We challenge recent findings by Abiad and Mody (2005) which suggest that financial liberalization has little to do with political variables. This analysis is at odds with some of the established literature, and only with difficulty comes to terms with the considerable cross-national variation in the pace, phasing, and extent of financial reforms over time. Using Abiad and Mody's own index of financial liberalization, but slightly unbundling and refining their measures of 'ideological affinity' and 'regime type', we examine what Abiad and Mody call the 'triggers' of liberalisation and the dynamics of the subsequent 'cumulative transformation'. We demonstrate the role of political variables in relation to initial liberalisation episodes, and as variables affecting the cumulative dynamics and sustainability of ongoing financial reform processes, including those which affect the acceptability and costs of liberalization. These factors include (i) shifts to - as opposed to levels in - Left government; (ii) the incidence of Left governments combined with low levels of democracy; (iii) international voter support for free markets; (iv) the extent of social safety nets; (v) the presence of multilateral and bilateral aid programs. Our empirical investigation confirms these factors as statistically significant determinants of financial liberalization, and reveal what Abiad and Mody identify as 'learning' to be a highly political process.
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Paper provided by Department of Economics, University of Leicester in its series Discussion Papers in Economics with number
08/30.
Length: Date of creation: Sep 2008 Date of revision: Handle: RePEc:lec:leecon:08/30
Contact details of provider: Postal: Department of Economics University of Leicester, University Road. Leicester. LE1 7RH. UK Phone: +44 (0)116 252 2887 Fax: +44 (0)116 252 2908 Email: Web page: http://www.le.ac.uk/economics/
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