Recent research shows mixed evidence about bond market discipline of emerging market (EM) politics and institutions. We argue that discipline varies across domestic and foreign currency EM bond markets. We focus on differences in bond index design in each market, given the increasing role of indexes in determining access to capital. Theory-building interviews show that in relatively high-risk local currency bond markets, indexes are designed to be discretionary, to include only a subset of the market, where index providers make country inclusion/exclusion decisions on a case-by-case basis. In contrast, in relatively low-risk foreign currency bond markets, indexes are designed to be mechanical, representing the entire market by automatically including bonds that meet a formal set of criteria. We find that these different index designs have different disciplinary effects. Discretionary indexes discipline EM politics and institutions, since index providers monitor country features to curate an investable index in a comparatively risky asset class. In contrast, mechanical indexes are less disciplinary of EM politics and institutions because they reflect the entire market rather than curate a comparatively safe subset of bonds. The findings indicate that focusing on investment mechanisms, and how they vary across markets, explains variation in discipline across contemporary sovereign bond markets.

Natalya Naqvi is an Assistant Professor of International Political Economy at the LSE International Relations Department. Her research focuses on the political economy of finance and development.  

Her current project investigates the conditions under which developing countries exert public control over their financial sectors in order to support industrial policy, despite constraints posed by economic globalisation. She also works on the political economy of sovereign debt and financial markets, and the causes and consequences of privatisation across the developing world. Related work is published in The Journal of Politics, European Journal of International Relations, and Review of International Political Economy, among others.