Banking on Democracy: The Political Economy of International Private Bank Lending in Emerging Markets
International Political Science Review, Vol. 29, No. 2, pp. 215-246, March 2008
32 Pages Posted: 12 Nov 2008
Date Written: March 10, 2008
Private capital movements have risen in recent decades, and bank flows have been part of this story. Some empirical studies have analysed the political drivers of private international liquidity, but paradoxically very few have looked at the political economy of bank flows. Even less research exists on the role of politics in explaining cross-border banking movements towards emerging democracies. The present study links compiled indicators on democracy, policy uncertainty and political stability to international bank lending flows from data developed by the BIS. It provides an empirical investigation of the political economy of cross-border bank flows to emerging markets and tries to answer two questions. Do bankers tend to prefer emerging democracies? Do they reward democratic transitions as well as policy and political stability? One of the major findings is that politics do matter, and international banks tend to have political preferences; annual growth in bank flows usually booms in the three years following a democratic transition, especially in Latin America.
Keywords: capital flows, banks, democracy and emerging markets
JEL Classification: F34, F21, G21, K00
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