Banking on Democracy: The Political Economy of Private Bank Flows in Emerging Countries Javier Santiso Chief Economist & Deputy Director OECD Development Centre ABCDE World Bank.
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Banking on Democracy: The Political Economy of Private Bank Flows in Emerging Countries Javier Santiso Chief Economist & Deputy Director OECD Development Centre ABCDE World Bank Conference 2007 Bled, Slovenia May 2007 Wall Street and the City are starting to take a fresh look at emerging markets. During the 1990s, financial and economic variables dominated their analysis. Over the 2000s, political and ethical variables are increasingly growing in relevance. In 2004 Rexiter Capital Management, a UK based asset maneger, launched the world’s first “sustainability” investment strategy exclusively focused on emerging markets. Previously, Calpers - a major US pension fund with nearly USD 170 billion of assets under, which started to invest in emerging markets by the beginning of the 2000s – also started to consider non-financial criteria such as political stability, transparency and labour rights. 2 2 Bankers also started to increasingly take into account other variables to assess their investment decisions around the world. In 2003, a leading group of top global bankers launched the Equator Principles, an initiative led by 10 of the world’s largest banks to address the social and environmental impact of the projects that they finance. Political issues such as human rights seem to be now on their radar screens. But what about democracy ? What about political regimes? Are they taken into account by banks when they decide to invest or not in a country? Put in another way, do banks have political preferences? 3 3 1 Banks in Emerging Countries: Stylized Facts 2 Banks and Political Regimes 3 Banks and Policy Stability. 4 Banking on Demorcacy: Politics Matters Institutional and political environment influence international capital transactions. Institutional quality is the most important variable explainging Lucas’ Paradox (Alfaro et al., 2003 and 2005). FDI in particular is sensitive to politics. Countries with weaker democratic rights tend to attract less US FDI capital (Rodrik, 1996). FDI private investors significantly increased their investments in the three years following the shift to democratic rule (Pei and Lyon, 2003). Investments made by multinationals are higher in democratic countries in terms of FDI per capita (Harms and Ursprung, 2002, Busse, 2003). 5 5 Politics Matters Regarding banks, politics and institutions are also key determinants of international banking activities (Papaioannou, 2004): a fall of five percent in the political risk of the recipient country is accompanied by a two percent rise in the volume of bilateral bank lending. The claims of US, Spanish and Italian banks tend to be sensitive to transaction costs (i.e. informational costs) but also to the role of government intervention in the financial sector as well as country risk, which includes not only economic and financial variables but also political factors (García-Herrero and Martínez-Peria, 2004). All in all, banks tend to invest in countries with high-quality institutions and allocate credit to countries that are not characterised by corruption, and which have efficient legal systems. 6 6 Two synchronized trends Over the past decade, foreign bank claims took off as part of the process of greater financial integration and the opening up of emerging countries to capital flows Among emerging countries, Latin America and Eastern Europe experienced the biggest increase, rising by more than 110% and 165% respectively. In both areas democratization has been particularly intensive. 