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The Political Economy of Financial Markets  

Federico Maria Ferrara and Thomas Sattler

The relationship between politics and financial markets is central for many, if not most, political economy arguments. The existing literature focuses on the effect of domestic and international political interests, institutions, and policy decisions on returns and volatility in stock, bond, and foreign exchange markets. This research bears implications for three major debates in political science: the distributive effects of politics, globalization and state autonomy, and the political roots of economic credibility and its tensions with democratic accountability. While the study of politics and financial markets is complicated by several theoretical and empirical challenges, recent methodological innovations in political research provide a window of opportunity for the development of the field.

Article

The Political Economy of Development Finance in Latin America  

Leslie Elliott Armijo

Finance is frequently, but incorrectly, judged a technical matter best left to experts. Equally mistaken is the exasperated conclusion encapsulated in the phrase “people, not profits,” which holds that capitalism, private investors, and markets are simply evil. Finance is necessary for economic development, but also has profound, and often unexamined, implications for social and political spheres. Channels for financial intermediation may be public or private, and national or foreign, implying tradeoffs among organizational forms. Public banks typically are superior in providing public goods and implementing national strategic plans, but private banks and capital markets normally are more efficient, assuming competitive markets. Savings may be sought within the national economy or from abroad, with domestic savings implying a smaller pool yet less subsequent international vulnerability, and foreign inflows offering potential abundance at the cost of external dependence. This framing yields four ideal-types of long-term finance (LTF): national public finance from state development banks; national private finance from domestic private banks and capital markets; foreign public finance via bilateral or multilateral aid or state investment (including from non-traditional lenders, such as China); and foreign private finance sourced from global investors seeking returns. Both national public and foreign public finance dominated long-term investment in Latin America in the early postwar decades of import-substituting industrialization. In the 1970s through the 1990s, they were succeeded by foreign private bank loans, followed by crisis and retrenchment. In the 21st century global political and market conditions brought a resurgence of foreign capital, including from both global private investors and non-Western public sources. Worries about problems arising from Chinese public finance to Latin America are likely overblown, as the quantity remains small, except in some Bolivarian Alliance countries. However, private foreign inflows, strongly promoted by Western-led multilateral actors, from the Organisation for Economic Co-operation and Development (OECD) to the World Bank, during the 2010s, may be more problematic. Excessive dependence on private securities markets funded by globally mobile capital often undercuts achievement of other valued societal goals such as reducing inequality and ensuring democratic accountability. Notwithstanding their predictable flaws, it may be time for a reemphasis on national, and possibly regional, public development banks.