National governance and global lending

Abstract

Global capital markets expanded rapidly during the latter part of the 20th century. Many access these global capital markets, but many others watch from the sidelines. National political arrangements help account for systematic disparities in access to global capital. Investigators employ a variety of measures and strategies as they try to understand the influence of political arenas upon economic activity. As they try to access political effects, some use relatively objective measures based upon formal political institutional arrangements, and others use more subjective measures to reflect the influence of the political arena. I suggest the formal institutional approach works well for developed political economies but exposes research to measurement problems when applied to developing nations where political institutional arrangements are emerging and have yet to gain firm footholds in society. Using more subjective measures, I show that democracy and regulatory stability matter as they influence investor behavior. Lending in global capital markets correlates well with better regulatory arenas and greater democracy. These provide information to international investors about threats from the state, which affects expectations about the risk to investments from local arenas.