Brazil: Economic Analysis Of International Law: International Agreements

Last Updated: 9 August 2018
Article by Amanda Celli Cascaes
Most Read Contributor in Brazil, July 2018

Abstract: International agreements represent an effective mean to solve externalities that arise from international relations, in order to reduce transaction costs and information asymmetry that may affect states, enabling them to reach an optimum point of efficiency in their relations. On the other hand, international agreements present their own problems and externalities, such as the conditions of uncertainty and difficulties of enforcement, which can affect the desired result from the interaction between countries. In this context, Law and Economics can be an efficient tool to assist in such issues, by means of incorporating an economic methodology to legal thinking. From the Law and Economics perspective applied to International Law, states can be seen as rational actors willing to maximize their welfare and international agreements are comparable to contracts, entered into by the parties with the expectation of mutual gains. Furthermore, International Law plays the role of coordinating the behavior of the states in order to address externalities and regulate fields of interests – task in which the contributions of Law and Economics can be of great value.

Resumo: Tratados internacionais representam uma forma efetiva de solucionar externalidades que surgem a partir das relações internacionais, a fim de reduzir os custos de transação e assimetria informacional que podem afetar os Estados, possibilitando-os atingir um nível ótimo de eficiência em suas relações. Por outro lado, acordo internacionais apresentam suas próprias externalidades, como as condições de incerteza e dificuldades de execução, que podem afetar o resultado desejado a partir da interação entre os Estados. Nesse contexto, a análise econômica do direito pode ser uma ferramenta eficiente para auxiliar em tais questões, por meio da incorporação de uma metodologia econômica ao pensamento jurídico. Do ponto de vista da Law and Economics aplicada ao Direito Internacional, Estados podem ser vistos como agentes racionais dispostos a maximizar seu bem-estar, e acordos internacionais são comparáveis a contratos, celebrados pelas partes com a expectativa de ganhos mútuos. Além disso, o Direito Internacional desempenha o papel de coordenar o comportamento dos Estados a fim de abordar as externalidades e regular áreas de interesse – tarefa na qual as contribuições da Law and Economics podem ser de grande valia.

INTRODUCTION

The relationship between law and economics has been historically characterized by a hostility. However, over the past decades, this view has changed, precisely because of the need for interaction between the two subjects. Law and Economics, through the incorporation of economic methodology to legal thinking, enables the interpreter to use a tool capable of assisting in the solution of the controversies that arise in many areas of law, such as contract law, tort law, criminal law and procedural law.

The fundamental premise for the economic analysis of law consists in the verification that the human being seeks what he considers to be the best for himself, acting in a rational way, in order to maximize his usefulness. By acting in such a way, individuals are influenced by the incentives they receive from the environment in which they live, generated from legal rules, which can be evaluated based on the economic efficiency generated by their application2.

In this sense, Law and Economics provided a scientific theory able to predict the effects of legal sanctions and measures on the behavior of the agents. For economists, sanctions are similar to prices, as people react to higher prices by consuming less of that given product3. When it comes to law, people will react to tougher legal sanctions by practicing less of that sanctioned activity.

As Law and Economics has proven to be a valuable tool to assist other areas of law in the assessment of the reactions and consequences of various measures and sanctions in the action of the agents, the application of such tool is being expanded to other areas of law in which this analysis was not historically made or thought. This work intends to demonstrate that Law and Economics can be useful to International Law, especially when it comes to international agreements.

The study has as its starting point the examination of the theory of Law and Economics, in order to provide an initial understanding of the theme and the guidelines of such theory, as well as an analysis of how institutes, concepts and themes of International Law can be studied in the light of Law and Economics. In the second part of the paper, we will analyze how an economic analysis of international agreements can be useful to better understand and solve issues related to signing, enforcement and compliance with agreements, as well as identify some solutions that are being proposed by scholars and that could be further developed.

PART I – INTERNATIONAL LAW UNDER THE FOCUS OF LAW AND ECONOMICS

A) LAW AND ECONOMICS' BACKGROUND AND METHODOLOGICAL ASSUMPTIONS

The main purpose of the Law and Economics' thinking is to incorporate an economic methodology to legal thought, which makes legal problems best solved through a cost/benefit analysis and identifies the elements involved in the process of decision making of rational agents. According to Armando Pinheiro4, agents react to the external incentives that they receive and legal rules shape these incentives and, therefore, influence in their decisions regarding trade, consumption, investments, among others.

In this sense, if law wants to prevent certain injuries from happening, for instance, the sanction imposed to the injurer should be severe enough that he does not get any advantage from his attitude. Otherwise, he may still opt to act in such a way that causes damages to someone else or to the environment, for example, by virtue of the economic benefits that such conduct may confer to him. This is what Steven Shavell5 indicates:

Given the assumption that the utility the injurer obtains from doing harm is not credited in social welfare, society wants to discourage the injurer's harmful act. To accomplish that, the damages that are imposed must exceed the utility that the injurer would obtain from his act. Therefore, damages may have to be higher than the losses caused

On the other hand, Rachel Sztajn6 highlights that law cannot ignore the impacts that its rules have in the agents' behavior, when it comes to defining sanctions or measures, but should also observe that law shapes the incentives and is likewise affected by the acts of the rational agents and the market:

Law, in its turn, by establishing rules of conduct ("deverser") that model relationships between people, should take into account the economic impacts that will result from the effects on the distribution or allocation of resources, the incentives that influence the behavior of the private economic agents. Thus, Law influences and is influenced by Economy and the organizations influence and are influenced by the institutional environment. (Free translation)

In view of this premise that law affect and is affected by the economy, it is important to analyze the three basic concepts of Law and Economics, which are maximization, balance and efficiency. Economics generally assume that each economic agent maximizes something (the consumer maximizes happiness; the politician maximizes votes, for instance), and a conception of rationality holds that a rational agent can sort the alternatives according to the degree of satisfaction provided.

