Paul M. Vaaler
University of Minnesota



(Thursday, 21st May 2015)

Title : How Do Foreign Financial Actors Vote in Developing Democracies?

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The last 25 years have seen political transformation of many developing countries from military-led regimes, one-party states or dictatorships into more democratic systems often with multiple parties across the partisan spectrum vying for office in competitive elections.  How do prominent foreign financial actors like credit rating agencies, sovereign bond investors, multinational corporate investors and others respond when policies affecting the attractiveness of a developing country for investment are “up for grabs” during elections?  To answer that question, I turn to political business cycle (PBC) theory and combine aspects of opportunistic and partisan PBC models into an integrated theoretical framework explaining the attractiveness of developing countries during election years based on the partisan orientation of the incumbent government and the likelihood of its re-election.  I derive from that theoretical framework testable hypotheses predicting when local politicians are more likely to engage in election year spending sprees, and how foreign financial actors will respond to such sprees and the economic distortions they often prompt with lower sovereign credit ratings, demands for higher yields on sovereign bonds, less international lending and foreign direct investment.  I will present broad-sample statistical evidence related to these PBC hypotheses in foreign financial risk and investment behavior during presidential elections in developing democracies since the late 1980s. Find out how foreign financial actors “vote” in developing country elections and what their votes mean for international business and political economy research and policy in the 2000s.

Bibliographical references :

Snowden, Brian & Vane, Howard R.. 2005. Modern Macroeconomics: Its Origins, Development and Current State. Edward Elgar: Cheltenham, UK, 517-578 (“Chapter 10: The New Political Macroeconomics”).

Vaaler, Paul M., Schrage, Burkhard N., & Block, Steven A. 2005. Counting the Investor Vote: Political Business Cycle Effects on Sovereign Bond Spreads in Developing Countries. Journal of International Business Studies, 36(1): 62-88.

Vaaler, Paul M. 2008. How Do MNCs Vote in Developing Country Elections? Academy of Management Journal, 31: 21-44.

Hanusch, Marek & Vaaler, Paul M. 2013. Credit Rating Agencies and Elections in Emerging Democracies: Guardians of Fiscal Discipline? Economics Letters, 119: 251-254.