Negative Alchemy? : Corruption and Composition of Capital Flows

Crony capitalism and self-fulfilling expectations by international creditors are often suggested as two rival explanations for currency crisis. This paper examines a possible linkage between the two that has so far not been explored: corruption may affect a country's composition of capital infl...

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Main Author: Wei, Shang-Jin
Format: eBook
Language:English
Published: Paris OECD Publishing 2000
Series:OECD Development Centre Working Papers
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Collection: OECD Books and Papers - Collection details see MPG.ReNa
Summary:Crony capitalism and self-fulfilling expectations by international creditors are often suggested as two rival explanations for currency crisis. This paper examines a possible linkage between the two that has so far not been explored: corruption may affect a country's composition of capital inflows in a way that makes it more likely to experience a currency crisis that is triggered/aided by international investors' self-fulfilling expectations. Using data on bilateral foreign direct investment (FDI) and bilateral bank loans, this paper finds clear evidence that corrupt countries tend to have a particular composition of capital inflows that is relatively light in FDI. Earlier studies have indicated that a country that has such a capital inflow structure is more likely to run into a subsequent currency crisis (in part through self-fulfilling expectations of the international creditors). Thus, this paper has illustrated one particular channel through which crony capitalism can increase ..
Physical Description:29 p. 21 x 29.7cm