The External Financing of Emerging Market Countries: Evidence From Two Waves of Financial Globalization

Abstract

We trace the history of where and why investors from the most advancedcountries directed funds, ultimately helping finance economic developmentin emerging market countries. To do this, we analyze the determinantsof international investors' willingness to hold the external liabilitiesissued by emerging market countries, through cross-country regressionsfor both prices (bond spreads) and quantities (bond market capitalizationor stocks of external liabilities) estimated at various points duringtwo waves of financial globalization (1870-1913 and the present time).The data are drawn from primary sources for the historical period,and the much-expanded, new vintage of the Lane and Milesi-Ferretti(2006) data set for the modern period. The results suggest that,throughout the past one and a half centuries, a combination of humancapital (including informal human capital) and institutional qualityhas been a key determinant of emerging market countries' abilityto attract international investors.