7 7 Some stylized facts: The 90’s recovery Foreign Claims 600000 (m illions $) 500000 400000 300000 200000 100000 Q4 2003 Q4 2002 Q4 2001 Q4 2000 Q4 1999 Q4 1997 Q4 1995 Q4 1993 Q4 1991 Q4 1989 Q4 1987 Q4 1985 Q4 1983 0 Africa & Middle East Asia & Pacific Em erging Europe Latin Am erica/Caribbean Source: Javier Rodríguez and Javier Santiso, OECD Development Centre, Working Paper 2007 8 8 Some stylized facts: Where? Foreign Claims 50 (% of total of em erging m arkets) 45 40 35 % 30 25 20 15 Q4 2003 Q4 2002 Q4 2001 Q4 2000 Q4 1999 Q4 1997 Q4 1995 Q4 1993 Q4 1991 Q4 1989 Q4 1987 Q4 1985 Q4 1983 10 Africa & Middle East Asia & Pacific Em erging Europe Latin Am erica/Caribbean Source: Javier Rodríguez and Javier Santiso, OECD Development Centre, Working Paper 2007 9 9 Some stylized facts: A Latin American perspective 18 16 14 Foreign Claims on Latin America & Caribbean (% of total of em erging m arkets) 12 10 % 8 6 Argentina Brazil Chile Mexico Q4 2003 Q4 2002 Q4 2001 Q4 2000 Q4 1999 Q4 1997 Q4 1995 Q4 1993 Q4 1991 Q4 1989 Q4 1987 Q4 1985 Q4 1983 4 2 0 Venezuela Source: Javier Rodríguez and Javier Santiso, OECD Development Centre, Working Paper 2007 10 10 Some stylized facts: Who? Main countries origin of Foreign Claims towards World Germany U.K. Switzerland France Netherlands Japan % of total* Europe** Germany Italy Belgium France Netherlands Austria % of total* 16,4 10,79 10,25 8,95 7,92 7,41 28,15 11,54 9,93 8,7 6,25 6,25 Emerging Countries % of total* U.S.A. 15,58 Germany 14,44 U.K. 10,52 Spain 9,99 France 9,08 Netherlands 6,36 Africa & Middle East France U.K. Germany U.S.A. Switzerland Japan Asia & Pacific U.S.A. U.K. Japan Germany France Netherlands Spain U.S.A. U.K. Germany Netherlands Canada * % of the total emerging countries receive % of total* 23,74 17,33 14,92 7,24 5,28 3,78 % of total* Latin America & Caribbean % of total* 21,34 15,69 10,39 10,22 8,38 7,66 34,27 22,26 7,96 6,35 6,35 5,48 ** European emerging countries Source: Javier Rodríguez and Javier Santiso, OECD Development Centre, Working Paper 2007 11 11 The political economy of bank lending: The French Touch French Foreign Claims to countries that are non-recipients of US finance in 2004 and 2005 (% of the total emerging countries receive) France Foreign Claims (% of the total emerging countries receive) Sao Tome and Principe 100 Mali 75,5 Somalia 100 Togo 66,5 Wallis/Futuna 100 Mauritania 54,5 New Caledonia 99,1 Benin 54,5 French Polynesia 97,0 Rwanda 52,7 Djibouti 94,3 Mozambique 46,3 Guinea 92,7 Lesotho 41,9 Burkina Faso 91,0 Laos 34,8 Comoros Islands 90,0 St.Vincent 34,7 Burundi 89,1 Cambodia 33,3 Congo 87,3 Cuba 28,0 Madagascar 83,1 Source: Authors based on BIS data (% of the total emerging countries receive) Source: Javier Rodríguez and Javier Santiso, OECD Development Centre, Working Paper 2007 12 12 1 Banks in Emerging Countries: Stylized Facts 2 Banks and Political Regimes 3 Banks and Policy Stability. 13 Do bankers love democracy? A Latin American Perspective 2000 1998 1996 Consolidation of Democracy Brazil 150000 11 130000 9 110000 7 Foreign Claims Consolidation of Democracy 14 14 2000 1 1998 50000 1996 3 1994 70000 1990 5 1988 90000 1986 2000 1998 1996 Consolidation of Democracy 1994 2000 1998 1996 1994 11 10,5 10 9,5 9 8,5 8 7,5 7 1994 1992 1990 1988 1984 1986 Foreign Claims Foreign Claims Consolidation of Democracy Argentina 100000 90000 80000 70000 60000 50000 40000 30000 20000 50000 1984 Foreign Claims 1992 1990 1988 1986 1984 0 70000 1992 2 90000 1992 4 110000 1990 6 11 10 9 8 7 6 5 4 3 2 130000 1988 8 Mexico 150000 1986 10 1984 Chile 55000 50000 45000 40000 35000 30000 25000 20000 15000 10000 Do bankers