OPINION – The Prevention of Economic Crises and International Investment Law
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OPINION – The Prevention of Economic Crises and International Investment Law


The Asian nations are party to several bilateral investment treaties (BITs) and to numerous regional trade agreements with chapters on investment protection. Furthermore, the ongoing negotiation of the Trans-Pacific Partnership Agreement has put this topic  among those at the top of the deliberations in the region. However, while the long-lasting economic problems that have persisted in the United States and Europe over the last years were not related to Asia, the continent itself had a major financial crisis at the end of the twentieth century. No world region today is immune to these events, whose adverse consequences on the economic system and the general population are significant.

The raw numbers of events during past crises portray a tragedy. Unemployment increases during a period of five years on average. The unemployment rate itself goes up about seven percentage points.[1] Housing prices decline on an average of 35.5% from peak prices and over six years. Average historical reduction in equity prices is 55.9% and lasts 3.4 years on average. Gross domestic product falls 9.3%, and the decline lasts two years on average.[1] Government debt rises 86% over the three years after the occurrence of a banking crisis. This significant impact is caused by a sharp reduction in tax revenue and significant increases in public spending to fight crises.[1]

This time the output losses of the Great Recession have already significantly exceeded those of recent crises. Output is, on average, 17% below the pre-crisis pattern after five years: the average of prior crises was 9%,[1] and there is evidence that the losses are more lasting. In the past, output returned to its pre-crisis level within five years. This time around, none of the countries that have experienced a banking crisis have returned to the pre-crisis output level.[1]

But there are other costs no less important and unaccounted for in economics: the political costs. Contrary to wars against external enemies, which rally societies around a common goal, economic crises fragment them and bring about severe political instability and civil unrest.[1]

It is for these reasons that research on the development of conceptual instruments aimed at the prevention of economic crises have received increasing attention by the International Monetary Fund, the U.S. Federal Reserve, and the European Central Bank, among other institutions. The tools are called Early Warning Models (EWMs). It is, then, important for international investment law to catch up with the conceptual developments in economics that the Great Recession is bringing about. Research at the Te Piringa – Faculty of Law, University of Waikato (New Zealand) seeks to do just that and is entitled The Great Recession and the New Frontiers of International Investment Law: the Economics of Early Warning Models and the Law of Necessity. Its author is Alberto Alvarez-Jimenez, one of the Faculty’s Senior Lecturers.

Alberto presents a comparison between the performance of EWMs and other tools, such as agency ratings and private analysts’ currency risks ratings, that policy makers use to anticipate economic crises, as well as the debate among economists on the meaningfulness of EWMs. He suggests ways in which international investment law should respond to this debate on the basis of the international case-law prompted by Argentina’s 2001 crisis. In particular, the research project evaluates the role that EWMs may have in the interpretation and application of emergency clauses in BITs and the customary rule of necessity embodied in Article 25 of the International Law Commission’s Articles on State Responsibility. To this end, the research project deals with the question of what happens in international legal terms when a State’s measures, put in place following an EWM and aimed at preventing an economic collapse, adversely affect foreign investors. The project also discusses the level of deference that future international arbitration tribunals in Asia and elsewhere may accord to States relying on EWMs when taking economic preventive action. In addition, University of Waikato Law scholar assesses the legal implications for a State when it fails to respond to consistent warnings sent by EWMs and subsequently faces a crisis. Can an Asian State, for instance, still claim the benefits of emergency clauses in bilateral investment treaties? Finally, the research project illustrates how international arbitration tribunals should deal with debates on the quality of the given EWMs. The third and final part presents the conclusions.

[1] Full list of references could be found in the full version of the article. This article was published in the Journal of International Economic Law in the third issue of 2014. You can read it on the Journal’s web page http://jiel.oxfordjournals.org/.  

Professor Alberto Alvarez-Jimenez

Waikato University Faculty of Law, New Zealand

Alberto Alvarez-Jimenez holds a Doctor of Laws degree from the University of Ottawa law. Alberto’s research agenda focuses on public international law, international trade law, and foreign investment law. He has published more than 25 articles in prominent peer-reviewed journals in the United States, Germany, the United Kingdom, Canada, the Netherlands and Switzerland. Professor Alvarez-Himenez is a Senior Lecturer with the Te Piringa – Faculty of Law, University of Waikato (NZ)  where in addition to promoting in depth assessments of facts and law, his teaching philosophy has a complementary principle: a constant encouragement to students to expand their intellectual horizons.