Financing Autocracy: Equity Markets and Authoritarian Survival

• In Event: The Political Economy of Democratic Backsliding

Abstract

Autocrats stay in power by rewarding elites in the winning coalition, creating economic growth to ensure mass support, and repressing opposition groups. Equity markets can provide a way to access the necessary capital to finance these costly strategies of maintaining power. Equity markets provide a way to allow regime-linked elites to access capital from around the globe, provide the regime with access to funds (particularly by issuing shares of state-owned companies), and foster economic growth that bolsters legitimacy among the public. However, when developing country stock markets become volatile or crash, authoritarian leaders will be less able to co-opt members of the elite, may face backlash from the public for weak economic performance, and have less capital to repress regime opponents. I test that theory, hypothesizing that shifts to democracy are more frequent during periods of weak financial market performance. Methodologically, I use exogenous changes in investor sentiment in the United States to predict shocks to stocks in emerging markets. I also examine how selectorate size mediates the effect of stock market performance on democratization, using the Geddes, Wright, and Frantz measure of regime type. I find that negative shocks to the stock market are associated with increases in democratization scores across all authoritarian regimes. In addition, countries with smaller selectorates-- particularly monarchies and personalistic regimes-- see the largest increases in democratization scores from such shocks. The results deepen insights into how international finance influences politics in the developing world, providing perspective on a lesser-understood driver of democratization.

Author

• Alexander Slaski, Georgetown University