Review of Finance (2011) 15: 207–243 doi: 10.1093/rof/rfq016 Advance Access publication: 2 July 2010 The External Financing of Emerging Markets—Evidence from Two Waves of Financial Globalization ∗ ANDR ´ E FARIA 1 , PAOLO MAURO 2 and ALEKSANDAR ZAKLAN 3 1 BlackRock; 2 International Monetary Fund; 3 DIW Berlin Abstract. What determines the yields at which international investors are willing to lend to emerging market countries, and the amounts of such lending? We analyze the motivation underlying investors’ choices in allocating their holdings across countries, through regressions for both prices (bond yields) and quantities (bond market capitalization or stocks of external liabilities) estimated during two waves of financial globalization (1870–1913 and today). The results suggest that, throughout the past one and a half centuries, a combination of human capital (including informal human capital) and institutional quality has been a key determinant of emerging market countries’ ability to attract international investors. JEL Classification: F21, F34, F36 1. Introduction What determines the yields at which international investors are willing to lend to emerging market countries? Why did pre-World War I investors place massive amounts of external finance in economies such as those of what are now Australia, Canada, and New Zealand, thereby playing an integral role in those countries’ paths to prosperity, whereas Egypt, India, and Sierra Leone to this date have attracted relatively little external capital? In this paper, we seek to understand the motivation underlying investors’ choices in allocating their holdings across countries. We draw on evidence from two waves of financial globalization—namely, the pre-WWI era, with special focus on emerging ∗ We are grateful to the editor, two anonymous referees, and Simon Johnson for very helpful com- ments and suggestions. Special thanks to Mart´ ın Minnoni for excellent research assistance and insightful suggestions in the early stages of the project. We are very grateful to Nathan Sussman and Yishay Yafeh for excellent comments and for generously sharing their data with us. The views expressed herein are those of the authors and should not be attributed to the IMF, its Executive Board, or its management. C  The Authors 2010. Published by Oxford University Press [on behalf of the European Finance Association]. All rights reserved. For Permissions, please email: journals.permissions@oxfordjournals.org Downloaded from https://academic.oup.com/rof/article/15/1/207/1579493 by guest on 10 February 2023