ABSTRACT Title of Dissertation: FLIGHT OR FLIGHT? DEMOCRATIC CONSOLIDATION AND CAPITAL FLIGHT IN LATIN AMERICA Daniel Scott Owens, Doctor of Philosophy, 2017 Dissertation directed by: Dr. Virginia Haufler, Department of Government and Politics 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. FIGHT OR FLIGHT? DEMOCRATIC CONSOLIDATION AND CAPITAL FLIGHT IN LATIN AMERICA by DANIEL SCOTT OWENS Dissertation submitted to the Faculty of the Graduate School of the University of Maryland, College Park, in partial fulfillment of the requirements for the degree of Doctorate of Philosophy 2017 Advisory Committee: Professor Virginia Haufler, Chair Professor Todd Allee Professor John McCauley Professor Joel Simmons Professor Robert Sprinkle (Dean’s Representative) © Copyright by Daniel Scott Owens 2017 Acknowledgements My interest in the interactions between domestic politics and capital markets began while I was living in Argentina. Then and later while I was on a study abroad program in Washington DC, I witnessed the collapse of Lehman Brothers in the September 2008 financial crisis. As a result of these experiences, I became fascinated with questions revolving around the modern state and how it could weather the effects of globalization. It has been a fascinating journey from those first musings to this finished work. I owe debts of gratitude to the many people who have helped me along this rewarding road. First of all, thank you to my dissertation committee, Virginia Haufler, Todd Allee, Joel Simmons, John McClauley, and Dr I. M. Destler who kindly offered to be my Dean’s representative. My chair Virginia Haufler, with whom I had the pleasure of working with at Global Communities, has provided me with excellent advice and feedback along with the many stimulating discussions we have had over my time in graduate school. While at the University of Maryland, I also greatly benefited from discussions with and courses taken by the GVPT faculty, particularly Ernesto Calvo, Mike Hanmer, Paul Huth and Mark Lichbach. I would also like to Wayne McIntosh for his many encouraging coffee chats. As any graduate student knows, so much learning takes place in those random conversations walking down a hall with someone or idly chatting with other students before class. In this context, I also thank Jacqui Ignatov, Tara Innes, Andres Garcia. Roudabeh Kishi, Darragh McNally, Bilal Saab, Jeronimo ii Torrealday, Tia Wrighten and Kim Wilson for their good humor and insights, which I benefited from throughout my time at Maryland. I also wish to thank my dear friend Gustavo Illia who gave me an inside understanding of Argentine politics, which prompted many of the questions I then applied in this dissertation. A special thanks also to Dean Hinton for helping me when I was coming up to that final strait. Finally, thanks to my family – my father, John Owens, my mother Margaret Owens and my sister, Rachel Owens - for their valuable support in many ways. iii Table of Contents Acknowledgements………………………………………………………………......ii Table of Contents…………………………………………………………………....iv List of Tables………………………………………………………………………...iv List of Figures……………………………………………………………………….vi List of Abbreviations………………………………………………………………...ix Chapter 1: Introduction……………………………………………………………...1 Chapter 2: What is capital flight and why does it occur?..........................................13 Chapter 3: Theoretical Framework………………………………………………….41 Chapter 4: Explaining capital flight in Latin America……………………………...83 Chapter 5: Within-case analysis: El Salvador, 1990-2009………………………....113 Chapter 6: El Salvador and Bolivia case comparison……………………………...154 Chapter 7: Conclusion……………………………………………………………...190 Bibliography……………………………………………………………………….202 iv List of Tables Table 3.1. Bolivia and El Salvador: Economic and political characteristics Table 4.1. Political mobilization and capital flight: variables and predicted signs Table 4.2. Popular Mobilization and capital flight Table 4.3. Rise of Leftist parties and capital flight Table 4.4. Rise of Leftist parties and capital flight with Non-Leftist incumbent Table 4.5. Government ideology and capital flight: variables Table 4.6. Leftist governments, Leftist electoral support, and capital flight Table 4.7. Leftist party age and capital flight Table 4.8. New Leftist governing party and capital flight (All governments) Table 4.9. Political opposition variables and predicted signs for Leftist governments Table 4.10. Political opposition, veto players, and capital flight Table 4.11. Political opposition, veto points, and capital flight (with country dummies) Table 4.12. Redistributive policies and capital flight: variables and predicted signs Table 4.13. Redistributive government policies and capital flight Table 4.14. Government ideology and redistributive policies variables and predicted signs Table 4.15. Government ideology and redistributive policies Table 4.16. Summary statistics Table 5.1. Vote share for ARENA candidates in El Salvador Presidential Elections, 1984-2009 Table 5.2. Vote share for ARENA candidates and allies in asamblea legislative elections, 1984-2009 Table 5.3. Policies under ARENA Administrations in El Salvador, 1989-2004 Table 5.4. Vote share for FMLN in El Salvador Presidential Elections, 1994-2009 v Table 5.5. Vote share for FMLN candidates and allies in asamblea legislativa elections, 1984-2009 Table 6.1. The FMLN’s legislative Approval Record, 2009-13 Table 6.2. MAS percentage of vote in Bolivian presidential elections, 2002-14 Table 6.3. MAS percentage of vote in Bolivian national legislative elections, 2002-14 Table 6.3. Comparative levels of political risk, by years of Leftist government, Bolivia and El Salvador Table 6.4. Change in Gini coefficient in Bolivia and El Salvador by year of Leftist government vi List of Figures Figure 1.1. Total capital flight from developing countries, World Bank Residual Measure, 1990-2012 (WBR z scores as per cent of GDP) Figure 1.2. Capital flight by world region, 1990-2012 (WBR z scores as per cent of GDP) Figure 1.3. Mean capital flight in Latin America, 1990-2012 (WBR z scores as per cent of GDP) Figure 2.1 Mean capital flight in Latin America by country, 1990-2012. (WBR’s as percentages of GDP). (Duplicate of Figure 1.3) Figure 2.2. Veto players and capital flight around the world, 1990-2012 (Mean 5-year WBR z scores as percentages of GDP) Figure 2.3. Veto players and capital flight in Latin America, 1990-1999. (Annual WBR z scores as percentages of GDP) Figure 2.4. Veto players and capital flight in Latin America, 2000-2009. (Annual WBR z scores as percentages of GDP) Figure 3.1. Government ideology and capital flight 1990-2008 (WBR z scores as percentages of GDP) Figure 3.2. Schema for popular mobilization, political opposition, and capital flight Figure 5.1. Capital flight as a percent of GDP, El Salvador, 1983-2010 Figure 5.2. Capital flight as a percent of GDP including reversals, El Salvador, 1983-2010 Figure 5.3. The rising trajectory of pro-market government policies in El Salvador, 1990- 2012 Figure 5.4. Patterns of Popular Support for ARENA in El Salvador Asamblea Elections and Capital Flight, 1985-2013 vii Figure 5.5. Rising Popular Mobilization and Capital flight as a percent of GDP, El Salvador, 1983-2010 Figure 5.6. Protest and capital flight in El Salvador, 1984-2010 Figure 5.7. FMLN vote share and capital flight (WBR z scores) Figure 5.8. External debt as a percentage of El Salvador’s GDP and capital flight, 1990-2012 Figure 5.9. Economic growth, inflation and capital flight in El Salvador, 1990-2012 Figure 5.10. Veto players and capital flight in El Salvador, 1990-2012 Figure 5.11. Financial openness and capital flight in El Salvador Figure 6.1. Levels of capital flight from Bolivia and El Salvador, 2006-15.