Mixed Blessings: Foreign Capital Flows and Democracy in Emerging Markets
47 Pages Posted: 6 Apr 1998
Recent decades have seen momentous shifts in the forms and quantity of capital transfers from advanced industrial countries, net creditors as a group, to developing countries, net debtors as a group. The 1950s and 1960s were the era of foreign aid and foreign direct investment; the 1970s was the heyday of commercial bank lending; and the 1990s has seen the rise of the new portfolio flows as world mutual fund managers snap up the stocks and bonds of each week's hot new investment destination from Mexico to the Philippines and surprisingly to Bulgaria, Kazakhstan, and Algeria. The 1980s and 1990s also have been a period of widespread democratization in developing and transitional economies, from Latin America, to East Asia, to Eastern Europe and Africa. This paper first examines the implications of the trend in the change in the forms of international flows implied by financial globalization and secondly examines the trend toward democratization. It suggests that the shift from a preponderance of public to overwhelmingly private sources of cross-border funds means that borrowing countries will find themselves less subject to the overtly political demands of creditor/donor countries but more constrained to implement neoliberal and perhaps inappropriate economic policies. A second shift from the public to the private sector as the direct recipient of capital flows within developing countries implies that incumbent governments will receive fewer political benefits from capital inflows, while the domestic political clout of big business will increase. A third secular trend toward more liquid forms of international investment brings a heightened risk of a balance of payments crisis for the borrowing country--which inevitably will be blamed on its government, responsible or not. None of these probably irreversible changes in the forms of capital transfers in global financial markets, unfortunately, is particularly auspicious for new or fragile democracies although the larger quantity of financial resources is welcome.
JEL Classification: F32, O16
Suggested Citation: Suggested Citation