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Banking on Democracy: The Political Economy of International Private Bank Lending in Emerging Markets

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  • Javier Rodríguez
  • Javier Santiso

Abstract

Private capital movements have risen in recent decades, and bank flows have been part of this story. Some empirical studies have analysed the political drivers of private international liquidity, but paradoxically very few have looked at the political economy of bank flows. Even less research exists on the role of politics in explaining cross-border banking movements towards emerging democracies. The present study links compiled indicators on democracy, policy uncertainty and political stability to international bank lending flows from data developed by the BIS. It provides an empirical investigation of the political economy of cross-border bank flows to emerging markets and tries to answer two questions. Do bankers tend to prefer emerging democracies? Do they reward democratic transitions as well as policy and political stability? One of the major findings is that politics do matter, and international banks tend to have political preferences; annual growth in bank flows usually booms in the three years following a democratic transition, especially in Latin America. Les flux de capitaux privés ont connu un essor sans précédents au cours des dernières années. Les flux bancaires ont pris part à cette dynamique. Néanmoins, excepté quelques rare travaux empiriques, peu de travaux ont été consacrés aux facteurs politiques expliquant cet essor, et encore moins de recherche a été dédiée à l’économie politique des flux bancaires privés. Le travail présenté aborde cette question en croisant une série d’indicateurs sur la démocratie, l’incertitude et la stabilité politique, avec les séries de flux bancaires développés par la Banque des Règlements Internationaux (BRI). Il propose une économie politique des flux privés bancaires internationaux en abordant deux questions : les banques préfèrent-elles la démocratie ? Tendent-elles à primer les transitions démocratiques, la stabilité des politiques publiques et la stabilité politique ? Un des résultats les plus intéressants du travail présenté est de corroborer que les facteurs politiques importent pour les banques internationales. Celles-ci tendent en particulier à augmenter leurs prêts internationaux dans les trois années qui suivent une transition démocratique. Cette tendance est particulièrement prégnante en Amérique latine où, pays vers lesquels les opérations de crédit bancaire internationale ont augmenté avec l’essor de la démocratie.

Suggested Citation

  • Javier Rodríguez & Javier Santiso, 2007. "Banking on Democracy: The Political Economy of International Private Bank Lending in Emerging Markets," OECD Development Centre Working Papers 259, OECD Publishing.
  • Handle: RePEc:oec:devaaa:259-en
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    File URL: http://dx.doi.org/10.1787/241233837210
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    References listed on IDEAS

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    1. Sapienza, Paola, 2004. "The effects of government ownership on bank lending," Journal of Financial Economics, Elsevier, vol. 72(2), pages 357-384, May.
    2. Shang-Jin Wei, 2000. "Local Corruption and Global Capital Flows," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, pages 303-354.
    3. Stein, Ernesto H. & Streb, Jorge M., 2004. "Elections and the timing of devaluations," Journal of International Economics, Elsevier, pages 119-145.
    4. Dani Rodrik & Romain Wacziarg, 2005. "Do Democratic Transitions Produce Bad Economic Outcomes?," American Economic Review, American Economic Association, pages 50-55.
    5. Rossi, Stefano & Volpin, Paolo F., 2004. "Cross-country determinants of mergers and acquisitions," Journal of Financial Economics, Elsevier, pages 277-304.
    6. Schultz, Kenneth A. & Weingast, Barry R., 2003. "The Democratic Advantage: Institutional Foundations of Financial Power in International Competition," International Organization, Cambridge University Press, vol. 57(01), pages 3-42, December.
    7. Tavares, Jose & Wacziarg, Romain, 2001. "How democracy affects growth," European Economic Review, Elsevier, vol. 45(8), pages 1341-1378, August.
    8. International Monetary Fund, 2000. "Spillovers Through Banking Centers; A Panel Data Analysis," IMF Working Papers 00/88, International Monetary Fund.
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    Cited by:

    1. Emmanuel Frot & Javier Santiso, 2011. "Herding in Aid Allocation," Kyklos, Wiley Blackwell, vol. 64(1), pages 54-74, February.
    2. Javier Rodríguez & Javier Santiso, 2007. "Banking on Development: Private Banks ans Aid Donors in Developing Countries," OECD Development Centre Working Papers 263, OECD Publishing.
    3. Christopher Hartwell, 2015. "Après le déluge: Institutions, the Global Financial Crisis, and Bank Profitability in Transition," Open Economies Review, Springer, pages 497-524.
    4. Sebastián Nieto Parra & Javier Santiso, 2008. "Wall Street and Elections in Latin American Emerging Economies," OECD Development Centre Working Papers 272, OECD Publishing.
    5. Daniel, L., 2008. "Foreign investors’ participation in emerging market economies’ domestic bond markets," Quarterly selection of articles - Bulletin de la Banque de France, Banque de France, pages 61-77.

    More about this item

    Keywords

    bank; capital flows; democracy & emerging markets;

    JEL classification:

    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • K00 - Law and Economics - - General - - - General (including Data Sources and Description)

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