Openness Without Liberalization: Why Bankers in Developing Countries Support Financial Internationalization

Abstract

Financial sectors in the developing world pressure governments to open capital accounts, a policy which standard theories of open economy politics predicts would harm their interests. I explain this apparent contradiction by studying international financial intermediation, showing that lenders prefer open capital accounts to lower the cost of capital, but also prefer ownership restrictions to avoid competing with foreign banks. I test the theory on two datasets on foreign entry restrictions in the developing world, and by examining interest group pressures for financial internationalization in Indonesia, Mexico, and Senegal. The findings add new theoretical perspectives to the study of financial internationalization in the developing world, and suggest further areas for research in the political economy of globalization.

Keywords: international finance, Indonesia, Mexico, Senegal, capital account liberalization, interest groups

JEL Classification: F21, G21, G28, L51