By Zhang Qian[1]

Introduction

International investment law (IIL) has long claimed development as part of its legitimating rationale. The foundational premise of the bilateral investment treaty (BIT) regime—that protecting foreign capital from sovereign interference will, through market mechanisms, translate into host-state development—has shaped the architecture of thousands of treaties and the jurisprudence of hundreds of arbitral awards. Yet the nature and beneficiaries of that ‘development’ have rarely been subjected to sustained normative scrutiny within the legal framework itself. This post argues that the capability approach offers a more coherent normative foundation for the right to development (RtD) in IIL—one that reorients the regime’s developmental claims away from macroeconomic aggregates and toward the substantive freedoms of host state residents.

The Capability Approach: A Normative Reorientation

The capability approach, developed by Amartya Sen and extended by Martha Nussbaum, begins with a deceptively simple claim: development is not the mere accumulation of wealth, but the expansion of ‘real freedoms’ of human beings. What matters is not how much capital a society commands, but what people are actually able to do and to be, i.e., whether they can be adequately nourished, participate in political life, enjoy a healthy environment, or pursue the kinds of lives they have reason to value. Sen calls these substantive opportunities ‘capabilities’, and the specific activities or states of being a person achieves from within that opportunity set ‘functionings’. Nussbaum extends this framework by articulating a list of central capabilities, including life, bodily health, bodily integrity, senses, imagination and thought, emotions, practical reason, affiliation, concern for other species, play, and control over one’s environment.

This reorientation has significant methodological consequences. It renders GDP growth, capital inflows, and aggregate national income inadequate as measures of developmental success, because it insists on asking what happens at the level of actual individuals. A society may experience significant macroeconomic growth while particular communities within it are displaced, impoverished, or deprived of cultural continuity. On a capability account, this is not development. Rather, it is development for some, achieved at the expense of others.

Equally important is the concept of ‘conversion factors’: the social, political, and environmental mechanisms through which resources are, or are not, translated into actual capabilities. Two communities may receive equivalent infrastructure investment but experience radically different capability outcomes depending on whether they have access to complementary public services, whether they retain meaningful political voice, and whether the investment reinforces or undermines existing social arrangements. Evaluating development outcomes therefore requires disaggregated, localized assessment rather than reliance on national averages. This methodological insistence on the local and the individual is precisely what traditional IIL needs to improve and reform.

The Development Deficit in IIL

Against this normative backdrop, the structural features of the traditional IIL regime appear in a different light. The regime was not designed (or at least not sufficiently) to ask whether investment expands host community capabilities. It was primarily designed to protect capital from the outset. To be sure, ICSID jurisprudence briefly flirted with a development-oriented understanding of “investment”: Salini v. Morocco treated a contribution to the host State’s economic development as relevant to Article 25, but later decisions, including the annulment decision of Malaysian Historical Salvors v. Malaysia, made clear that ‘development’ is not a rigid jurisdictional threshold and that the analysis should turn instead on the now-familiar ‘contribution-duration-risk’ constellation.

As for the protection standards, the Fair and Equitable Treatment (FET) standard, as interpreted by many tribunals (e.g., Eco Oro v. Colombia, where the tribunal found a breach of FET despite the state’s legitimate measures to protect a vital wetland ecosystem), shields investors’ legitimate expectations regarding the stability of the host state’s regulatory environment at the moment of investment. Host states that subsequently enact progressive environmental legislation, higher labor standards, or redistributive taxation risk FET claims. The result is what scholars call ‘regulatory chill’: states, especially those with limited fiscal capacity, are effectively deterred from exercising their sovereign functions in ways that would expand resident capabilities, for fear of generating multi-million dollar arbitral liability. Besides, broad readings of indirect expropriation capture non-discriminatory public policy measures as compensable takings. Stabilization clauses bind successor governments to the concessions of their predecessors. Rules on free transfer of profits protect investors’ right to repatriate earnings without any corollary obligation to reinvest in the local economy. Cumulatively, these provisions enforce a capability-depleting legal architecture: one that systematically privileges the financial returns of the investor over the substantive freedoms of the host community.

The jurisprudential blind spots are equally significant. In the Lupaka Gold v. Peru award, an ICSID tribunal ordered Peru to pay over USD 40.4 million in compensation after indigenous communities blockaded a Canadian mining company’s extraction site to protest its ecological impacts. The tribunal categorized the community’s resistance as unlawful ‘third-party interference’ from which the state was obliged to protect the investor under the full protection and security standard. The residents had no standing in the proceedings. Their capability deprivation generated no countervailing legal obligation on the investor. This is not an anomaly. It reflects the regime’s foundational choice about who counts as a legal subject, and what counts as cognizable harm.

Reconceptualizing the Right to Development in IIL

Kéba M’baye, widely recognized as the first one who used the term ‘right to development’, emphasized that the RtD ‘should be seen as the prerogative of all peoples and individuals to be able to satisfy their needs in accordance with their inspirations, so far as the equitable enjoyment of the goods and services produced by the community permits’. Later, the RtD was first formally articulated in the 1986 UN Declaration on the Right to Development.

