Global Treaties and Domestic Politics: Do BITs Constrain Fiscal Policy in Developing Countries?
37 Pages Posted: 20 Dec 2018 Last revised: 13 Mar 2019
Date Written: November 16, 2018
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. Studies of BITs’ effects on policymaking have mainly asked whether BITs stifle regulatory policy, and for the most part have ignored the fiscal costs of those restraints. 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 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 105 developing countries from 1981 to 2009 supports our hypotheses.
Keywords: bilateral investment treaties, taxation, umbrella clauses, foreign direct investment
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