Byunghwan Son

Latin America experienced a deep political transformation from authoritarianism to democracy in recent decades. During the same period, many also suffered severe currency crises. We contend that these two phenomena are causally related. Specifically, we argue that democratic transitions increase political demand for public spending, leading to budget deficits, and this increases investors’ propensity to liquidate local currency holdings. Moreover, we note an important ‘threshold’ effect, in which democratization is particularly likely to lead to currency crises when pre-existing fiscal deficits are already relatively high. Statistical analysis confirms these arguments in a sample of twenty-five Latin American countries during 1975-2008.

Despite significant research on the efficacy and inadvertent humanitarian and political effects of economic sanctions, surprisingly little is known about the possible economic and financial consequences of sanctions for target economies. Synthesizing insights from the currency crisis literature with sanctions scholarship, we argue that economic sanctions are likely to trigger currency collapses, a major form of financial crisis that impedes economic growth and prosperity. We assert that economic coercion instigates currency crises by weakening the economy and creating political risks conducive to speculative attacks by currency traders. To substantiate the theoretical claims, we use time-series cross-national data for the 1970-2005 period. The results from the data analysis lend support for the hypothesis that sanctions undermine the financial stability of target countries. The findings also indicate that the adverse effect of economic coercion on the financial stability of target economies is likely to be conditioned by the severity of the coercion and the type of actors involved in the implementation of sanctions. The findings of this article add to the sanctions literature demonstrating how economic coercion could be detrimental to the target economy beyond the immediate effect on trade and investment. It also complements and adds to the literature on political economy of currency crises that has so far overlooked the significant role that economic coercion plays in financial crises.

Extant literature on democratization documents that ordinary citizens’ unconditional support for democracy is indispensable to democratic consolidation. Yet observers of nascent democracies have repeatedly witnessed that such support often hinges upon their economic conditions. This paper argues that income levels have a conditioning effect on this relationship; the Korean poor see democracy as a tool for income redistribution and are less likely than the rich to support it when economic hardships appear to close windows of opportunities for such redistribution. Using survey data from the first round of the Asian Barometer Survey on South Korea, I find strong empirical support for this argument. The implication of this finding for broader literature on democratization is that the weakening of young democracies can be attributed to the poor in times of trouble, or the “weak link”.

Do policymakers under financial and political distresses make otherwise undesirable policy choices? This paper attempts to answer this question by studying the relationship between democratization and currency devaluation under speculative pressures. The central argument is that leaders of young democracies lack policy credibility and instead engage in clientelistic politics. The empirical expectation based on this argument is that young democracies, when compared to autocracies and established democracies, exhibit high chances of succumbing to speculative attacks as the political cost of economic adjustment needed for defense is relatively high to these nascent regimes. The paper further contends that this relationship holds stronger when the regime can mobilize less resources to defend their currencies. To test these arguments, I use monthly data for 117 countries from 1977 to 2006. The results from statistical models provide corroborative evidence for this argument.