Mixed Blessings : Foreign Capital Flows and Democracy in Emerging Markets

In the 1980s and early 1990s many countries-in Latin America, Eastern Europe, East Asia, and elsewhere--replaced authoritarian governments with political democracy. Leaders of new democracies everywhere faced weak institutions, the challenge of inculcating unfamiliar democratic practices and ideals, and soaring popular expectations. Also during these years the trends jointly known as financial globalization dramatically altered the character of capital flows between advanced industrial and developing, or 'emerging,' economies. Previous to the late 1980s, official capital flows had bulked large, most flows were long-term, and most recipients were governments or state enterprises. From the early 1990s, private capital flows dominated, at least a third of net flows were short-term or potentially so, and a growing number of in-country borrowers were private firms, making individual financial decisions without deference to national plans or supposed strategic priorities. This essay maps some of the consequences of the new types of flows for democratic development. Among the likely benefits are a more efficient use of scarce capital resources, as allocation conforms more closely to market, rather than political, demands. Another benefit is pressure on corrupt, authoritarian states to allow a freer press and create a more honest and neutral regulatory framework. Likely costs of these financial trends include a more rapid transmission of externally generated financial crises, a structural bias toward enhancing the political power of capital as compared to that of workers, and a deepening of income inequalities during periods of orthodox structural adjustment. The political power of private business is likely to be enhanced, while that of government technocrats decreases; the implications of this trend for democracy depend greatly on prior conditions in each country