The political economy of financial internationalization in the developing world

Abstract

In the last decade a growing number of developing countries have opened their financial systems by liberalizing capital flows and the rules governing the international operations of financial intermediaries. One explanation of this rush toward greater financial internationalization is that increasing interdependence generates domestic and foreign political pressures for capital account liberalization. While we find evidence for that hypothesis, we find that the proximate cause in developing countries more frequently is found in balance of payments crises. Politicians perceive that financial openness in the face of crisis can increase capital inflows by indicating to foreign investors that they will be able to liquidate their investments and by signaling government intentions to maintain fiscal and monetary discipline. The argument is explored through case studies of Chile, Indonesia, Mexico, and South Korea.

The Political Economy of U.S. Foreign Direct Investment in Latin America: A Reappraisal

“…Preliminary testing of the pooled autocorrelation parameter indicated the presence of moderate autocorrelation (ρ = .53) in models specified without the lagged dependent variable. We followed Beck and Katz (1995;1996) and included a lagged dependent variable, U.S. FDI (t-1), in order to address this problem. Estimation of the model with the lagged dependent variable successfully controlled for serial correlation (ρ = -.13) in the model.…”

“…We performed the Cook-Weisberg test in preliminary trials and detected the presence of heteroscedasticity (χ 2 = 130.86; p <.001). To address this problem, we followed the advice of Beck and Katz (1996;1996) and used panel-corrected standard errors to estimate the model. Employing panel-corrected standard errors successfully addressed the problem.…”

Measurements of Capital and Financial Current Account Openness

“…Another early set of intensity measures covering both current and capital accounts was Haggard and Maxfield's (1996) coding of financial integration from in four countries from 1970 to 1990. 21 More recently, Kaminsky and Schmukler (2008) constructed a chronology of financial liberalization in 28 emerging markets and advanced economies for the years 1973-2005.…”

U.S. Foreign Economic Policy and the Significance of the National Economic Council

“…The prevailing research also focuses on financial crises. According to Haggard and Maxfield (1996), emergencies are the result of more liberal and open financial policies of developing nations. Radelet and Sachs (1998:37) claim that the International Monetary Fund (IMF) and World Bank “have arguably contributed to significant new moral hazards in international lending.” As liquidity shocks are imperfectly correlated across regions, banks hold interregional claims on other banks to provide insurance against liquidity preference shocks (Allen and Gale 2000).…”