love democracy? A Latin American Perspective Peru 18000 16000 14000 12000 10000 8000 6000 4000 2000 6,3 5,8 Uruguay 8000 12 7000 11 6000 5,3 5000 10 4,8 4000 9 2000 1998 1996 1994 1992 1988 1990 Consolidation of Democracy Guatemala 2500 10 2 0 0 Foreign Claims Consolidation of Democracy 15 15 2000 500 1998 4 1996 1000 1994 6 1992 1500 1990 8 1988 2000 1986 2000 0 1998 0 1996 2 Consolidation of Democracy 1986 7 1984 2000 1998 1996 1994 200 1994 4 1992 400 1990 6 1988 600 1986 1000 10 8 1984 3,8 8 Foreign Claims 800 Foreign Claims 2000 Consolidation of Democracy Nicaragua 1000 4,3 1984 Foreign Claims 1992 1990 1988 1986 1984 3000 Executive assaults and foreign banks in Latin America Executive Assaults Country Argentina Bolivia Brazil Chile Colombia Ecuador Paraguay Mexico Peru Uruguay Venezuela Period Analyzed % of country-year with at least one assault 1983-2002 (20 years) 1982-2002 (21 years) 1985-2002 (18 years) 1990-2002 (13 years) 1979-2002 (25 years) 1979-2002 (25 years) 1989-2002 (14 years) 1979-2002 (25 years) 1980-2002 (25 years) 1985-2002 (18 years) 1979-2002 (25 years) 30% Foreign Bank Presence (% of total banks assets) 1990 2005 Increase 10 61 51 38% 6 49 43 0% 19 62 43 88% 8 34 26 n.a. 0 90 90 87% 4 61 57 1 59 58 19% 58% 28% 11% 42% 16 16 Blind to political colors Foreign Claims on Argentina 100000 90000 Foreign Claims on Brazil 160000 (m illions $) (m illions $) 140000 80000 120000 70000 Collor Menem 60000 100000 De la Rua 50000 40000 Franco Cardoso 2 80000 Menem 2 60000 30000 Lula Cardoso Chile Q4 2003 Q4 2002 Q4 2001 Q4 2000 Q4 1999 Q4 1997 Q4 1995 Q4 1993 Q4 1991 Mexico 17 17 Q4 2003 Q4 2002 Q4 2001 Q4 2000 Q4 1999 Q4 1997 Q4 1995 Fox Q4 1993 Q4 1991 Q4 1989 Q4 2003 Q4 2002 Q4 2001 Q4 2000 Q4 1999 Q4 1997 Q4 1995 Q4 1993 Q4 1991 Q4 1989 Q4 1987 Q4 1985 Q4 1983 15000 10000 Q4 1987 Lagos 30000 25000 20000 Salinas Zedillo Q4 1985 Frei (m illions $) Q4 1983 (m illions $) Alw yn Foreign Claims on Mexico 240000 220000 200000 180000 160000 140000 120000 100000 80000 60000 40000 Foreign Claims on Chile 45000 40000 35000 Q4 1989 Brazil Argentina 55000 50000 Q4 1987 Q4 1985 Q4 2003 Q4 2002 Q4 2001 Q4 2000 Q4 1999 Q4 1997 Q4 1995 Q4 1993 Q4 1991 Q4 1989 Q4 1987 Q4 1983 Q4 1985 20000 Q4 1983 40000 Bankers and Cabinet Turnover Argentina Bolivia Brazil Chile Colombia Ecuador Mexico Paraguay Peru Uruguay Venezuela Presidency Including months Menem Jul-89/Apr-95 Menem 2 May-95/Nov-99 De la Rua Dec-99/Dec-01 Zamora 1989/1993 de Lozada 1993/1997 Banzer 1997/2001 Collor Jan-90/92 Franco 92/Dec-94 Cardoso Jan-95/Dec-98 Cardoso 2 Jan-99/Dec-02 Alwyn Dec-89/Dec-93 Frei Jan-94/Dec-99 Lagos Jan-00/,,, Gaviria Jun-90/May-94 Samper Jun-94/May-98 Pastrana Jun-98/May-00 Borja Aug-88/Jul-92 Duran Aug-92/Jul-96 Bucaram Aug-96/Jan-97 Alarcon Feb-97/Jul-98 Mahuad Aug-98/Jan-00 Noboa Feb-00/Dec-02 Zedillo Jan-88/Dec-1993 Salinas Jan-94/Dec-00 Fox Jan-01/Act Rodrigues 1954/1993 Wasmosy 1993/Mar-98 Cubas Grau Apr-98/Mar-99 González Macchi Apr-99/Aug-03 Fujimori Apr-90/Mar-95 Fujimori 2 Apr-95/Mar-00 Paniagua Apr-00/Jul-01 Lacalle Apr-90/Mar-95 Sanguinetti 2 Apr-95/Mar-00 Battle Apr-00/Act Perez Jan-89/May-93 Velazquez Jun-93/Jul-94 Caldera Aug-94/Dec-98 Chavez Jan-99/Jun-00 Chavez 2 Aug-00/Act Source: based on BIS and Martínez-Gallardo (2004) Foreign Claims % of total Latam 14,73 18,35 17,34 0,12 0,16 0,42 29,52 28,83 31,39 25,87 6,36 8,63 9,03 3,47 4,60 4,17 1,87 1,25 1,07 0,98 0,75 0,34 27,27 23,60 38,21 0,33 0,40 0,34 0,30 1,41 2,88 2,97 1,52 1,58 1,09 9,66 8,53 4,66 4,55 3,94 Ministers Estability (% total) 53,45 34,48 31,03 32,50 32,50 42,50 21,88 42,71 31,25 20,83 37,29 55,93 23,73 35,78 45,87 29,36 18,10 28,45 12,07 16,38 18,97 15,52 41,98 41,98 22,22 26,98 36,51 17,46 23,81 44,90 51,02 13,27 53,70 38,89 25,93 36,92 13,08 33,85 18,46 10,77 Ministers Average duration in months 46 28 22 27 33 39 29 44 30 20 22 41 16 42 59 32 23 38 14 19 25 18 40 37 19 20 26 11 16 57 61 14 36 23 15 60 19 47 38 22 18 18 1 Banks in Emerging Countries: Stylized Facts 2 Banks and Political Regimes. 