The Political Economy of Emerging Markets: Political Business Cycles, Corruption, and Fixed Investment in the Private Sector

Abstract

The topic of emerging markets, while prevalent in the private sector of financial services and investors, is infrequently approached in the context of political science and political economy. Although overlap exists in the lexicon of “emerging market economies” and “developing countries,” I argue that key differences in how they are perceived by the investment community and by scholars and international organizations have several implications for past research on the political economy of the “non-developed” world. To test this, I conduct a regression analysis on a cross-country panel to examine political business cycles in emerging market countries, accounting for traditional indicators of political uncertainty such as domestic elections, foreign elections, adverse regime change, and corruption, which remain largely untested in the context of private infrastructure and irreversible investment activity in emerging markets. The regression results provide evidence that, given appropriate adjustments in the methodology of past research, the link between the timing of elections and private fixed investment in emerging market economies has several differences with results of past studies nested in the “developing – developed countries” nomenclature, which is increasingly unrepresentative and outdated. Namely, private fixed investments in emerging market countries increase significantly in the period before domestic and U.S. national elections, even when accounting for government ideology and partisan theory. Moreover, the empirical evidence also suggests that increased levels of perceived corruption magnify this investment boost, but only when considered in election years. These findings, as well as the contributing theory, demonstrate the relevance of emerging markets as a novel but increasingly important topic in the literature of political science.