Walking the walk: Emerging market governments' credibility in international financial markets

Emerging market countries have experienced an unprecedented surge in both the volume and volatility of foreign investment inflows during the past two decades. While foreign investment inflows can contribute to growth and economic development, sudden investment outflows often trigger financial irises. To mitigate this risk of crisis, governments in emerging markets have adopted pro-market reforms, in large part to gain the confidence of international investors. Carrying out standard reforms, however, neither guarantees success in earning time confidence needed to attract foreign investment nor lessens vulnerability to crisis. Investors understand that reforms are not always permanent. Instead, as I argue, emerging market governments must also demonstrate that they are willing to "walk the walk," by incorporating enforcement mechanisms into such policy reforms that make their commitment to stable macroeconomic policies seem credible to international investors.;This dissertation answers the question: how can emerging market governments make their commitments to pro-market reforms and stable macroeconomic policies seen credible to international investors? I suggest that credibility is associated with interest groups that emerge during the process of adopting reforms. When interest groups are created that both share policy preferences with international investors and can influence domestic policy decisions, the groups serve as a signal to international investors that governments will remain committed to the reform agenda. To assess the validity of this theory, I compare the effects of two policy reforms that occurred m many emerging market countries in the 1990s: pension privatization and the adoption of fiscal responsibility laws. I draw on both quantitative evidence, based on analyses of cross-country, time-varying data for emerging market countries in Latin America, Eastern Europe and Asia, as well as qualitative evidence, based on interviews with policy makers and interest group leaders in Latin America.