Cross-border flows of capital are an integral component of contemporary globalization, and scholarship on the economic effects of international capital movements is extensive. But the question of whether and how international capital flows influence national politics has received much less attention. Faisal Z. Ahmed’s new book, The Perils of International Capital, goes a long way to filling in this gap. Ahmed convincingly shows that inflows of international capital have an important impact on a range of political outcomes, from the tenure of national leaders to the degree of political freedom.

The book’s central argument is that international capital enhances authoritarian rule in developing countries. Increased inflows of foreign capital increase the resources available to governments, which helps dictators (and would-be dictators) repress their opponents and channel rents to potential supporters. Increases in autocrats’ ability to repress and distribute pork, in turn, help them extend their tenures in office.

The book begins with an introductory chapter that provides an overview of the book and its contributions. The second chapter presents a variety of descriptive statistics that demonstrate the growing importance of international capital flows and help establish the plausibility of the book’s main arguments. Chapter 3 then develops the theoretical argument about how international capital influences domestic politics.

One of the book’s unique strengths is that it considers three different types of international capital flows: foreign aid, remittances, and foreign direct investment (FDI). Most scholarly works focus on just one type of capital flow; I am not aware of any earlier books that tackled all three. But Ahmed presents a strong case that research considering just one type of capital flow potentially suffers from omitted variable bias. The development of a unified theoretical framework for studying three different forms of international capital flows is one of the book’s notable achievements.

The theoretical links between foreign aid and autocratic rule are fairly intuitive. Because foreign aid goes directly into a government’s coffers, it directly increases a government’s revenues, and governments are free to use these funds as they see fit. The book hypothesizes that autocrats are especially likely to use this revenue to finance repression and to provide private goods—fiscal transfers, for example—to key constituents such as the military.

Because remittances and FDI are private capital flows that are not directly controlled by the government, it is less obvious why they would be politically consequential. Elaborating these causal links is one of Ahmed’s key theoretical innovations. Remittances are transfers of money from individuals that cross borders, often from an individual who emigrated abroad to relatives or friends who are still back home. Ahmed argues that remittances work through a “substitution effect.” Individuals who receive remittances often spend those funds on health care or schooling. This creates a perverse incentive for autocrats: remittances enable them to reduce the provision of these public goods and to divert resources toward patronage goods like higher salaries for government employees. FDI, which involves the movement of assets across firms in different countries, is also not directly controlled by the state. However, Ahmed points out that increases in FDI can often lead to higher tax revenues, and they can also provide opportunities for rent-seeking, particularly when the investment is in industries with high barriers to entry. Thus, all three types of international capital flows promote authoritarian politics, although each operates through a different channel.

The next three chapters test the argument empirically, with each focused on a different type of international capital flow. In each chapter, the book presents a mixture of qualitative and quantitative evidence. The qualitative case studies are fairly brief and based solely on secondary sources. Although they help establish the plausibility of the argument, they do not provide definitive support for the theory. The real empirical contribution of the book lies in its statistical analyses: this is an area where The Perils of International Capital shines. Compared to most other recently published books in the field, the quantitative analyses in this book are considerably more sophisticated and rigorous. In each chapter, the book presents instrumental-variable (IV) regression analyses to estimate the causal effect of international capital flows on various political outcomes.

Chapter 4 focuses on the effect of US foreign aid on political rights, economic policy, and leader survival. To address possible endogeneity problems, the amount of foreign aid that a country receives from the United States is instrumented by the degree of legislative fragmentation in the US Congress (and its interaction with the probability that each country receives aid in a given year). The intuition behind this instrument is that aid volumes (like other forms of government spending) tend to be higher when the legislature is more fragmented. Equally important, the book makes a compelling case that there are no other likely channels through which US legislative fragmentation is likely to affect political outcomes in developing countries. This IV therefore provides a useful source of exogenous variation in the amount of aid that a country receives. For these reasons, the causal estimates presented in this chapter are highly convincing.

The statistical analyses in the next two chapters focus on remittances and FDI, respectively. They are also well done but not quite as compelling as the models presented in chapter 4. To examine the effect of remittances, chapter 5 instruments remittance inflows using the interaction of two variables: the price of oil and a country’s distance to Mecca. This empirical strategy relies on the assumption that “the price of oil…is unrelated to the economic, political, and social conditions in remittance-receiving countries” (p. 108). However, because oil prices are correlated with the prices of many other commodities and other important global economic variables like the value of the US dollar, the exclusion restriction may not be satisfied in these models.

Chapter 6 studies the effects of FDI, focusing on the oil sector, the industry that receives the largest amount of FDI worldwide. The analyses exploit the fact that the success or failure of an oil exploration is largely random to estimate the causal effect of the value of oil discovery on political outcomes such as defense spending. The chapter then shows that the effect of oil discoveries on military spending is stronger when oil discoveries are accompanied by FDI. These analyses therefore provide plausibly causal estimates of the effect of oil discoveries. But because FDI decisions are not themselves random, the results with respect to international capital flows are more suggestive than definitive in this chapter.

These limitations notwithstanding, The Perils of International Capital is an impressive book. The unified theoretical framework, which integrates three types of capital flows, and the application of a different instrumental variable for each form of international capital make this an exceptionally ambitious piece of research. In addition to these scholarly contributions, the book also generates important policy implications. By showing that international capital flows undermine democracy, this research implies that the aggregate net benefits of international capital flows may be smaller (or more negative) than previously believed.