Does democracy promote capital account liberalization?

• Published in: Review of international political economy : RIPE Vol. 25; no. 6; pp. 854 - 883
• Main Authors: Steinberg, David A., Nelson, Stephen C., Nguyen, Christoph
• Format: Journal Article
• Language: English
• Published: London Routledge 02.11.2018; Taylor & Francis, Ltd; Taylor & Francis LLC
• Subjects: capital account liberalization; capital controls; Capital markets; Capital movement; Case studies; Democracy; Developing countries; Economic factors; Economic models; Economic reform; Financial systems; Home financing; Immediate; International finance; LDCs; Liberalization; Markets; Openness; Panel data; Political change; Political economy; Political institutions; Political leadership; Reforms; Wisdom
• ISSN: 0969-2290; 1466-4526
• DOI: 10.1080/09692290.2018.1486725

Conventional wisdom maintains that democracy promotes market-oriented economic reforms. This paper argues that democracy's effect on economic liberalization hinges on international-systemic factors. To develop this argument, we focus on one important reform issue: capital account liberalization. We hypothesize that the level of financial openness abroad moderates the relationship between democracy and financial policy at home. An open global financial system increases societal support for capital account liberalization and incentivizes democratic leaders to liberalize the capital account. Analyses of country-level panel data demonstrate that democracy is only positively associated with capital account openness when proximate countries maintain open capital markets. Firm-level survey data and an illustrative case study of Argentina provide support for the mechanisms by showing that policy choices abroad influence domestic support for capital account liberalization. Our findings suggest that integrating domestic- and international-level variables in a single framework improves our understanding of the political economy of reform.