Covert Confiscation: How Governments Differ in Their Strategies of Expropriation

• Author: Jane Esberg,Rebecca Perlman
• DOI: http://doi.org/10.1177/00104140221089650
• Published date: 01 January 2023
• Date: 01 January 2023
• Subject Matter: Articles

https://doi.org/10.1177/00104140221089650

Comparative Political Studies

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DOI: 10.1177/00104140221089650

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Article

Covert Confiscation:

How Governments

Differ in Their Strategies

of Expropriation

Jane Esberg1 and

Rebecca Perlman2

Abstract

A substantial literature concludes that democratic-type institutions

curb governments’ propensity to expropriate foreign direct investment.

However, little attention has been paid to the strategies of expropriation

regimes employ. We theorize that more politically constrained regimes

will utilize expropriation methods that help them overcome institutional

impediments. Using data on expropriations in developing countries between

1960 and 2014, we show that rather than rely on the most direct and overt

forms of expropriation, constrained regimes tend to use more indirect

and covert methods, such as forced sale or contract renegotiation, tools

which can be harder to identify, easier to justify, and frequently face lower

legislative approval hurdles. Indeed, while more politically constrained

regimes are less likely to overtly expropriate foreign investment than less

constrained regimes, they are nearly as likely to do so covertly, introducing

new questions about the extent to which institutional constraints really

translate into improved protections for foreign investors.

Keywords

foreign direct investment, expropriation, democratic advantage, globalization,

political economy

1Princeton’s Empirical Studies of Conflict Project, Princeton, NJ, USA

2Department of Politics and the School of Public and International Affairs, Princeton

University, Princeton, NJ, USA

Corresponding Author:

Rebecca Perlman, Department of Politics and the School of Public and International Affairs,

445 Robertson Hall, Princeton University, Princeton, NJ 08544-1013 USA.

Email: rebecca.perlman@princeton.edu

1089650

CPSXXX10.1177/00104140221089650Comparative Political StudiesEsberg and Perlman

research-article2022

2023, Vol. 56(1) 3–35

4 Comparative Political Studies 56(1)

1. Introduction

Foreign direct investment (FDI) can provide important benefits to developing

countries, not only spurring productivity and growth but also encouraging the

introduction of new technologies. Yet in order to attract this potentially lucra-

tive form of capital, governments must be able to credibly commit not to

expropriate the property of foreign direct investors. A substantial literature

stemming from the work of Olson (1993) and North and Weingast (1989)

concludes that regimes with more democratic-type institutional constraints

have an inherent advantage when it comes to making such commitments.

Proponents of this view argue that although all regimes may face similar

temptations to expropriate, those governments with increased checks on their

authority through legislative oversight of the executive and public account-

ability should be less likely to act on those temptations (see, e.g., Jensen,

2003, 2006, 2008; Li, 2009; Li & Resnick, 2003). Such theories offer impor-

tant predictions about the rate of expropriation of FDI across various forms

of government, yet there is another element of variation on which these theo-

ries are largely silent: the strategy of expropriation.

While all forced divestment may be undesirable from the perspective of the

original property holder, there are important differences in how involuntary

ownership transfer can be accomplished and the extent to which this is likely

to be curbed by institutional impediments. The most overt forms of expropria-

tion, exemplified by such instances as Venezuela’s issuance of an Expropriation

Decree in 2010 ordering the immediate nationalization of a foreign-owned

glass-container company,1 represent clear and deliberate violations of the

investor’s property rights. By contrast, less outright methods of expropriation,

such as coerced sale or forced contract renegotiation, can similarly transfer

ownership of a private asset to the state without adequate compensation but

may be more difficult for third parties to distinguish from a mutual agreement.

This may allow states to dissemble about the degree to which they are actually

engaging in forced divestment. For example, when Bolivia coerced several oil

companies into selling to the state in 2006, the government made a great show

of claiming that the sale had been voluntary and then used this to argue that no

expropriation had in fact occurred (Quiroga, 2008).

In other words, unlike outright nationalization via executive decree, strat-

egies of expropriation that entail forcing the investor to agree under duress to

sell or otherwise transfer his stake to the state can help governments claim

publicly (albeit insincerely) that the terms of the transfer were fair. This not

only might help reduce the economic consequences of the expropriation and

any concomitant public backlash, but it may also allay the concerns of legis-

lative veto players that the act will lead other investors to pull out en masse,

Esberg and Perlman 5

a consideration that may be particularly important to legislators in so far as

they have investments in foreign-owned companies and other stocks that may

suffer reduced value as a result of domestic expropriations (Jha, 2015). In

fact, as recently as 2012, the Kyrgyzstan legislature blocked an attempt to

engage in outright nationalization of a gold mine while nevertheless later

permitting steps to be taken toward a forced contract renegotiation transfer-

ring a greater portion of the mine to the state (Dzyubenko, 2012). Moreover,

states can even engage in methods of expropriation that bypass the legislature

altogether by pursuing property transfers through extra-legal means, such as

when state-affiliated agents seize the asset in question without official

approval from the central government. Under such extra-legal strategies, leg-

islative constraints on the executive not only become entirely moot but gov-

ernments gain plausible deniability regarding their involvement in the

seizure, helping them avoid any domestic repercussions. Taken together, the

above discussion suggests that executives that face political impediments to

unilateral action may gravitate toward or even prefer methods of expropria-

tion that offer an alternative to the more outright and unambiguous strategy

of nationalization via decree. It also suggests that two of the primary mecha-

nisms often assumed by scholars to play a central role in protecting foreign

investors’ property rights from expropriation—legislative constraints and

audience costs—may be less effective at preventing methods of confiscation

in which government culpability is less clear cut.

Therefore, much as Kono (2006) has suggested that democracies tend to

use less conspicuous methods of trade protections, we theorize that more

constrained governments ought to use methods of forced divestment for

which culpability on the part of the government can be disguised or what we

term “covert” methods of expropriation. Such methods allow politically con-

strained regimes to enjoy the advantages of expropriation, while minimizing

the bite of institutional impediments. By contrast, minimally constrained

governments should tend to rely upon more explicit, outright methods of

property transfer or what we term “overt” forms of expropriation. Overt

expropriation, as exemplified by the previously mentioned Venezuelan case,

is typically accomplished via an official act of the legislature (where one

exists) or via executive writ. This is desirable for leaders with fewer checks

on their authority because it provides an immediate and sizable benefit that

accrues directly to the state without requiring any sort of extended show of

negotiation with the aggrieved party, as can be required in the case of forced

sales or contract renegotiations. At the same time, this strategy is also the

most obviously expropriatory and, as we will demonstrate, the most difficult

to achieve in the face of institutional impediments, which should make it less

viable for more politically constrained regimes.