The Power of Money: Global Capital and Policy Choices in Developing Countries

Extant studies of the impact that international phenomena have on policy choices, and those focused on the political economy of exchange‐rate regimes in particular, are incomplete because they do not consider the effect that reliance on global capital has on the policy preferences of domestic groups. Consequently, they cannot explain why some newly emerging market countries pursue fixed exchange regimes under political and economic conditions—such as recently completed elections, uncompetitive export sectors, and poor national economic performance—in which others have altered their policies. I argue that reliance on different types of foreign capital generates distinct capital‐specific policy preferences. Furthermore, rather than simply mimicking the preferences of foreign investors, domestic groups are likely to promote policies that reduce their capital‐specific risks and vulnerabilities. Panel logit models of exchange‐rate regimes in emerging market countries from 1973 through 2000 demonstrate that higher levels of democracy bolster these effects.