Firstly, the meaning of maximization of utility can be better understood when we analyze the concept of scarcity. In summary, it means that the agents' desires will always be greater than the means or resources to satisfy them. In view of these shortages, the agent is induced to act rationally in order to choose the option that best meets his/her interests. This is the lesson of Cooter and Ulen7:

In practice, the alternatives available to the agent are restricted. For example, a rational consumer can sort alternative packages of consumer goods, and his budget restricts his choice. A rational consumer should choose the best alternative that the restrictions allow. Another common way of understanding this conception of rational behavior is to recognize that consumers opt for alternatives that are appropriate for achieving their goals. Understanding the best alternative that constraints allow can be described mathematically as maximization. (Free translation)

The concept of scarcity can be applied to International Law, as well pointed out by Gustavo Ferreira Ribeiro and José Guilherme Caiado8:

The inferences are immediate to the international level. There are not enough resources in the world to satisfy global hunger, eliminate pollution of the sea, conserve forests, eliminate unemployment, welcome refugees, eliminate international trafficking in children, and ensure peace, among others. Choices will be made and discussions will go through the legitimacy of these choices and how actors, if they want to achieve the goal with the least possible waste of resources, can maximize the intended results. (Free translation)

Regarding the model of rational choice that guides the conduct of agents, Mackaay and Rousseau9 highlight that it is directly connected with the premise of predictability of the agents' acts and, consequently, of the impact that certain legal measures will have on society:

The rational choice model allows for generalizations about human behavior. It gives humans a predictable line of conduct; supposes that humans will always choose among the available options the one that offers them the greatest satisfaction. This implies, for example, that if the cost of an option (price of a good to be purchased, sacrifice to take action) increases, affected people will less often choose this option (law of demand). (Free translation)

Secondly, the concept of balance can be explained by the assumption that, generally, interactions tend to balance, whether they occur in markets, club, games, business or weddings. In this sense, a balance is a pattern of interaction that tends to persist, unless disturbed or affected by external forces. This concept, which is almost a logical consequence of the concept of maximization, is also well explained in the work of Cooter and Ulen10:

We characterize the behavior of every individual or group as a maximizer of something. Maximizing behavior tends to push these individuals and groups toward a resting point, to an equilibrium. They certainly do not seek balance as a result; instead, they simply try to maximize what interests them. Nonetheless, the interaction of maximizing agents usually results in an equilibrium. (Free translation)

Finally, economists have several different definitions for efficiency. It is said that a production process is efficient when either two conditions are present: (i) there is no way to generate the same amount of product using a combination of lower cost raw materials; and (ii) there is no way to generate more production using the same combination of raw material. In strictly economic terms, efficiency refers to the relationship between the benefits and added costs to a given situation.

These three basic concepts (maximization, balance and efficiency), explained in an objective and succinct way in this section, are the key elements for explaining the economic behavior, especially in the areas of law that require coordinated interaction of the parties, such as contract and international law. The economic analysis conducted in the framework of each specific area of law will apply such concepts to the institutes and specificities of the area in question, in order to collaborate in solving problems and promoting more beneficial alternatives, adding the economic point of view.

When it comes to the application of the concepts of Law and Economics, the binomial efficiency and justice can be deemed critical. This happens because the economist will always value efficiency, but justice is the key element that rules the legal discussion. The difficulty is to adjust the economic efficiency (as part of the rational behavior) to the search for justice based on human behavior. Apart from the well-known difficulties of communication between the areas, the sense that law and justice are being affected by economists may seem uncomfortable, but economy can, in fact, work in collaboration with lawyers and law scholars in order to pursue justice efficiently.

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Footnotes

1 Mestre em Direito Civil pela Universidade Federal do Rio Grande do Sul (UFRGS). Especialista em Processo Civil pela Pontifícia Universidade Católica do Rio Grande do Sul (PUC/RS). Advogada.

2 PINHEIRO, Armando Manuel da Rocha Castelar; SADDI, Jairo. Direito, economia e mercados. Rio de Janeiro: Elsevier, 2005.

3 COOTER, Robert; ULEN, Thomas. Direito & Economia. 5. ed. Porto Alegre: Bookman, 2010.

4 PINHEIRO, Armando Manuel da Rocha Castelar; SADDI, Jairo. Op. Cit

5 SHAVELL, Steven. Foundations of economic analysis of law. Cambridge (USA): Belknap Press of Harvard University Press, 2004. p. 245

6 SZTAJN, Rachel. Direito e Economia. Rio de Janeiro: Elsevier, 2005. p. 102.

7 COOTER, Robert; ULEN, Thomas. Op. Cit. p. 3637.

8 RIBEIRO, Gustavo Ferreira; CAIADO, José Guilherme Moreno. Por que uma análise econômica do direito internacional público? Desafios e perspectivas do método no Brasil. Revista de Direito Internacional, Centro Universitário de Brasília (UNICEUB), v. 12, n. 2, 2015. p. 250251.

9 MACKAAY, Ejan; ROUSSEAU, Stéphane. Análise Econômica do Direito. 2. ed. São Paulo: Atlas, 2015. p. 31.

10 COOTER, Robert; ULEN, Thomas. Op. Cit. p. 37.

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