UNDERSTANDING THE POLITICAL IMPLICATIONS OF FINANCIAL INTERNATIONALIZATION IN EMERGING MARKET COUNTRIES

The author explores the impact of financial internationalization on pr ospects for sustainable democratic developing in non-OECD countries. E xisting arguments rest on changes in relative factor scarcity drawing from neoliberal trade theory, on governments' decreasing ability to ta x increasingly mobile capital, on volatility of flows and on the risin g intensity of the ''market as prison'' phenomenon first identified by Lindblom in a domestic context. The causal logic implied in these dif ferent arguments is not consistent with evidence on the determinants o f North to South financial flows. A survey of empirical literature on capital flows, organized by a simplified capital asset pricing model, suggests that to the extent international investors in developing coun tries act rationally, they respond to international liquidity and glob al interest rates more than the specific actions of host country polic y makers. Investor herding and poor information also weaken the chains that supposedly bind Third World governments in an increasingly inter nationalized world. Financial internationalization does constrain capi tal-poor countries, but not in the ways alluded to in existing literat ure. The author concludes by stipulating several hypotheses about the causal link between financial internationalization and social democrac y in emerging market countries that are consistent with empirical evid ence on the determinants of North to South capital flows. (C) 1998 Pub lished by Elsevier Science Ltd. All rights reserved.