functioning of basic institutional structures in burdened host societies and on their potential for reform. Successful in executing its limited goal, the challenge to justice theory thus ‘opens-‐up’ to what I called a political philosophy of corporate responsibility. The crucial insight behind this political philosophy is that corporate responsibilities ought to be considered under an institutional perspective. Endowed with public power, the normative assessment of the corporate agent cannot be premised solely on the corporation as a private, economic agent but needs to reflect the institutional role it has acquired. This implies, in short, that corporate agents are to be ascribed as range of negative as well as positive duties that underwrite the expectation of the corporation to constructively contribute to the improvement of the standing of the poor. Evidently, Chapter 5 provides the argument that neither CSR nor the promising approach of BHR do not provide for such stringent normative understanding the corporate responsibilities. Adhering to a pre-‐theoretical conception of the corporate agent as a private, economic agent, these disciplinary approaches remain largely caught in either freestanding or negative no-‐harm duties. It is at this point that the BSM is developed to reflect corporate responsibilities within a realm between the either/or of institutionalism versus interactionalism. In as much, the BSM is premised on the grounds of corporate agency that stand in justification, a ‘reciprocity gap’ within the distributive outcome of the investment regime and the provision of extensive rights as well as liberties that effectively endows the corporate agent with public power. Based on these two premises, the BSM articulates the reasonable expectation of corporations to hold responsibilities that can justify the institutional-‐legal grounding of its agency. The thesis ends by outlining the prerequisites of an adequate model and shows how the
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BSM articulates a new focus on structural issues pertaining to the involvement of corporate agents in burdened society. 7.2. The Potential Imprint of the Thesis There is a silent hope that the core idea operative in the thesis, that the responsibilities of corporate agents are not first and foremost at the level of philanthropic giving but with their structural influence on the socio-‐economic well-‐ being of the affected populations, can trigger a shift within the current realm of CSR-‐ initiatives. This thesis provides a model that can guide and inform, albeit in a general manner, a more reflective stance on CSR with actual corporate managers on the manner in which a corporation engages on a structural level with the conditions of burdened societies.
Naturally, as an exercise in political philosophy this thesis remains at a level
of abstraction that leaves the BSM operative on a plain too distant for the manager to have direct application. Such commentary is valid and there is no pretention that the model is of direct practical utility in the sense of it prescribing particular obligations – in that light, it adheres to the language of responsibility instead of the language of obligation throughout. The task of normative theory is not to present ready-‐made proposals but to contribute to the conceptual exercises of the rigorous framing of problems and intricate questions, as well as the fine-‐tuning of our theoretical intuitions. Therefore the question of implementation, important as it is in effectuating normative proposals, has as such not been a main issue of this thesis. The moral guidance that is offered can subsequently be translated into diverse models of implementation – through ‘soft’ legal instruments, institutional reform, or a hybrid of public-‐private initiative. This is a core conclusion for the rendition provided of the misapplication of ‘pure’ institutionalism to the non-‐ideal realm. At this level institutions can be considered as ‘best means’ to correct for existing injustices, but it cannot be a theoretical precondition of normative argument. In terms of a contribution to the field of philosophy, particularly Global Justice Theory, this thesis has engaged the field in a largely negative manner for it sought to carve out a new line of research within the discipline. Therefore the thesis has critically engaged some articles of faith within the field of liberal political philosophy. There can be clear positive element distilled however from the account. The argument on corporate public power as a constitutive distributional effect of the
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investment regime that cannot find legitimacy, neither in procedural nor in reciprocal terms, had been set up to show how current justice theory’s adherence to two liberal articles of faith turn problematic when faced by the investment regime. The ‘opening up’ of the liberal philosophical argument, if convincingly undertaken, creates a novel and challenging niche within the discipline. I take this argumentative strategy to have two impacts on the field. Firstly, and relating to Consequence 1 under section 4.3.1, if ‘pure’ institutionalism is to be considered merely effective on the ideal plain and that its general application to the non-‐ideal is a flaw in the understanding of the status of ideal and non-‐ideal theory, an interesting challenge opens to those theorists preoccupied with the development of applicable principle of justice beyond borders. This implication is relevant to all theoretical denominations as it plays out on the ground on which all have converged for so long: The site of justice. What the argument would mean for a potential resultant recalibration of justice theory is unclear at this point, and this thesis has provided only limited insight on this topic as it has not set out to formulate a general theory of justice that would bring together the corporate and institutional-‐focused argument. In as much “[d]eveloping a better understanding of what is distinctive about the problems raised by the global political order, and which conceptual and methodological approaches are best suited to address them, thus represents one of the most pressing challenges in this theoretical field” (T. Macdonald and Ronzoni 2012, 521), the site of justice and particularly the role of the transnationally operating corporate agent need to be included among those pressing challenges. Secondly, representing in a more obvious sense the line of argument followed in the chapters that built on the critique of justice theory, the main contribution of this thesis to the field of justice theory is that it has opened up a space that necessitates what could best be called a political philosophy of corporate responsibilities. The argument on the BSM presented particularly in Chapter 6 is an attempt to develop this branch of political philosophy. The unique contribution of this thesis is that it has argued for corporate agency as a site of justice by challenging assumption internal to justice theory. Clearly, once the idea of a political philosophy of corporate responsibilities becomes a prevalent notion in the literature it ought to reintegrate with, even though its existence is first dependent on the carving out from, institutional accounts. As the overarching aim of justice theory is the
