No abstract

Despite significant research on the efficacy and inadvertent humanitarian and political effects of economic sanctions, surprisingly little is known about the possible economic and financial consequences of sanctions for target economies. Synthesizing insights from the currency crisis literature with sanctions scholarship, we argue that economic sanctions are likely to trigger currency collapses, a major form of financial crisis that impedes economic growth and prosperity. We assert that economic coercion instigates currency crises by weakening the economy and creating political risks conducive to speculative attacks by currency traders. To substantiate the theoretical claims, we use time-series cross-national data for the 1970-2005 period. The results from the data analysis lend support for the hypothesis that sanctions undermine the financial stability of target countries. The findings also indicate that the adverse effect of economic coercion on the financial stability of target economies is likely to be conditioned by the severity of the coercion and the type of actors involved in the implementation of sanctions. The findings of this article add to the sanctions literature demonstrating how economic coercion could be detrimental to the target economy beyond the immediate effect on trade and investment. It also complements and adds to the literature on political economy of currency crises that has so far overlooked the significant role that economic coercion plays in financial crises.

This article focuses on the nature of party systems to explain variations in foreign direct investment inflows within developing democracies. We hypothesize a positive relationship between the effective number of parliamentary parties and foreign direct investment inflows. Large effective number of parliamentary parties is indicative of the expropriation risks as well as stability of the political environment of host countries. We thus argue that expropriation risks are low when the presence of multiple parties makes drastic, impulsive changes in economic policies difficult. We also suggest that a larger number of parties represent diverse societal interests better, reducing the chances of underrepresented social groups driving political instability. The relationship between effective number of parliamentary party and foreign direct investment inflows is tested on a sample of 56 developing democracies from 1985 to 2011. The evidence presented lends strong support to the argument and is found robust to a number of alternative empirical scenarios.

Does democracy affect foreign exchange reserves? This paper identifies four possible explanations for the determinants of foreign exchange reserves. Using the relationship between public goods provision and political regime types as a conceptual centerpiece, it offers a theoretical framework in which these four arguments are pit against each other. The “insurance” and “social cost” arguments posit monotonously positive and negative relationships between democracy and reserves, respectively, each citing democratic governments’ propensity to provide public goods such as financial stability and public spending. The mercantilist and rentier state arguments together put forth a conditional hypothesis that autocracies serve particularistic interests of outwardly (inwardly) oriented elites more than democracies do through weak-currency/large-reserve (strong-currency/small-reserve) policies. Utilizing panel data covering 127 countries from 1975 to 2012, I find that more democratic regimes are associated with larger (smaller) volumes of reserves when the size of exporting sectors is considerably small (large).

Do policymakers under financial and political distress make undesirable policy choices? This paper attempts to answer this question by studying the relationship between democratization and currency devaluation under speculative pressures. The central argument is that young democracies exhibit relatively high probabilities of succumbing to speculative attacks, as the political cost of economic adjustment needed for defense is relatively high for these nascent regimes. The paper further contends that this relationship is stronger when the regime can mobilize fewer resources to defend their currencies. To test these arguments, this paper uses monthly data for 117 countries from 1975 to 2008. The results from statistical analysis provide corroborative evidence for these arguments.