THE POLITICAL-ECONOMY OF FINANCIAL INTERNATIONALIZATION IN THE DEVELOPING-WORLD

In the last decade a growing number of developing countries have opene d their financial systems by liberalizing capital flows and the rules governing the international operations of financial intermediaries. On e explanation of this rush toward greater financial internationalizati on is that increasing interdependence generates domestic and foreign p olitical pressures for capital account liberalization. While we find e vidence for that hypothesis, we find that the proximate cause in devel oping countries more frequently is found in balance of payments crises . Politicians perceive that financial openness in the face of crisis c an increase capital inflows by indicating to foreign investors that th ey will be able to liquidate their investments and by signaling govern ment intentions to maintain fiscal and monetary discipline. The argume nt is explored through case studies of Chile, Indonesia, Mexico, and S outh Korea.