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Preventing Currency Crises in Emerging Markets$
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Sebastian Edwards and Jeffrey A. Frankel

Print publication date: 2002

Print ISBN-13: 9780226184944

Published to Chicago Scholarship Online: February 2013

DOI: 10.7208/chicago/9780226185057.001.0001

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Negative Alchemy?

Negative Alchemy?

Corruption, Composition of Capital Flows, and Currency Crises

(p.461) 10 Negative Alchemy?
Preventing Currency Crises in Emerging Markets
Shang-Jin Wei, Yi Wu
University of Chicago Press

This chapter examines the influences of corruption and lack of transparency on capital flows composition. It focuses on the foreign direct investment (FDI). Corruption may influence the composition of capital inflows in such a way that the country is more likely to experience a currency crisis. A corrupt country seems to have a composition of capital inflows that is relatively light in FDI and relatively heavy in bank loans. Countries that are more corrupt tend to have a capital inflow structure that depends relatively more on bank borrowing than FDI. Furthermore, corruption could lead to a financial crisis by weakening domestic financial supervision and damaging the quality of banks' and firms' balance sheets. Thus, the connection between corruption and financial crises offers a reason to decrease corruption. The key to greater financial stability is not corruption per se but foreign loans and other short-term capital.

Keywords:   corruption, capital flows, foreign direct investment, currency crisis, corrupt country, capital inflows, bank loans, financial crisis, foreign loans

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