Say you are a foreign investor that invests in a developing country, which is subsequently hit by a deep financial crisis. As a new government tries to get its house in order, it undertakes a number of emergency measures such as freezing bank deposits, not paying wages and pensions, and freezing some prices. You happen to have invested in one of those sectors where prices are now frozen, so you are upset.
But unlike many domestic firms and investors, who have equal reason to be to be aggrieved, you are foreign, which means that you can take your case to an international tribunal (the International Center for the Settlement of Investment Disputes, ICSID). A bunch of lawyers with no expertise in matters of financial crises or economic development meet and "arbitrate" the case, and then award you with a handsome compensation.
Should you as a government pay up?
Wait, there is more. It turns out that the initial arbitration panel made "manifest errors of law," according to a review committee subsequently set up by ICSID. But since there is no formal appeals procedure allowed in these arrangements, the damages still stand.
Now would you pay?
A long piece by Alan Beattie in the FT does great service by bringing these issues to light. (The case in question concerns Argentina.)
The FT article does not mention what is perhaps one of the most outrageous instances to date of foreign companies taking governments to court for changing the terms under which the original investments were made: Three Italian mining companies have filed a case against South Africa challenging the country's affirmative action policies (Black Economic Empowerment, BEE) designed to undo the ugly legacy of apartheid.
OK, I know that the bilateral investment treaties (BITs) under which these arbitration cases are filed are entered into voluntarily by host governments anxious to attract foreign investors. And I have nothing against rules that enable investors to take governments to court. It is the the privileged treatment of foreign investors over domestic investors and the patent disregard for due process that I find grating.
UPDATE: I should have mentioned this paper, which shows that there are scant benefits to BITs in terms of attracting foreign investment. And do read the long comment below by Jurgen Kurtz which is very interesting.
UPDATE2: See also this interesting paper on this subject.