The Politics of Capital Flight in the Global Economic Crisis

26 Pages Posted: 20 Oct 2014

See all articles by Thomas B. Pepinsky

Thomas B. Pepinsky

Cornell University - Department of Government

Date Written: November 2014


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.

Suggested Citation

Pepinsky, Thomas B., The Politics of Capital Flight in the Global Economic Crisis (November 2014). Economics & Politics, Vol. 26, Issue 3, pp. 431-456, 2014, Available at SSRN: or

Thomas B. Pepinsky (Contact Author)

Cornell University - Department of Government ( email )

Ithaca, NY 14853
United States

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