Double Jeopardy? The Use of Investment Arbitration in Times of Crisis

Cédric Dupont (Graduate Institute), Thomas Schultz, and Merih Angin (Harvard University), in D. Behn, O.K. Fauchald, and M. Langford (eds), The Legitimacy of Investment Arbitration: Empirical Perspectives, Cambridge University Press, forthcoming.

Abstract: Investment arbitration is increasingly making the headlines because of both its potential to overly restrict the policy space of states and its significant costs for parties. Against this background of negative side-effects, it is worth asking whether it is used predominantly in situations that at least appear legitimate. We focus on the hypothesis that investment arbitration is used as a response to the effects of two types of shocks on investors – shocks caused by severely dysfunctional governance at the national level and shocks caused by economic crisis. Whereas investment arbitration could gain legitimacy if used to redress or mitigate severe governance deficiencies, its use in the context of economic crisis could be viewed as putting the countries’ economy in double jeopardy. Investment arbitration would further hurt countries already in great difficulty and would thus be used in a situation that does not appear plainly legitimate. We test links between governance, economic crises and investment arbitration using an original dataset that includes investment claims filed under the rules of all arbitration institutions as well as ad hoc arbitrations. We find that bad governance, understood as corruption and lack of rule of law (using the WGI Corruption and WGI Rule of Law indexes), has a statistically significant relation with investment arbitration claims, but economic crises do not when considered separately. Yet, bad governance and economic crises considered together are a good predictor of when countries get hit by investment arbitration claims.

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