Political Risk Guarantees and Capital Flows: The Role of Bilateral Investment Treaties

Abstract

This paper examines the influence of political risk guarantees of bilateral investment treaties on debt and equity flows using panel data on middle income countries for the period 1984-2011. Adopting system GMM methodology, the paper empirically finds that ratified bilateral investment treaties with OECD countries have a combined positive influence on non-guaranteed debt flows and a direct positive influence on portfolio equity flows. The results highlight the importance of considering political risk guarantees in financial integration, regulation of financial markets and institutions, and capital liberalization.

Keywords: Political risk guarantees, bilateral investment treaties, capital flows, debt flows, equity flows

JEL Classification: F21, F34, G15, G18, K33