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Story | Education
3 November 2020

Op-ed: State capitalism and sovereign investors - between global governance and national sovereignty


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Georgios Dimitropoulos, Associate Professor of Law at QF member Hamad Bin Khalifa University’s College of Law, on state capitalism – including sovereign wealth funds – and the questions it may raise

State capitalism can be defined as an economic system whereby the state takes an active role in economic activity. The means of production may be organized and managed in a number of ways, including an active involvement of the state either directly or through public corporations – referred to as State-Owned Enterprises, or SOEs.

There are, of course, as many state capitalisms as states, but one may identify three main varieties: Chinese state capitalism, East Asian state capitalism, and Gulf state capitalism. State capitalism has exited the realm of the state and become a global paradigm of economic organization. SOEs have started operating internationally, and exercising great economic influence in a cross-border way; Sovereign Wealth Funds (SWFs) – state-owned investment funds comprised of public monies often derived from the surplus reserves of a country – have increasingly become more popular vehicles for governments to invest globally, and in a wide variety of sectors.

The Qatar Investment Authority (QIA) is one of the most successful sovereign investors worldwide. SWFs now have diversified portfolios in a very wide range of asset classes, industries and sectors, including infrastructure. QIA, for example, has established Qatari Diar for investment in the real estate and Hassad Food for investment in the food and agri-business sectors in Qatar and abroad.

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Sovereigns operate in the international economic order with the use of domestic institutions such as SOEs, SWFs, and other institutional investors like pension funds and are reshaping global governance and international economic law in a bottom up way. State capitalism is reshaping the foundations of global governance, but it also raises the issue of the protection of sovereign investments under International Investment Agreements (IIAs), and poses potentially challenges to the system of investor-state dispute settlement (ISDS).

While the institutions of state capitalism are trying to redefine the relationship between the state and the market, a different question persists: is the current system of international investment law positively, negatively, or neutrally predisposed towards state capitalism and its institutions? The vast majority of Bilateral Investment Treaties (BITs) and Investment Chapters of Free Trade Agreements have either been neutral on state capitalist investments or have explicitly included protections for governments, SOEs, and/or SWFs and their investments. For example, the Qatar-Singapore BIT explicitly includes “the Government and Governmental agencies of a Contracting Party” under the definition of “investor”.

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Sovereign investments flow mostly from the South to the North, and East to West. As a reaction, countries in the North and West have started developing mechanisms to reassert their own sovereignty as regards state capitalist investments. Investment Screening Mechanisms are on the rise to control inward investment flows from sovereign investors from emerging economies. The Committee on Foreign Investment in the United States (CFIUS) is the most striking example, alongside the European Union (EU) Foreign Direct Investment Screening Regulation that recently came into effect and is expected to result to some harmonization of investment screening mechanisms and procedures of EU member states and more rigorous foreign investment screening in the whole of the EU.

State capitalism is trying to redefine the relationship between the state and the market, suggesting a new political economy of global governance and international investment law. The variety of actors such as state capitalists and the multicentricity prompted because of state capitalism has led to the development of new layers of actors and institutions in the international investment regime.

These developments call for the need to design coherent and holistic domestic and international investment policies on behalf of governments, such as the State of Qatar, that use SOEs to further their sovereignty – as they are now under the microscope of foreign governments and international organizations. At the domestic level, the organization of the operations of SOEs in a transparent way and according to commercial criteria is becoming even more pertinent.

The prioritization of investment in the sustainability industries will, in the long run, be both more commercially viable for sovereign investors and will have less chances of raising the eyebrows of foreign governments. At the international level, it will be important to continue designing and adopting BITs that will protect outward sovereign investment – along the lines of the Qatar-Singapore BIT. Lastly, this policy must integrate the “intermediate” level of foreign investment promotion that includes Special Economic Zones such as the Qatar Financial Centre (QFC), the Qatar Free Zones, Qatar Science & Technology Park, and the Qatar Media City, and their institutions, such as the Qatar International Court and Dispute Resolution Centre.

The Juris Doctor program, through courses such as Global Economic Law and Governance, as well as the new LL.M. programs at HBKU College of Law provide students with the necessary knowledge and skills and help prepare lawyers and policymakers that are in the position to address the challenges posed by these new realities at the domestic and international levels of governance.

Georgios Dimitropoulos is an Associate Professor of Law at Hamad Bin Khalifa University’s (HBKU) College of Law. He is also a Research Associate at the University College London Centre for Law, Economics and Society and the University College London Centre for Blockchain Technologies. He studied law at the University of Athens, and holds an LL.M. from Yale Law School, as well as an LL.M. and a Ph.D. summa cum laude from the University of Heidelberg. Before joining HBKU’s College of Law, he was a Senior Research Fellow at the Max Planck Institute Luxembourg and a Hauser Research Scholar at New York University (NYU) School of Law.

Georgios’ research seeks to expand the boundaries of international economic law and dispute settlement, both thematically and methodologically. He uses mixed method approaches to unpack the complex relationship between international and domestic law. His work has appeared in journals such as the Washington Law Review, the Northwestern Journal of International Law & Business, the Journal of International Dispute Settlement, the Journal of World Investment & Trade, the Law & Practice of International Courts & Tribunals, the Journal of Law & Policy, and the Maastricht Journal of European & Comparative Law.

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