Corruption, Composition of Capital Flows, and Currency Crises

Crony capitalism and international creditors' self-fulfilling expectations are often suggested as rival explanations for currency crises. A possible link between the two has not been explored. The author shows one channel through which crony capitalism can increase the chance of a currency/financial crisis by altering the composition of capital inflows. Using data on bilateral foreign direct investment and bilateral bank loans, the author finds clear evidence that in corrupt countries the composition of capital inflows is relatively light in foreign direct investment. Earlier studies indicated that a country with a capital inflow structure is more likely to run into a currency crisis down the road (partly through international creditors' self-fulfilling expectations). Therefore, crony capitalism, through its effect on the composition of a country's capital inflows, makes the country more vulnerable to currency crises brought about by self-fulfilling expectations. Corruption may also weaken domestic financial supervision, with a subsequent deterioration in the quality in banks' and firms' balance sheets.

Bibliographic Details

Main Author:	Wei, Shang-Jin
Language:	English en_US
Published:	World Bank, Washington, DC 2000-08
Subjects:	BALANCE SHEETS, BANK CREDIT, BANK FOR INTERNATIONAL SETTLEMENTS, BANK LENDING, BANK LOANS, BORROWING, BRIBERY, BUSINESS LICENSES, CAPITAL FLOWS, CAPITAL INFLOWS, CAPITALS, CITIZENS, COMPETITIVENESS, CORRUPT COUNTRIES, CORRUPT OFFICIALS, CORRUPTION, CORRUPTION LEVELS, CORRUPTION VARIABLE, COUNTRY AVERAGE, COUNTRY CHARACTERISTICS, COUNTRY COVERAGE, CREDIT MARKET, CREDITORS, CRISES, CRONY, CRONY CAPITALISM, DEBT, DEMOCRACY, DEREGULATION, DEVELOPMENT ECONOMICS, DIRECT INVESTMENT STATISTICS, DOMESTIC INVESTORS, ECONOMIC DEVELOPMENT, ECONOMIC POLICY, ECONOMIC RESEARCH, ECONOMIC RISK, EMERGING MARKETS, ETHNIC GROUPS, EXCHANGE RATE, EXCHANGE RATES, EXPENDITURES, EXPORTS, FDI, FINANCIAL CRISIS, FIRM-LEVEL SURVEYS, FOREIGN BANKS, FOREIGN CAPITAL, FOREIGN DIRECT INVESTMENT, GCR, GDP, GDP PER CAPITA, GROSS DOMESTIC PRODUCT, GROSS PROFIT, HOST COUNTRIES, HOST COUNTRY, HOST ECONOMIES, HOST- COUNTRY, HOST-COUNTRY, INDUSTRIAL COUNTRIES, INSURANCE, INTERNATIONAL BANKING, INTERNATIONAL BANKING STATISTICS, INTERNATIONAL BANKS, INTERNATIONAL DEVELOPMENT, INTERNATIONAL ECONOMICS, INTERNATIONAL FINANCIAL, INTERNATIONAL INVESTORS, INWARD FOREIGN DIRECT INVESTMENT, MEASUREMENT ERROR, MEASUREMENT ERRORS, MORAL HAZARD, OFFSHORE BANKING, PORTFOLIO, PORTFOLIO INVESTMENT, PRIVATE SECTOR, PUBLIC GOVERNANCE, REVERSE CAUSALITY, STATISTICAL ANALYSES, TAX REVENUES, TRANSITION ECONOMIES, TRANSPARENCY,
Online Access:	http://documents.worldbank.org/curated/en/2000/08/693237/corruption-composition-capital-flows-currency-crises https://hdl.handle.net/10986/19816
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