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Latin American Politics & Society 46.2 (2004) 151-165

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Financial Globalization, Democracy, and Economic Reform in Latin America

Susan Minushkin

Armijo, Leslie Elliott, ed. Financial Globalization and Democracy in Emerging Markets. New York: Palgrave Macmillan, 2001 [1999]. Figures, tables, bibliography, index, 368 pp.; paperback $24.95.
Haley, Mary Ann. Freedom and Finance: Democratization and Institutional Investors in Developing Countries. New York: Palgrave Macmillan, 2001. Figures, tables, appendixes, bibliography, index, 200 pp.; hardcover $69.95.
Williamson, John, and Pedro-Pablo Kuczynski, eds. After the Washington Consensus: Restarting Growth and Reform in Latin America. Washington, DC: Institute for International Economics, 2003. Figures, tables, appendix, bibliography, index, 373 pp.; paperback $30.

Financial globalization, it is argued, privileges neoliberal policy choices, debilitates democracy, and causes devastating financial crises that increase poverty and inequality in Latin America. Latin Americanists nevertheless have written few books that specifically treat the role of foreign portfolio investors in domestic political systems. A relatively recent collection of papers edited by Leslie Elliott Armijo seeks to do just that, albeit from the perspective of all developing countries rather than just that of Latin America.1

Another recent book, by Mary Ann Haley, shows how the "global herd" (Friedman 1999) of portfolio investors is not really a group of autonomous, independent decisionmakers, at least for emerging-market investments. Instead, it is a very small group of dedicated emerging-market experts that makes coordinated investment decisions and that influences and perhaps debilitates democracy because of its preference for stability and neoliberal economic policies.

An even newer book edited by Pedro-Pablo Kuczynski and John Williamson sets out the reform agenda for Latin American countries in the first decades of the twenty-first century. The new agenda bears only a faint resemblance to the much-maligned Washington Consensus policy reforms advocated by these same authors a decade ago; yet the reforms are billed as the next step needed to make the first-generation reforms more effective and less unfair in their distributive impact. [End Page 151]

The Power of Mobile Capital

The relationship between capital flows and democracy in Latin America has been much discussed, but little has been written on the specific mechanism through which globalized finance affects democracy. The most frequent accusation is that increased flows of portfolio capital privilege certain types of economic policy choices in government decisionmaking and rule out other choices. More specifically, many commentators argue that increased international capital mobility and Latin America's dependence on foreign capital flows result in neoliberal policy biases throughout the region. The typical causal mechanism proposed is that financial globalization increases the relative power of capital holders, particularly mobile capital holders and trade-oriented business, to the detriment of other groups, such as labor or domestic-oriented business. This occurs because those in the first group have a greater ability to threaten or actually to leave the country (taking their investment capital with them) if governments adopt policies they do not like than do those in the second group. Democracy is undermined because the privileged few have a greater voice in policy choices than the many hurt by neoliberal policies.

While the first part of this argument was extensively explored in a variety of books on Latin America in the 1990s, the link between increased relative power of capital holders and the quality of democracy in the region is still largely unexplored. Armijo and her contributors, however, address the question from the perspective of all emerging market countries in a series of general conceptual and theoretical chapters and case studies from a variety of emerging markets, including Mexico and Brazil. The central question her book explores is, what are the implications of changes in the forms of international capital flows for democratization?

Armijo, in her introduction and first chapter, provides a conceptual framework and working hypotheses from which the later case studies draw. She identifies six forms of international investments: foreign aid, foreign direct investment, bank loans to governments, bank loans to private firms, portfolio investments with governments, and portfolio investments in private firms, specifying a priori whether each form tends...


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