Property Rights, Political Risk, Federalism

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Property Rights, Political Risk, Federalism

• 1. What is political risk?
• Assessing political risk, property rights
• Managing political risk
• Federalism
• Free trade
• Regulatory conflict and preemption

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Property Rights, Investment Political Risk
What is political risk? What sort of
political risks can undermine the value of a
firms investment?
Nationalization or creeping expropriation Law
or Policy change (regulatory monetary) Terrorism/
war/civil strife
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Example Oil Industry Early 20th c rapid
growth of international oil industry 1930s-70s
Latin American nationalizations 1960 OPEC
formed
How can firms contemplating investment in
developing countries predict political risk?
1960s-70s Middle east nationalizations
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Investing in Developing Countries
Political Risk
corporate managers came to view risk analysis as
an ivory tower exercise, rooted in academic
theory rather than managerial practice.
HBS Note on Political Risk
Then how do companies (or their investors or
insurers) decide when political risk is too
great? What characteristics do you think are
correlated with political-legal stability, or
negatively correlated with political risk?
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Investing in Developing Countries
Political Risk
What should investors look for?
1. Veto points in the policy process (e.g.,
divided government, separated powers,
federalism)? 2. System stability, but peaceful
political change? 3. Strong independent
bureaucracy judiciary? In other words,
credible commitments against arbitrary policy
changes. Like what?
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What is a taking for constitutional purposes?
Where does this idea come from?
5th Amendment Nor shall private property be
taken for public use without just
compensation. What is a physical taking? A
regulatory taking?

• Pa. Coal v. Mahon (1922)
• government could hardly go on if compensation
  were required for every diminution of property
  value caused by regulation
• if regulation goes too far it will be recognized
  as a taking

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Standard analysis of regulatory takings in U.S.

• Penn Central v. City of NY (1978)
• No set formula is ad hoc, factual inquiry
• Economic impact on claimant
• Interference with distinct investment backed
  expectations
• Character of governmental action
• Legitimacy of public purpose

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Lucas-type categorical takings Lucas v.
S.C.Coastal Council (1992)
1986 Lucas purchased lots for 975,000 to
develop high-end resort homes 1988 SC statute
prohibited construction on lots Trial court
determined that land now valueless (but had
nominal value) How did the court analyze this
problem? Did it use the Penn Central analysis?
If regulation leaves no economically beneficial
use of the property, then is a taking requiring
compensation. Was the land literally valueless?
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Investing in Developing Countries
Political Risk
How can corporate managers manage political risk?

• Insurance
• Sharing risk with host nation

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• Federalism and Government Relations
• Trade
• Multiple regulators
• Boundaries of jurisdiction/authority
• Multiple enforcers

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• Federalism, Governments Trade
• Shouldnt governments protect domestic jobs and
  local regulatory standards? Arent trade
  restrictions sensible and good?

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Federalism, Governments Trade
So if free trade benefits most consumers and
creates wealth, by and large, then why do
governments try to restrict it?

• Identified losers, unidentified winners
• Concentrated losers, diffuse winners
• Strategic, national security issues
• Way of life issues

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• What about protecting public health, safety and
  local community standards and traditions?
• EU Commission v. Kingdom of Spain
• Why is the European Commn suing Spain?
• Isnt Spain trying to uphold local standards and
  local consumer expectations?
• Why cant each country have its own standards,
  its own definitions of these terms?
• Can I sell brown lard and call it chocolate in
  Spain?

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• Europes Single Market
• Article 28 Quantitative restrictions on imports
  and all measures having equivalent effect shall
  be prohibited between Member States.
• Article 29 Quantitative restrictions on
  exports, and all measures having equivalent
  effect, shall be prohibited between Member
  States.

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• Europes Single Market
• Article 30 The provisions of Articles 28 and 29
  shall not preclude prohibitions or restrictions
  on imports, exports or goods in transit justified
  on grounds of public morality, public policy or
  public security the protection of health and
  life of humans, animals or plants the protection
  of national treasures possessing artistic,
  historic or archaeological value or the
  protection of industrial and commercial property.
  Such prohibitions or restrictions shall not,
  however, constitute a means of arbitrary
  discrimination or a disguised restriction on
  trade between Member States.

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U.S. Constitution The Commerce Clause Art. II
grants Congress the power to regulate Commerce
with foreign Nations, and among the several
States Does that language limit state power?
How?

• Dormant Commerce Clause
• Purpose of clause
• Gibbons v. Ogden (1824)
• Two-step test

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The Dormant Commerce Clause

• May states regulate cross-border commerce at all?
  
• What cant states regulate?
• City of Philadelphia v. New Jersey

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If intrastate and intra-EU protectionism is so
clearly prohibited under U.S. and EU law, why do
member states continue to enact such
legislation? So is the power of the EU and of
the American national government overriding and
absolute? Are their any limits to their
regulatory power?
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Federalism and Allocating Legal Authority
Drawing Boundaries

• The Federal Government exercises only the
  authority allocated to it under Article I, Sec. 8
  of the Constitution
• The Lopez case (1994)
• The European Union has the principle of
  subsidiarity

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Federalism and Allocating Legal Authority
Supremacy

• The Supremacy Clause of the U.S. Constitution
• Supremacy of EU law

This Constitution, and the Laws of the United
States which shall be made in Pursuance thereof
and all Treaties made, or which shall be made,
under the Authority of the United States, shall
be the supreme Law of the Land . . .