Democratic (Dis)Advantage: Financial Integration, Crisis, & Threats to Inference

• In Event: The Political Economy of the Global Financial System

Abstract

To what extent can financial integration and domestic institutional differences among regime types be considered independent, and what consequences does this entail for inference? I argue that domestic institutional differences among autocracies and democracies affect and inhere in the structure of the global financial system wherein cross-border financial investments predominate among co-democracy pairs. This both presents a problem for causal inference in research designs in which regime type and investments flows are treated as independent, and once accounted for, helps explain certain domestic political economic outcomes such as the prevalence of financial crises among democracies occurring since the turn of the twenty-first century. I examine the structure of the global financial system with regard to regime type using IMF Coordinated Portfolio Investment Survey data for 155 countries over the period 2001-2012. Employing an additive and multiplicative effects network regression model, I find that the global network of cross-border portfolio asset investments are systematically patterned by co-democracy pairs. I provide a test of the inferential consequences and substantive implications of regime-patterned financial integration using a spatial model of financial crisis diffusion. I find that the prevalence of crises among democracies in the recent period results in part from these co-democracy investment relationships. This finding suggests a democratic disadvantage of greater financial crisis susceptibility resulting from democracies’ greater level of investment relationships and highlights the need to account for regime-patterned financial integration for the purpose of drawing inferential conclusions. In doing so, I qualify recent critiques of the “open economy politics” approach by re-centering the role of domestic institutions in system-level structures and build on the “democratic advantage” theory by extending it to a new class of financial assets in global finance from a networks perspective.

Author

• Devin Case-Ruchala