The Limits of Hegemony: Banks, Covert Actions, and Foreign Firms

Authors:
Felipe Aldunate, Felipe González, Mounu Prem.

Abstract:
Economic sanctions and covert actions from hegemonic states are common policies to influence the behavior of foreign countries. However, less is known about the role of non-state actors and their economic impact on foreign agents. We use novel firm-level data from Chile to document a substantial decrease in financial relations with U.S. banks after socialist Salvador Allende took office in 1970. An analysis of links with banks from other countries reveals that part of the decrease was related to credit risk and another was specific to the U.S. banking sector. Data from business reports and the stock market suggest that firms were mostly unaffected by the destruction of links with U.S. banks. Substitution of financial relations towards state-owned banks appears to be the key mechanism to explain these findings.