Poor States or Poor Governance? Explaining Outcomes in Investment Treaty Arbitration

Abstract

Critics of the international investment regime have claimed that its institution of arbitration is biased against developing states. Others have countered by arguing that any difference in treatment is better explained by the lack of democratic governance in developing states. This paper uses the largest dataset on concluded investment treaty arbitrations compiled to date to test these competing assertions of development bias and governance conflation. Beginning with a theoretical framework for both hypotheses, it argues that we need to disaggregate the potential causal mechanism, which includes replacing the idea of democratic governance with that of governmental quality. Empirically, the paper finds that the development status of a respondent state is a consistently powerful and statistically significant explanation of investment treaty arbitration outcome. Even after the introduction of a range of control variables and finely-tuned quality of governance variables, poorer states remain vastly more likely to lose in arbitration than wealthier states. However, some caution is needed in interpreting these results and more precise research is needed on competing development bias theories.