The Role of Democratic Governance and Indirect Expropriation in International Investment Treaty Violations

Abstract

Democracies are thought to violate treaties less frequently than non-democracies, yet democracies violate bilateral investment treaties (BITs) just as often as non-democracies. Though democratic governments may intend to meet their international obligations, and though democratic institutions provide greater political constraints to encourage compliance, investment agreements may conflict with the goal of maintaining domestic public support. Specifically, we argue that credible elections create strong incentives for governments to side with domestic voters over foreign business interests, and to pass legislation that violates investment agreements. We use a data set of BIT violation complaints that better captures potential indirect expropriation to confirm prior findings that show a difference in violations by regime type. Since policies are not passed immediately and companies do not file arbitration complaints instantly when a potential violation occurs, democratic governments are only more likely to be sued as their time in office increases. The results suggest that the ability of voters to sanction leaders is an important mechanism that incentivizes governments to pass legislation that potentially violates investment treaties through indirect expropriation.