If developing countries want to be prosperous and attract international investment, they should hold free and fair elections. That’s the takeaway from my analysis of data on elections and net investment flows in 157 countries between 1990 and 2013, which I presented in a recent paper in International Interactions. Over the past years, illiberal democracy has been spreading across the developing world. By “illiberal democracy” I mean countries like Venezuela, Argentina, and Hungary, which hold elections but curtail civil liberties, where constitutions limit power in theory but where in practice the rule of law is flexible at best, and no one holds leaders to account. For them, it may be useful to know that simply holding free and fair elections makes a big difference in attracting investment, whether a right- or left-leaning party wins the election or whether the country has a broader commitment to political rights. Let’s look at why.
I’ll start with two recent examples of countries that had been run illiberally, but which held relatively free and fair elections that resulted in opposition victories: Argentina, which held elections in the fall, and Venezuela, which elected a new government in December. In both cases, voters replaced left-leaning and illiberal incumbents with center-right parties, precisely to improve the economy.
Even before the new governments could take any actions, investors responded. The Merval, Argentina’s stock index, increased 40 percent from the beginning of October, before the Oct. 25 election, to just after it at the end of the month — even before the completion of the second round of voting in early November. The bond markets improved even more, and yields on the country’s 10-year bonds fell to just 2.25 percent. Meanwhile, in Venezuela, the Caracas Stock Exchange gained more than 35 percent in value between November and the week after the Dec. 6 election.
Full Article: Free and fair elections attract investment, no matter who’s elected. Here’s why. – The Washington Post.