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.
Banking on Democracy
The Political Economy of International Private Bank Lending in Emerging Markets
Working paper
OECD Development Centre Working Papers
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Abstract
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