Bilateral Investment Treaties and Fiscal Constraints in Developing Countries

• In Event: Domestic Politics, Distributive Concerns, and Foreign Direct Investment Policy

Abstract

Abstract: Economic globalization often asks developing countries to trade policy autonomy for access to internationally mobile capital. That trade-off is particularly stark with respect to bilateral investment treaties (BITs), which promise increased FDI flows while ceding to investors the right to sue states for perceived to be treaty-non-compliant policies. How costly are those constraints? Studies on this topic have mainly asked whether BITs stifle regulatory policy, and for the most part have ignored associated fiscal costs. We argue that BITs have fiscal costs, and that those costs most directly emanate from umbrella clauses that allow foreign firms to use BITs’ ISDS clauses to challenge violations of side agreements that are often tax-specific and typically more constraining than the BITs themselves. Indirectly, as well, we argue that fiscal costs arise as BITs channel economic activity into multinational corporations, the least easily taxed part of the economy. Evidence from 114 developing countries from 1981 to 2009 supports our hypotheses.

Authors

• Cristina Bodea, Michigan State University

• Andrew Kerner, Michigan State University

• Fangjin Ye, Michigan State University