Have Institutional Investors Destabilized Emerging Markets PDF Download

This dissertation explores how portfolio capital affects democratization in developing countries by examining institutional investor practices. It addresses the dilemma presented by the international finance community's meritocratic system that simultaneously rewards austerity programs and stability. The shift from public finance to private capitalization is found to facilitate an anti-democratic strain within the recent wave of democratization. Chapter 1 describes the shift from official development assistance to private finance, and the growing importance of portfolio capital in emerging markets. A brief history of investment and loan instruments is presented. Chapter 2 investigates emerging capital markets for investor coordination and asset concentration. Findings indicate emerging market funds are influenced by fund location and have high levels of asset concentration within a few funds. Preferences of institutional investors are uncovered in Chapter 3 through an investor survey of the emerging market investment criteria. Stability is consistently valued over democratic institutions, even if repressive measures are sometimes needed. Chapter 4 focuses on the systemic factors shaping international financial constraints experienced by developing countries. Five levels of coordination are presented (ideological, intra-firm, inter-firm, market-level, institutional) through which common goals and outcomes emerge, producing varying degrees of cohesion over policy direction in developing countries. Chapter 5 examines investor efforts to exercise power in developing countries by drawing parallels between domestic and international investor activism. The increase of emerging market activism, combined with the reinforcement of corporate governance regulations, augments the potential power of large investment firms in developing countries. The last chapter tests the possibility that there is a relationship between the apparent investor preference for stability over democracy and the levels of political rights and civil liberties in emerging market countries. By constructing counterfactuals and correcting selection bias, I find that the 1980s and 1990s finance capital inflows controlled by institutional investors have not, in general, helped to increase democracy. These results indicate that those countries with higher rates of market capitalization as a percent of GDP are more likely to lose freedoms over time. Country experiences with investor demands complement this quantitative analysis.