New institutional economics (NIE): a possible theoretical foundation for the Multilateral Agreement on Investment (MAI)?

The Multilateral Agreement on Investment (MAl) represented an attempt by the Organisation for Economic Cooperation and Development's (OECD) member countries to create a comprehensive multilateral legal framework governing foreign investment, particularly foreign direct investment. After a three-year effort, negotiations for the MAl collapsed in December 1998. Considerable support remains however, for creating global rules on foreign investment. The issues of possible loss of nation states' sovereignty in favour of the Transnational Corporations (TNCs) and the possible loss of developing states' sovereignty and flexibility in drawing their own development agenda as a result of the MAl's implementation are at the heart of the debates over the MAL The New Institutional Economics (NIE) represents an influential body of economic theory that tries to incorporate the study of institutions into mainstream neoclassical economics and to investigate the implications for economic development and reform. The development of NIE from a theory of firm and contracts (Williamson, 1996) to a theory of global development and reform (North, 1990a) extends the neoclassical orthodoxy and brings relevant theoretical insights for, the logic behind and the implications deriving from, the MAl. The theoretical underpinnings provided by NIE to international agreements, such as the MAl, have been generally neglected. This thesis argues that the NIE is a possible theoretical foundation for the MAL This is argued by looking at the commonalties in terms of NIE's and the MAl's development and policy implications and by analyzing NIE's contribution to the official discourse on development and reform. First, this thesis argues that the MAl and NIE did not develop in a vacuum. They developed as social and intellectual reactions for dealing with significant changes in the world economy, particularly the increasing importance of TNCs and ofFDl within the context of persistent disparities between countries' levels of economic development. Second, this thesis argues that the MAl's logic and policy implications directly relate to NIE's recommendation for development and reform. Third, this thesis argues that NIE has helped redesign the official discourse on development and reform with FDl and global rules on investment gaining an increasing developmental role. This thesis contributes to the existing body of literature on the MAl and NIE in a number of ways. The contribution of this thesis to the MAl literature is in its insistence of (i) the need for clearer identification of the theoretical logic behind the MAl or future similar agreements; (ii) the relevance of any such agreement for developing countries; (iii) the need to oppose any such agreement not only by arguing that the outcomes will be undesirable but also that the underlying theory - in this case the NIE- is also flawed; and finally (iv) the need to analyze the MAl not just as an individual project that could determine the dynamics of the foreign investment transactions but as a fundamental part of an ongoing process of building a global institutional framework that determines the distribution of rights and power in the global economy. This thesis contributes to the NIE literature by (i) advancing the argument for a complementary Oliver Williamson- Douglass North framework and (ii) analysing the line of departure between NIE and neoclassical economics (NEO) in answering fundamental theoretical questions. Lastly, but not least, this thesis contributes to the theory and practice of international political economy by reinforcing the opinion that dominant social practices (MAl) are sustained and constituted by mainstream theoretical discourses (NIE).