To employ the Stiglitz Test once again

Joe Stiglitz has done some outstanding economic work in his time. But possibly a greater gift to humanity is the creation of the Stiglitz Test. When commenting upon a matter that is not economics if we take the opposite view to Joe then we’ll be correct.

As with this about the ISDS system - Investor-State Dispute Settlement - and how awful it is. We can also check this by considering that Global Justice Now! is against the system showing us that it must be wonderful.

Among the most notable of these is an arcane set of international agreements by which private investors can sue governments, known as ISDS: investor-state dispute settlement. These disputes are litigated not in public courts with impartial judges but in private arbitration – behind closed doors, and rife with conflicts of interest.

This is to get it - to slip into colloquial English - wholly arse over tip.

Imagine, for a moment, that the law in a place is whatever the law is. So, people invest, conduct economic activity, according to that law. The government then changes the law. The investors - those foreign capitalists say, evil as they are because they’re both foreign and capitalists - lose money as a result of that change in the law. Sometimes this will be something those - dastardly - foreign capitalists just have to suck up. The change in the law was just democracy and governance at work. Other times this will not be so: those capitalists, even foreign and dastardly as they were and are, are due compensation.

Say, the Russian Government decides to take Yukos off Mikhail Khordokovsy and his investors. Or Argentina Repsol off its owners.

We need somewhere actually impartial to adjudicate such claims. Public courts - those controlled by the very state whose activity is being questioned - might not meet that standard. Of course, of course, our courts are wholly and completely impartial. But those operated by Mr. Foreigner, J, well, it’s possible to sometimes muse that perhaps they’re not wholly and completely.

This is what the ISDS system is. The ability to take such compensation questions out of the, ahem, democratically controlled, court system and into something that is impartial.

An interesting little guide to how the systems differ is that both the Yukos and Repsol cases were decided very differently by the arbitration system than the domestic courts. Which is what leads to this:

Claim damages – and win them – they have. Because of the secrecy in which much of these actions are cloaked, it has been hard to assess the magnitude. Investigative reporting by the Guardian has given us a glimpse into exactly how large and consequential these suits have become, showing more than $120bn (£94bn) of public money has been awarded to private investors since 1975, $84bn to the fossil fuel industry alone.

Well, yes. To be colloquial again the system found that both countries roughly enough nicked those oil companies. Perhaps nationalised without compensation is better. Compensation then becoming due, of course.

There is also this:

In my view it has become a form of legal terrorism, that rich companies use to discourage countries from addressing the needs of their citizens and protecting the global environment.

Uruguay was sued when it proposed requiring cigarette companies to disclose that cigarettes are dangerous to one’s health – a disclosure that most advanced countries require. The labelling would, admittedly, discourage smoking – that was the point – and that in turn would hurt these companies’ profits.

Yes, but the interesting part is that Uruguay won. Changing cigarette labelling - whatever that does to ‘baccy company profits - is a just fine deployment of the law. Stealing a company isn’t. This is the sort of thing we actually have courts - impartial courts - to decide for us.

Which is all and everything that the ISDS system does. If someone thinks a government has nicked their money there’s an impartial forum for them to so make that claim in. Governments win the majority of such cases.

This country once went to war - The War of Jenkins’ Ear - over compensation for the confiscation of a citizen’s assets by some Johnny Foreigner government. We can’t help but think that sticking three lawyers in a room to chew it over - that arbitration process - is a better solution.

Of course, it’s also true that the existence of an impartial and external dispute resolution system limits the ability of governments to nick things. But we think that’s a pretty good idea too.

Tim Worstall