Electoral Particularism, Bank Concentration, and Capital Account Liberalization in Developing Democracies

Abstract

Extant research suggests that democracy fosters capital account liberalization in developing countries. Yet the data reveal that there exists substantial variation in the extent of capital account openness across democracies in the developing world. When do democratic governments in developing states liberalize their capital account policies? We hypothesize that the market concentration of domestic private banks has a positive effect on capital account liberalization, but only when the degree of electoral particularism in these states is sufficiently high. Specifically, we claim that highly market-concentrated private banks have interests and the capacity to lobby elected politicians to liberalize capital account transactions. We then argue that politicians in particularistic democracies will respond to such lobbying pressure by dismantling capital controls as they have political incentives to cater to the interests of powerful bankers. Statistical results from a comprehensive data set provide robust support for our main hypothesis.

Constraints, competition, and competitiveness: explaining the non-linear effect of democratization on political budget cycles

“…It has been shown to affect growth (Tavares and Wacziarg, 2001) and to condition the effect of inequality on growth (Persson and Tabellini, 1994). We also know that it fosters trade (Milner and Kubota, 2005) and capital account liberalization (Milner and Mukherjee, 2009; Mukherjee et al ., 2014); contributes to economic stability (Rodrik, 2000); and stimulates social spending (Ross, 2006). But what is its effect on PBCs?…”

Do international non-governmental organizations inhibit globalization? The case of capital account liberalization in developing countries

“…12 We proxy these interests using trade as a proportion of gross domestic product (GDP) and the Herfindahl index of market concentration of private-sector banks (where higher values indicate greater concentration). These data are from the World Development Indicators (WDI) (World Bank, 2012) and Mukherjee et al (2013), respectively.…”

“…1 Economists have focused mainly on macroeconomic determinants that may lead governments to liberalize (Eichengreen, 2001). Political scientists have identified a range of factors, largely focusing on international developments, such as technological innovations that made controls increasingly costly and ineffective (Andrews, 1994), and domestic factors, such as the role of interest groups affected by liberalization and institutions that channeled their demands (Brooks and Kurtz, 2007; Frieden, 1991; Mukherjee et al, 2013; Pepinsky, 2013; Quinn and Inclán, 1997). Others have explored transnational mechanisms and processes related to the interdependent nature of government policy decisions across nations (Brooks and Kurtz, 2012; Simmons and Elkins, 2004), the influence of the International Monetary Fund (IMF) (Chwieroth, 2007b; Mukherjee and Singer, 2010), or foreign-trained economists (Chwieroth, 2007a).…”

“… 12. For an opposing view, see Pepinsky (2013) and Mukherjee et al (2013), who argue that financial interests benefit from access to foreign capital. …”

Correlates of Crisis Induced Credit Market Discipline: The Roles of Democracy, Veto Players, and Government Turnover

“…The Polity2 index is taken from the Polity IV Database, which measures democracy based on election-related indicators such as competitiveness of political participation, the openness and competitiveness of executive recruitment as well as constraints on the chief executive(Marshall et al 2018). The break point of +4 is common in the literature (e.g.,Mukherjee et al (2014).23 An example of a collective veto player is an entire legislative chamber. For example, in the US, the president is one individual veto player.…”