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overcoming of injustices such integrative accounts are themselves a demand of justice. For now, a core challenge is to analyze the potential scalability and applicability of the BSM to a diverse set of issues confronting corporate agency. The BSM has in this thesis been brought forth as a result of an argument along the lines of the constitutive impact of the investment regime on the public powers of corporations. The Model however should not be seen as necessarily deriving from this argument, or more precisely, it should not singularly dependent on it. The BSM in other words should also, potentially, be grounded on different justificatory arguments. Here I think most particularly of a complementary argument concerning the power of corporate agents through supply chains (Young 2006; K. Macdonald 2011). As there are as of yet few arguments to be found in the literature that systematically argue on corporate responsibilities within a justice-‐framework, in the short run a comparative account of these models can be useful. This will certainly not come without its difficulties as the models at hand differ in subject (particularly by sector) and normative grounding of models. On a positive note, while in Chapter 5 the thesis has critically distanced itself from the Ruggie project, there are also clear points of overlap and complementarity to be found between the two models. On certain points, such as the explication of justificatory grounds, this thesis extends on Ruggie’s Framework, while it also opens up to a broader range of corporate responsibilities in light of socio-‐economic right than currently available under the Guiding Principles. At the same time it is notable that the conception of corporate respect for human rights, not withstanding the legal questions surrounding it, expresses a comparable societal focus in Ruggie’s work as it is presented here. Furthermore, the notion of due diligence, as was already noted in the earlier critical discussion provides for a precious instrument to make practicable the normative claims formulated under a model such as the BSM. Where the BSM deepens the Ruggie Framework’s normative understanding of corporate responsibilities, the prescribed normative tools of the Framework on the other hand can be instrumental for its implementation. This is not the place to further explore these issues but as the agenda on corporate responsibility for CSR and BHR is continuously developing the task of the philosopher to track and reflect upon the conceptual and moral innovations is a pertinent and imperative one.
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7.3. Limits and Challenges As this thesis effectively is an attempt to carve out a sparsely treaded road within justice theory, applying a methodology that is still unconventional to say the least, both the limitations to the project as such as the potential commentaries and critiques on the project are multiple. I will not outline expected critical commentaries on, for instance, the ideal/non-‐ideal distinction applied in this thesis or the usage of the PDA, nor the lack of integrating the idea of a political philosophy of corporate responsibility within an institutional framework again (to name only a few). I will only comment on a select number of issues that directly relate to the professed claim of the problem-‐oriented nature of the normative theory I develop. Since this could be misunderstood to imply something different than intended, I will first comment on the question of the applicability of the BSM to specific situations. The abstract and general nature of the BSM both follows the set-‐up of this study and is functionally defined. The hope is that the model can provide for a lens under which to study multiple problems surrounding the agency of the corporation. Certainly, a normative account that more immediately focused on specific business– society relations would be able to formulate more concrete obligations. While this is certainly so, such account would have by necessity much less to say about the larger philosophical picture within which the relation of the corporate agent with the state through complex regimes emerges. This thesis has focused attention on exactly this picture as to argue that a grey area of normative ethics is apparent between justice theory and CSR/BHR-‐approaches. The BSM itself is a proposal to start coloring in the area by integrating a set of moral expectations based on an account of justificatory grounds of corporate responsibilities into a singular model. The background question set for this thesis is not concerned with the specific contextual obligations but with the theoretical question whether corporations ought to be ascribed responsibilities of justice to abate poverty. I have set out an argument that deviates from directly formulating an answer based in political philosophy. The practical hopes therefore of the BSM are more limited. The hope is that the model can serve as a basis to articulating a set of maxims that can under case-‐specific conditions help articulate the institutional component to the normative expectations resting on a corporate agent. In as much, the evident limitations to this thesis in providing on the ground guidance positively read opens up to further and more concrete, case-‐specific research to be undertaken informed by the BSM. This would require the adaptation
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of the model to be applicable to a particular type of corporate activity but that should not impede the potential of such a research program. Given the lacuna in such normative analysis of duty-‐ascription this might well be a fruitful undertaking. A challenge that no account of corporate responsibility can ignore of course concerns the context of implementation. As corporate leaders themselves are quick to note, particularly in fields as the extractive industries, investment often times takes place within a context of less than democratic circumstances and with natural resources, and their rents, controlled by only a small club of people that have little interest in providing for the public good. This problem however is not one that is specifically geared at my proposal but reflects the core of non-‐ideal theory: The confrontation with partial or non-‐compliance. Still, as my intentions are to articulate the reasonable moral expectations of corporate agents, the BSM has to provide for the flexibility to counter such limitation. At this stage I cannot account for such flexibility but it should be clear that at the genesis of this challenge to my account stand not only corrupt government leaders or rebel groups, as corporate agents have throughout been unscrupulous in their business dealings with exactly these figures. In as much, requiring the corporate agent even under such circumstances to be an agent of justice might eventually contribute to the end of autocratic leader. This is mere conjuncture. As it stands this topic of partial or non-‐compliance presents one of the most challenging inroads to further exploration.
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