Banking on Democracy: The Political Economy of Private Bank Flows in Emerging Countries

1
Banking on DemocracyThe Political Economy of
Private Bank Flows in Emerging Countries

• Javier Santiso
• Chief Economist Deputy Director
• OECD Development Centre

ABCDE World Bank Conference 2007 Bled, Slovenia
? May 2007
2

• Wall Street and the City are starting to take a
  fresh look at emerging markets. During the 1990s,
  financial and economic variables dominated their
  analysis. Over the 2000s, political and ethical
  variables are increasingly growing in relevance.
• In 2004 Rexiter Capital Management, a UK based
  asset maneger, launched the worlds first
  sustainability investment strategy exclusively
  focused on emerging markets.
• Previously, Calpers - a major US pension fund
  with nearly USD 170 billion of assets under,
  which started to invest in emerging markets by
  the beginning of the 2000s also started to
  consider non-financial criteria such as political
  stability, transparency and labour rights.

3

• Bankers also started to increasingly take into
  account other variables to assess their
  investment decisions around the world.
• In 2003, a leading group of top global bankers
  launched the Equator Principles, an initiative
  led by 10 of the worlds largest banks to address
  the social and environmental impact of the
  projects that they finance.
• Political issues such as human rights seem to be
  now on their radar screens. But what about
  democracy ? What about political regimes? Are
  they taken into account by banks when they decide
  to invest or not in a country? Put in another
  way, do banks have political preferences?

4
1
Banks in Emerging Countries Stylized Facts
2
Banks and Political Regimes
3
Banks and Policy Stability.
5
Banking on Demorcacy Politics Matters

• Institutional and political environment influence
  international capital transactions.
• Institutional quality is the most important
  variable explainging Lucas Paradox (Alfaro et
  al., 2003 and 2005).
• FDI in particular is sensitive to politics.
  Countries with weaker democratic rights tend to
  attract less US FDI capital (Rodrik, 1996). FDI
  private investors significantly increased their
  investments in the three years following the
  shift to democratic rule (Pei and Lyon, 2003).
• Investments made by multinationals are higher in
  democratic countries in terms of FDI per capita
  (Harms and Ursprung, 2002, Busse, 2003).

6
Politics Matters

• Regarding banks, politics and institutions are
  also key determinants of international banking
  activities (Papaioannou, 2004) a fall of five
  percent in the political risk of the recipient
  country is accompanied by a two percent rise in
  the volume of bilateral bank lending.
• The claims of US, Spanish and Italian banks tend
  to be sensitive to transaction costs (i.e.
  informational costs) but also to the role of
  government intervention in the financial sector
  as well as country risk, which includes not only
  economic and financial variables but also
  political factors (García-Herrero and
  Martínez-Peria, 2004).
• All in all, banks tend to invest in countries
  with high-quality institutions and allocate
  credit to countries that are not characterised by
  corruption, and which have efficient legal
  systems.

7
Two synchronized trends

• Over the past decade, foreign bank claims took
  off as part of the process of greater financial
  integration and the opening up of emerging
  countries to capital flows
• Among emerging countries, Latin America and
  Eastern Europe experienced the biggest increase,
  rising by more than 110 and 165 respectively.
• In both areas democratization has been
  particularly intensive.

8
Some stylized facts The 90s recovery
Source Javier Rodríguez and Javier Santiso, OECD
Development Centre, Working Paper 2007
9
Some stylized facts Where?
Source Javier Rodríguez and Javier Santiso, OECD
Development Centre, Working Paper 2007
10
Some stylized facts A Latin American perspective
Source Javier Rodríguez and Javier Santiso, OECD
Development Centre, Working Paper 2007
11
Some stylized facts Who?
Source Javier Rodríguez and Javier Santiso, OECD
Development Centre, Working Paper 2007
12
The political economy of bank lending The French
Touch
French Foreign Claims to countries that are
non-recipients of US finance in 2004 and 2005 (
of the total emerging countries receive)
Source Javier Rodríguez and Javier Santiso, OECD
Development Centre, Working Paper 2007
13
1
Banks in Emerging Countries Stylized Facts
Banks and Political Regimes
2
3
Banks and Policy Stability.
14
Do bankers love democracy? A Latin American
Perspective
15
Do bankers love democracy? A Latin American
Perspective
16
Executive assaults and foreign banks in Latin
America
17
Blind to political colors
18
Bankers and Cabinet Turnover
19
1
Banks in Emerging Countries Stylized Facts
2
Banks and Political Regimes.
3
Banks and Policy Stability.
20
Bankers and Economic Policy Stability in Latin
America
21
Bankers and Economic Policy Stability in Latin
America
22
The Search for Economic Policy Stability in
Emerging Markets
23
Correlations of Foreign Claims withEconomic
Policy Stability Index, Consolidation of
Democracy Index and Democracy Score.
24

• Based on
• Javier Rodríguez and Javier Santiso, Banking on
  Democracy The Political Economy of International
  Private Bank Lending in Emerging Countries, OECD
  Development Centre, Working Paper, 259, March
  2007.
• Javier Rodríguez and Javier Santiso, Banking on
  Development Private Banks and Aid Donors in
  Developing Countries, OECD Development Centre,
  Working Paper, 261,May 2007.
• www.oedc.org/dev

25
Banking on DemocracyThe Political Economy of
Private Bank Flows in Emerging Countries

• Javier Santiso
• Chief Economist Deputy Director
• OECD Development Centre

ABCDE World Bank Conference 2007 Bled, Slovenia
? May 2007