Fight or Flight? Democratic Consolidation and Capital Flight in Latin America

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Since 1980, developing countries lost US$16.3 trillion dollars as a result of capital flight (Kar 2016) representing a major threat to international development efforts. This dissertation investigates why some democracies in the developing world experience much more capital flight than others. Using the experiences of Latin America democracies, the fundamental reasons for flight lie in the failure of these countries to consolidate their democracies. As a result of their failure to consolidate, they are highly vulnerable to popular mobilization by excluded groups demanding redistribution, which has the effect of increasing perceptions of political risk among asset holders and incurring flight.

In an area of the world where wealth, income, and power is chronically unequal, my central argument posits a causal sequence that begins with mass mobilization by social movements directed towards new redistributive public policies and in opposition to pro-market democratically elected governments. Typically, as mass mobilization strengthens, Leftist parties embrace the aims of popular movements whose electoral support subsequently increases to levels that allow them to form governments committed to redistribution. Under these conditions, as mobilization and support for the Left strengthened, asset holders’ perceptions of risk increase significantly, leading to capital flight.

Using a mixed methods research design combining quantitative analysis with qualitative case studies I present empirical evidence to support my argument. For the quantitative analysis, regression analysis was applied to a cross-sectional time series dataset for 18 democracies. My results show that when Leftist parties actually form governments - thereby sealing the process of democratic inclusion and triggering more capital flight - the magnitude of capital flight is often mitigated a) if a Leftist party forming a government had been established for some time, in which case it typically moderated its redistributive policies; and b) by the continued electoral strength of pro-capital parties able to defend the interests of asset holders and effectively oppose the Leftist government. I reinforced these findings with two case studies: one, a within-case longitudinal study of the impact of class mobilization on capital flight in El Salvador from 1990 to 2009 when the Left finally won power, and the other a comparative study of two Leftist governments in power, in El Salvador from 2009 onwards and Bolivia after 2006.