3 Banks and Policy Stability. 19 Bankers and Economic Policy Stability in Latin America Mexico 275000 Brazil 7 150000 6,5 130000 6 110000 5,5 90000 5 225000 175000 125000 6,5 6 5,5 5 4,5 4 3 EFW Index 2002 2001 1995 1990 2000 EFW Index Chile 55000 50000 45000 40000 35000 30000 25000 20000 15000 10000 8 7,5 7 6,5 6 Foreign Claims 2002 2001 2000 1995 5,5 1990 2002 2001 7,5 7 6,5 6 5,5 5 4,5 4 3,5 3 2000 1990 1985 1995 Foreign Claims 1985 2002 Foreign Claims EFW Index Argentina 100000 90000 80000 70000 60000 50000 40000 30000 20000 50000 1985 Foreign Claims 2001 4 2000 25000 1995 3,5 1990 4,5 70000 1985 75000 EFW Index 20 20 Bankers and Economic Policy Stability in Latin America 8000 6000 Foreign Claims 15000 4,5 10000 4 Foreign Claims EFW Index Peru 18000 16000 14000 12000 10000 8000 6000 4000 2000 0 5 2002 2001 2000 1995 1990 1985 4000 5,5 20000 8 7 2002 10000 6 2001 12000 6,5 25000 2000 14000 1995 16000 Venezuela 30000 1985 5,7 5,6 5,5 5,4 5,3 5,2 5,1 5 4,9 1990 Colombia 18000 EFW Index Bolivia 2000 7 6,5 6 5,5 5 4,5 4 3,5 3 1500 6 5 4 1000 500 3 Foreign Claims EFW Index Foreign Claims 2002 2001 2000 1995 1990 0 1985 2002 2001 2000 1995 1990 1985 2 EFW Index 21 21 The Search for Economic Policy Stability in Emerging Markets 5,1 4,9 10000 4,7 Foreign Claims 2002 2001 2000 1995 1990 4,5 1985 0 4,5 4 Foreign Claims EFW Index China 70500 5 6 60500 5,5 50500 40500 5 30500 20500 2002 20000 5,5 2001 5,3 2000 5,5 30000 6,5 6 1995 5,7 40000 India 45500 40500 35500 30500 25500 20500 15500 10500 5500 500 1990 5,9 1985 Turkey 50000 EFW Index Russia 60000 6 50000 5 40000 4 30000 3 20000 2 10000 1 0 0 Foreign Claims EFW Index Foreign Claims 2002 2001 2000 1995 2002 2001 2000 1995 1990 4 1985 500 1990 10500 1985 4,5 EFW Index 22 22 Correlations of Foreign Claims with: Economic Policy Stability Index, Consolidation of Democracy Index and Democracy Score. Correlations Ukraine India Venezuela Greece Russia Polonia Czech Rep Hungary Slovenia Brazil Romania Peru Paraguay Portugal China Tunisia Argentina Morocco Slovakia Uruguay Turkey Spain Colombia Chile Guatemala Mexico Bolivia Bulgaria Nicaragua Algeria Foreign Claims vs EFW 1985-2002 0,98 0,97 0,93 0,92 0,92 0,89 0,87 0,86 0,85 0,85 0,84 0,84 0,84 0,79 0,79 0,77 0,76 0,76 0,76 0,74 0,71 0,70 0,70 0,64 0,58 0,58 0,55 -0,76 -0,77 -0,96 Foreign Claims vs CoD 1984-2000 0,83 ----0,51 0,90 0,48 0,71 0,54 0,67 0,46 0,40 0,24 --0,57 ---0,30 0,77 0,88 0,64 0,72 0,86 0,08 --0,57 0,90 0,70 0,49 -0,28 0,13 -0,47 Foreign Claims vs DS 1984-2002 0,77 --0,32 0,30 0,74 0,42 0,60 0,39 0,56 0,20 0,49 0,12 -------0,44 0,14 --0,75 0,36 0,16 ---0,75 0,48 0,85 0,79 0,04 -0,19 -0,19 -0,53 Source: BIS, The Fraser Institute, Schmitter and Schneider (2004), and Polity IV 23 23 Based on : Javier Rodríguez and Javier Santiso, “Banking on Democracy: The Political Economy of International Private Bank Lending in Emerging Countries”, OECD Development Centre, Working Paper, 259, March 2007. Javier Rodríguez and Javier Santiso, “Banking on Development: Private Banks and Aid Donors in Developing Countries”, OECD Development Centre, Working Paper, 261,May 2007. www.oedc.org/dev 24 24 Banking on Democracy: The Political Economy of Private Bank Flows in Emerging Countries Javier Santiso Chief Economist & Deputy Director OECD Development Centre ABCDE World Bank Conference 2007 Bled, Slovenia May 2007