Michael Lee, Adrian Florea and Nicolas Blarel

When Norman Angell inveighed against the jingoism of the early 20thcentury, he centred his case for pacific policies on a belief in the futility of conquest, rather than an altruistic case for peace. Conquerors are “unable to take the wealth of a conquered territory owing to the delicate interdependence of the financial world,” Angell (1910: 37) averred. Many contemporary writers agree and argue that intense economic interdependence has ushered in an unprecedented era of “capitalist peace.” If their intuition is correct, we should then see evidence of pacific proclivities among the biggest beneficiaries of financial interdependence – the financial sector itself. Indeed, as Kirschner (2007) suggested, bankers should universally endorse a “capitalist peace” by favouring candidates opposed to military adventurism. 

Yet, American history is full of examples in which financial interests motivated military intervention. The risk of expropriation played a non-zero role in U.S. (and British) support for the fall of Arbenz in Guatemala, Mossadegh in Iran, or Allende in Chile. There are additional contemporary examples of politically active financiers who deviate heavily from pacifism. For example, the SuperPAC run by Donald Trump’s National Security Advisor, John Bolton, was largely bankrolled by luminaries of the financial world, like Robert Mercer. Paul Singer of Elliott Management buys up heavily discounted bonds of countries in dire straits and then insists on full repayment. Quite dramatically, in 2012, Elliott Management repossessed an Argentine warship docking in Ghana (Kolhatkar, 2018). One wonders whether his ability to get away with this extreme tactic from Singer’s hedge fund had anything to do with his financial support for neoconservatives in Washington. More broadly, one also wonders whether preferences for more extreme tactics aimed at safeguarding foreign investments are more common among financial firms than currently understood.

In our article, “Opening the Black Box of Finance: North-South Investment, Political Risk, and U.S. Military Intervention,” we submit that a more nuanced perspective on the preferences of financial firms is warranted. First, the financial sector is far from monolithic – financial firms differ in myriad ways, such as their appetite for risk or where they invest. For instance, since 2013 North-South investment flows have exceeded North-North flows. If North-South investors differ from North-North ones, some of the conventional wisdom on the preferences of the finance sector might be called into question. Secondly, military intervention is just as diverse – there are great power wars, but also minor wars, shows of force, covert actions, and a range of other actions states might engage in below the threshold of outright war. Much as Norman Angell overlooked the fact that the financial integration of the 19thcentury-world required constant military deployments to defend far-flung British interests, the financial pacifist perspective understates the degree to which the world of free-flowing capital rests on the use of force. Some time ago, Lucas (1990) took note of a paradox in patterns of foreign investment. Although returns were much higher in the Global South (i.e. the developing world), capital in the 1980s largely flowed North-North (i.e. from rich countries to other rich countries). In order to explain this paradox, he posited that the key driver of this discrepancy was political risk. The risk of expropriation, of default on financial obligations, of war and conflict was greater in the Global South, deterring investment. Political risk continues to feature prominently in investment decisions – in a 2016 survey of global CEOs, more expressed concern about geopolitical uncertainty than about high taxes. Concerns about political risk typically rate highly in the Multinational Investment Guarantee Agencies (2013) survey of 191 multinational companies (MNCs) as well. 

Our article explores a wrinkle in this notion of financial pacifism. We submit that financial firms with strong exposure to the Global South are more sensitive to political risk, and more likely to favour policies that might reduce it. Such policies are likely to include support for military intervention aimed at reducing political risk, should peaceful entreaties fail. Examples might include intervention to protect property (or to remove governments hostile to property rights), deter defaults, third-party intervention to reduce conflict, or peacekeeping missions. The removal of political risks can create investment opportunities for those firms with the relevant expertise to invest in a newly opened market. Moreover, although intervention entails risks and costs, military action in the Global South is less costly, and North-South investors are better placed to evade the macroeconomic consequences of intervention. 

We wanted to see whether our contention held up empirically, so we turned to the data on campaign finance. If North-South investors favour stabilising intervention, we should also see evidence that they are more likely to donate to members of Congress sharing those preferences. Hence, we looked at PAC donations to U.S. Senators and House members by Fortune 500 financial firms in the 107thCongress (2001-2002) – a session where questions of intervention in the Global South featured prominently. Next, we had to measure North-South exposure. Because company reports do not include consistent data on the kind of exposure financial firms face, we opted for an indirect measure. We looked at the statistical relationship between the Templeton Emerging Markets fund – a mutual fund that invests solely in the Global South – and the stock prices of Fortune 500 financial firms. Finally, we needed a measure of the intervention preferences of policymakers. To capture that, we developed an index of support or opposition for stabilising intervention using past votes on intervention questions. 

We found empirical support for our intuition in both the House of Representatives and the Senate. For firms with the lowest exposure to the Global South (predominantly domestically oriented firms, like those in real estate), the effect of interventionism on donations was negative (and statistically significant) in the U.S. House and statistically insignificant in the U.S. Senate. By contrast, for firms with the highest exposure to the Global South, the effect of interventionism was statistically significant and positive in both legislative bodies, consistent with our expectations. The capitalist peace literature has made many important findings. We broadly accept that dyadic flows of trade and investment capital reduce the likelihood of conflict between states. At the same time, we argue that the literature needs to do more to understand what is happening under the hood of current assumptions. Do all financial flows create a peace interest? Our research suggests that some of the fastest growing financial flows – North-South flows – may not.


Read the full version of this article in Political Studies here.


Michael J Lee is an Assistant Professor in the Department of Political Science at Hunter College. His work focuses on international political economy, international conflict, and political economy of financial regulation. His work has recently been published in the British Journal of Politics and International Relations, and PS: Political Science. Adrian Florea is Lecturer/Assistant Professor in International Relations at the University of Glasgow. His work has been recently published in International Studies Quarterly and Security Studies. Nicolas Blarel is Assistant Professor in International Relations at Leiden University. His research interests include foreign policy analysis, security studies, and the politics of South Asia. He recently co-edited the Oxford Handbook of India’s National Security.

Image: Mariusz Prusaczyk