The RtD has been paralyzed for decades by a foundational ambiguity: does the right belong to the state, to collective ‘peoples’ or to individual human beings? The capability approach dissolves this impasse by providing a normative criterion. If development means the expansion of real freedoms, then its ultimate subject should be the host state residents, and the states are instrumental vehicles, not ends in themselves. This does not render states irrelevant; on the contrary, the state’s role is reconceptualized as that of a fiduciary, whose authority over foreign investment derives its legitimacy from its duty to protect and expand the capabilities of its residents. A state that authorizes a foreign investment generating significant GDP growth while decimating the livelihoods of a local community has not exercised its right to development—it has betrayed it.

Operationalizing this reconceptualization within IIL requires attending to two distinct but interrelated dimensions of the right, both grounded in the capability framework.

The first is the defensive dimension. Just as the capability approach insists on a minimum capability floor below which no individual should fall, IIL should recognize residents’ entitlement to resist investment activities that erode their existing capabilities. This means providing a legal basis for the social license to operate (SLO), i.e., the ongoing acceptance and approval of a project by the host community. This issue has surfaced in disputes such as Copper Mesa v. Ecuador, Bear Creek v. Peru and Gabriel Resources v. Romania, where tribunals and parties have increasingly engaged with the notion of SLO and the relevance of community acceptance to the legitimacy and sustainability of investment projects. Therefore, SLO also brought investors under the spotlight, especially when it came to the calculation of damages. If an investor fails to secure and maintain meaningful community consent, the host state should be entitled to intervene, either by revoking concessions or by mandating operational changes, without incurring ISDS liability, provided the intervention is proportionate and directed at protecting resident capabilities. The Lupaka Gold award illustrates precisely what the absence of this defensive dimension produces—a legal order that responds to community resistance not by requiring the investor to address its social license deficit, but by ordering the sovereign to suppress it.

The second is the constructive dimension. This is the more demanding, and ultimately more important, of the two. It asserts that host state residents hold an affirmative distributive entitlement—that is, a right to share actively in the economic value generated by the commercial exploitation of their local geography, resources, and labor. On a capability account, this claim is direct—if the conversion of local resources into foreign profit leaves resident capabilities unchanged or diminished, then the investment has not produced development in any meaningful sense, regardless of its contribution to national GDP. This dimension requires moving beyond ex post compensation for harms incurred toward ex ante benefit-sharing embedded in the investment relationship itself—for example, binding obligations on technology transfer, local employment, infrastructure provision, and reinvestment of a defined share of profits into local public services. Foreign investment, on this account, should be evaluated not merely by the capital it introduces but by the capability sets it durably expands.

Treaty Practice and the Possible Direction of Reform

A discernible, if uneven, shift is underway in treaty drafting that reflects elements of both dimensions. The Morocco-Nigeria BIT (2016) conditions treaty protection on an investment’s positive contribution to sustainable development and imposes binding human rights and environmental obligations on investors, including civil liability for harms caused in the host state—a direct expression of the defensive dimension. The AfCFTA Investment Protocol (2023) explicitly links investment protection to the host state’s right to regulate in the public interest, mandates disclosure of environmental and social impact assessments to local communities, and imposes direct obligations on investors to respect customary land rights. The EU-Angola Sustainable Investment Facilitation Agreement (2023) removes traditional ISDS altogether in favor of cooperative frameworks oriented toward investment facilitation for development. Each of these instruments, in different ways, begins to move the treaty regime toward a model where the developmental credentials of an investment—assessed in terms of its impact on resident capabilities—are a condition of its legal protection, not an afterthought.

At the level of dispute settlement, the ongoing reform discussions within UNCITRAL Working Group III offer a critical institutional window to correct the procedural exclusivity of the regime. The goal is to restructure the dispute framework so that one-sided evaluations of local conflicts, as seen in Lupaka Gold, are no longer legally tenable. Notably, expanding standing to allow affected communities to submit amicus curiae briefs and requiring tribunals to address those submissions in their awards, would begin to correct the epistemic imbalance built into the current system. Practice shows this is an acute problem; in the most recent Silver Bull Resources v. Mexico case, for example, the tribunal has explicitly rejected an amicus submission that sought to provide a perspective of local communities. Moreover, permitting host state counterclaims for investor violations of environmental and human rights obligations, as built on the remarkable case Urbaser v. Argentina, would rebalance incentive structures that currently reward non-compliance. Finally, diversifying arbitral panels to include expertise in human rights law and development economics would ensure that capability impacts are assessed by adjudicators equipped to understand them.

Conclusion

The capability approach does not offer a blueprint for any specific treaty clause or arbitral rule. What it offers is something more fundamental: a criterion for evaluating whether IIL’s developmental claims are genuine. If development means the expansion of real freedoms, measured by what people can actually do and be, rather than by capital flows and GDP aggregates, then the traditional BIT regime fails that test to a large extent, not incidentally.

Reforming IIL in a capability-sensitive direction requires, at minimum, giving legal force to both dimensions of the right to development: protecting existing capabilities from investment-induced erosion, and ensuring that investment actively expands the capability sets of host state residents. The treaty instruments and reform processes discussed above demonstrate that these changes are within reach. The normative case for pursuing them is, on a capability account, straightforward—an IIL regime that consistently depletes the freedoms of the people it claims to serve has lost its developmental legitimacy.

 

[1] PhD Candidate, Guanghua Law School, Zhejiang University. Visiting Scholar, Lauterpacht Centre for International Law, University of Cambridge