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Negative Alchemy?: Corruption and Composition of Capital Flows

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  • Shang-Jin Wei

Abstract

Crony capitalism and self-fulfilling expectations by international creditors are often suggested as two rival explanations for currency crisis. This paper examines a possible linkage between the two that has so far not been explored: corruption may affect a country’s composition of capital inflows in a way that makes it more likely to experience a currency crisis that is triggered/aided by international investors’ self-fulfilling expectations. Using data on bilateral foreign direct investment (FDI) and bilateral bank loans, this paper finds clear evidence that corrupt countries tend to have a particular composition of capital inflows that is relatively light in FDI. Earlier studies have indicated that a country that has such a capital inflow structure is more likely to run into a subsequent currency crisis (in part through self-fulfilling expectations of the international creditors). Thus, this paper has illustrated one particular channel through which crony capitalism can increase ... Deux facteurs concurrents sont souvent avancés pour expliquer les crises monétaires : le capitalisme « de favoritisme » et les anticipations auto-entretenues des prêteurs internationaux. Il y a pourtant entre ces deux facteurs une relation qui n’a pas encore été étudiée : la corruption, qui affecte les flux de capitaux se dirigeant vers un pays dans un sens qui les rend vulnérables aux crises, crises elles-mêmes alimentées par les anticipations auto-entretenues des investisseurs internationaux. Ce document exploite des données sur les investissements directs étrangers et les prêts bancaires bilatéraux. Il en ressort que dans les pays corrompus, la composition des flux de capitaux est particulièrement pauvre en investissements directs étrangers. Or des études antérieures ont mis en évidence que les pays ayant ce type de composition des flux de capitaux étaient plus sensibles au risque de crise monétaire (notamment via les anticipations auto-entretenues des prêteurs internationaux). Ce ...

Suggested Citation

  • Shang-Jin Wei, 2000. "Negative Alchemy?: Corruption and Composition of Capital Flows," OECD Development Centre Working Papers 165, OECD Publishing.
    • Handle: RePEc:oec:devaaa:165-en
    DOI: 10.1787/201684580375
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    Citations

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    Cited by:

    1. Thierry Mayer, 2006. "Policy Coherence for Development : A Background paper on Foreign Direct Investment," SciencePo Working papers Main hal-01065640, HAL.
    2. repec:hal:wpspec:info:hdl:2441/10184 is not listed on IDEAS
    3. Mina, Wasseem, 2015. "Political risk guarantees and capital flows: The role of bilateral investment treaties," Economics - The Open-Access, Open-Assessment E-Journal (2007-2020), Kiel Institute for the World Economy (IfW Kiel), vol. 9, pages 1-38.
    4. Axel Dreher & Thomas Herzfeld, 2005. "The Economic Costs of Corruption: A Survey and New Evidence," Public Economics 0506001, University Library of Munich, Germany.
    5. Straub, Stephane, 2008. "Opportunism, corruption and the multinational firm's mode of entry," Journal of International Economics, Elsevier, vol. 74(2), pages 245-263, March.
    6. repec:spo:wpecon:info:hdl:2441/10184 is not listed on IDEAS
    7. Christoph Walkner, 2004. "Issues in corporate governance," European Economy - Economic Papers 2008 - 2015 200, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
    8. Peter Ignatiev, 2004. "Theoretical Models of Financial Crises," Economic Thought journal, Bulgarian Academy of Sciences - Economic Research Institute, issue 2, pages 110-130.
    9. repec:hal:spmain:info:hdl:2441/10184 is not listed on IDEAS

    More about this item

    Keywords

    capital inflows; corruption; crony capitalism; currency crisis;
    All these keywords.

    JEL classification:

    • F2 - International Economics - - International Factor Movements and International Business

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