Domestic imperatives and the international arena: Essays in international political economy

This dissertation examines the effects of exposure to international markets on decision making by governments in emerging market economies. The growth of international financial markets has been accompanied by a transformation in economic policies in many developing economies. Developments in the international economy have constrained the policy choices of governments in developing countries. In turn governmental policy choices have influenced the pattern and size of trade and capital flows across countries. This interaction between domestic policy making and the international economy gives rise to a number of issues that are analyzed in this dissertation.The first essay analyzes whether a government in a developing country can resolve inefficiencies through the development of stock markets. The implications of well-developed financial markets for the pattern of investment and welfare are examined. It is found that stock markets have the potential to commit the government to pursue efficient policies.The second essay provides a caveat to the general notion that the growth of international capital flows enhances efficiency. The main result is that once the signaling aspect of policy choice is taken into account, the very attempt to attract more capital can lead to inefficiently low levels of investment. A nonmonotonic relationship between capital inflows and uncertainty is shown. Very low levels of uncertainty can actually lead to the collapse of investment. A country might, under some circumstances, prefer having a policy implemented by a government predisposed to opposing that policy on ideological grounds.The final essay analyzes conditions under which governments will find it politically expedient to enact reformist policies. The main result is that the political and economic to enact reformist policies. The main result is that the political and economic imperatives of governments might prevent reforms from being enacted, even though they benefit a majority. The reason is that the government is unable to precommit credibly to compensate potential losers from economic reform. While reforms benefiting either a minority or a vast majority may succeed, those benefitting a small majority might flounder.