Capital Openness, Bilateral Investment Treaties, and Coups d’état

• In Event: The Politics and Economics of Bilateral Investment Treaties

Abstract

Bilateral investment treaties (BITs) have been the most visible and powerful legal protective mechanism underlying the growth of cross-border capital flows since its inception back in 1959 between Pakistan and Germany. BITs guarantee certain standards of investment protection in treaty language and implementation, including fair and equitable treatment, national treatment, repatriation of investment and return, compensation for direct and indirect expropriation, and agreement to international dispute arbitration venues such as the International Centre for Settlement of Investment Disputes (ICSID). Since BITs are initiated to overcome the time-inconsistency problem plaguing cross-border foreign direct investment (FDI) by reducing political and regulatory risks for foreign investors, most of scholarships in the literature examine whether conclusion of BITs are able to bring in foreign direct investment for developing countries (e.g., Buthe and Milner 2009, Kerner 2009, Allee and Peinhardt 2011, Haftel 2010). As a result, recent studies further investigate how BITs contribute to leadership survival and political stability in their signatories (e.g., Arias, Hollyer, Rosendorff 2018).

In line with the recent development on the stabilizing effects of BITs, in this paper we examine the relationships between capital openness, BITs, and the risk of coups in developing countries. This paper is distinct from previous studies by incorporating capital openness and BITs in the same analytic framework when investigating their effect on political stability, coups in particular. We argue that capital account openness increases the risk of coups because it opens a window for capital owners to move their asset abroad and “hollow out” their countries, so other elites act against political leaders and their cliques. By contrast, BITs function as a credible commitment of political leaders to long-term economic growth, which further mitigate the tension between capital owners and non-capital owners. Furthermore, we argue that BITs mediate the relationship between capital openness and coup risks. More specifically, countries with a higher level of capital openness have less incentive to sign BITs, thereby facing more risk of coups. Using data from 1960 to 2009 of 118 developing countries, results of our mediation analysis demonstrate that capital openness increases the risk of coups whereas BITs reduces it. Our results are robust to the inclusion of a large number of control variables, exclusion of outliers, and different model specifications. This paper contributes to the research agenda on the political economy of BITs.

Authors

• Wen-Chin Wu, Academia Sinica

• FANGJIN YE, MICHIGAN STATE