The Politics of Capital Flight in the Global Economic Crisis

This paper studies the effects of economic governance and political institutions on portfolio investment during the Global Economic Crisis of 2008–2009. Leveraging a unique cross‐national dataset on portfolio flows immediately following the collapse of Lehman Brothers in September 2008, it shows that countries with “better institutions” – those with more (or less) democratic, more (or less) constrained or more accountable political systems – were no less vulnerable to portfolio outflows than countries with “worse institutions.” However, countries with better governance prior to the crisis – those with better regulatory apparatuses, rule of law, property rights, and those considered less politically risky – experienced lower net portfolio capital outflows after Lehman. Governance is in fact the strongest predictor of portfolio capital flows during the global flight to liquidity, while political institutions perform poorly. The findings shed light onto the political factors that mediated how the collapse of Lehman affected national financial markets the world over, and have implications for literatures on the political economy of foreign investment, as well as for broader topics of institutions, governance, and economic performance.