IDEAS home Printed from
   My bibliography  Save this paper

Fear Factor: How Political Insecurity Shapes the Diffusion of Financial Market Deregulation


  • Wray, Christopher R.


Nearly 30 years after "financial repression" was flagged as a major problem in developing countries, nearly all nations have at least partially liberalized their financial systems. Explanations for this spread of financial market deregulation have emphasized either "top down" mechanisms (globalization, pressure from IOs and the U.S.) or "bottom up" mechanisms focusing on domestic coalitions (derived from configurations of economic interests). In contrast to these broadly structural approaches that de-emphasize the choices of agents, this paper focuses on the micro-foundations of diffusion by emphasizing the incentives facing office-seeking leaders. I argue that politically insecure leaders are potent agents of diffusion because they are particularly likely to "learn" the lessons of financial market reform and emulate the liberalizing practices of others for two reasons. First, the hefty economic boom often associated with financial liberalization provides a tempting way to attempt to buttress their near- to medium-term grip on power. As they observe other nations in their region experiencing a boom, leaders fearful of losing office will be quick to learn the lesson and particularly eager to jump on the liberalization bandwagon, accelerating regional deregulation cascades. Second, insecure governments may be particularly susceptible to pressure from international organizations: they have motivated biases both to believe the efficiency claims of liberalizers and strong reasons to seek the "seal of approval" for their policies. Either way, politically insecure leaders will be quick learners about the benefits of liberalization. To assess these arguments, I estimate hazard models of political survival to generate a proxy for political insecurity. With this proxy for insecurity in hand, time-series cross-sectional logit models of the timing of reforms are estimated. The argument implies that while politically insecure leaders may speed diffusion, their depth of commitment will be shallow, and that reforms motivated partly by fear of losing office will be more likely to unravel than those taken out of deeper conviction.

Suggested Citation

  • Wray, Christopher R., 2004. "Fear Factor: How Political Insecurity Shapes the Diffusion of Financial Market Deregulation," Centre on Regulation and Competition (CRC) Working papers 30607, University of Manchester, Institute for Development Policy and Management (IDPM).
  • Handle: RePEc:ags:idpmcr:30607

    Download full text from publisher

    File URL:
    Download Restriction: no

    References listed on IDEAS

    1. repec:idb:wpaper:318 is not listed on IDEAS
    2. Inessa Love, 2003. "Financial Development and Financing Constraints: International Evidence from the Structural Investment Model," Review of Financial Studies, Society for Financial Studies, vol. 16(3), pages 765-791, July.
    3. Wyplosz, Charles, 2001. "How Risky is Financial Liberalization in the Developing Countries?," CEPR Discussion Papers 2724, C.E.P.R. Discussion Papers.
    4. Leblang, David & Bernhard, William, 2000. "The Politics of Speculative Attacks in Industrial Democracies," International Organization, Cambridge University Press, vol. 54(02), pages 291-324, March.
    5. Carmen M. Reinhart & Graciela L. Kaminsky, 1999. "The Twin Crises: The Causes of Banking and Balance-of-Payments Problems," American Economic Review, American Economic Association, vol. 89(3), pages 473-500, June.
    6. Broz, J. Lawrence, 2002. "Political System Transparency and Monetary Commitment Regimes," International Organization, Cambridge University Press, vol. 56(04), pages 861-887, September.
    7. Collins, Susan M., 1996. "On becoming more flexible: Exchange rate regimes in Latin America and the Caribbean," Journal of Development Economics, Elsevier, vol. 51(1), pages 117-138, October.
    8. repec:cup:apsrev:v:89:y:1995:i:04:p:841-855_09 is not listed on IDEAS
    9. Kahneman, Daniel & Knetsch, Jack L & Thaler, Richard H, 1990. "Experimental Tests of the Endowment Effect and the Coase Theorem," Journal of Political Economy, University of Chicago Press, vol. 98(6), pages 1325-1348, December.
    10. Enrica Detragiache & Asli Demirgüç-Kunt, 1998. "Financial Liberalization and Financial Fragility," IMF Working Papers 98/83, International Monetary Fund.
    11. Asli Demirgüç-Kunt & Enrica Detragiache, 1998. "The Determinants of Banking Crises in Developing and Developed Countries," IMF Staff Papers, Palgrave Macmillan, vol. 45(1), pages 81-109, March.
    Full references (including those not matched with items on IDEAS)

    More about this item


    Political Economy;


    Access and download statistics


    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ags:idpmcr:30607. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (AgEcon Search). General contact details of provider: .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.