Between votes and capital: Democracy and financial integration in the developing world

This dissertation investigates how the internationalization of financial markets affects prospects for income redistribution and the consolidation of democracy in the developing world. I examine financial investors' responses to national elections and how, and under which institutional and economic conditions, these responses curtail left-wing governments' capacity to advance a redistributive agenda. After introducing the problem, the second chapter of the dissertation presents a model of optimal taxation that depicts the way incumbents decide how much income to redistribute, subject to voters' demands and the prospect of capital flight. It explains why increased capital mobility exacerbates the conflict between growth and redistribution in less developed economies, and how international liquidity cycles intervene in this dynamic. Statistical analyses that follow test the general logic of the model. Chapter 3 shows that financial investors tend to flee countries where the left replaces the right in government while chapter 4 evidences that capital flight during elections increases the likelihood that left-wing incumbents back down from a redistributive agenda and switch to conservative programs early in their term. The last two chapters focus on elections taken place in Brazil, France, Ecuador and Venezuela, in order to illustrate the mechanisms analyzed in the model proposed in chapter 2, as well as its major implications.