Paper short abstract:

This paper looks at the importance of external factors in influencing international portfolio flows to developing country financial markets, and the impact of these flows on domestic development policy autonomy

Paper long abstract:

The mechanisms of policy constraint imposed by international capital markets 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. Utilising 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. This is further explored through a case study of portfolio inflows to emerging market sovereign bonds 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.