The Political Economy of Emerging Market Sovereign Bonds: Narrowing the Policy Space?
autonomy has been the subject of extensive analysis, the role of private financial market actors has
been less studied, despite the fact that the majority of capital flows to developing countries now come
through private rather than official channels. The mechanisms of policy constraint which are
commonly written about in the International Political Economy literature are assessed, through trying
to understand what factors actually determine financial markets’ allocation of resources to developing
countries, and whether this allocation actually reflects country-specific fundamentals. Utilising
extensive qualitative material, including over 41 interviews and two and a half months of participant
observation among sovereign bond market participants in Hong Kong, it was found that ‘push’ factors
external to the capital receiving country (including international liquidity, market sentiment, and
international interest rates) were fundamentally more important than ‘pull’ factors (country-specific
factors such as economic policy and economic performance), in influencing financial market resource
allocation. This was not only because financial market investors explicitly based their investment
decisions on push factors, but also because push factors exerted an important influence on investors’
interpretations of the pull factors themselves. How push factors influenced market participants’
interpretations of country fundamentals was further explored in depth through a case study of portfolio
inflows to emerging market sovereign bonds during and after the recent financial crisis, between 2008
and 2013. It was found that despite country-specific fundamentals remaining constant during this
period, investors’ interpretations of them changed dramatically according to changes in the push
factors. If financial market prices do not reflect country specific policies in the first place, this means
that it is less likely that they pose a constraint on government policy directly through the market
mechanism as is implied in much of the literature on the topic. Furthermore, the findings of this paper
problematise the rational actor models of financial market behaviour used by the International Political
Economy and International Economics literatures. It is instead argued that alternative models of
financial market behaviour, such as Keynesian and Economic Sociology approaches, should be
integrated into the literature.