Electoral Particularism, Bank Concentration, and Capital Account Liberalization in Developing Democracies

Abstract

Extant research suggests that democracy fosters capital account liberalization in developing countries. Yet the data reveal that there exists substantial variation in the extent of capital account openness across democracies in the developing world. When do democratic governments in developing states liberalize their capital account policies? We hypothesize that the market concentration of domestic private banks has a positive effect on capital account liberalization, but only when the degree of electoral particularism in these states is sufficiently high. Specifically, we claim that highly market-concentrated private banks have interests and the capacity to lobby elected politicians to liberalize capital account transactions. We then argue that politicians in particularistic democracies will respond to such lobbying pressure by dismantling capital controls as they have political incentives to cater to the interests of powerful bankers. Statistical results from a comprehensive data set provide robust support for our main hypothesis.