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

  • Wray, Christopher R.
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    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.

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    Paper provided by University of Manchester, Institute for Development Policy and Management (IDPM) in its series Centre on Regulation and Competition (CRC) Working papers with number 30607.

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    Date of creation: 2004
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    Handle: RePEc:ags:idpmcr:30607
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    1. Charles WYPLOSZ, 2001. "How Risky Is Financial Liberalization In The Developing Countries?," G-24 Discussion Papers 14, United Nations Conference on Trade and Development.
    2. Reinhart, Carmen & Kaminsky, Graciela, 1999. "The twin crises: The causes of banking and balance of payments problems," MPRA Paper 14081, University Library of Munich, Germany.
    3. 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.
    4. 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.
    5. Enrica Detragiache & Asli Demirgüç-Kunt, 1998. "Financial Liberalization and Financial Fragility," IMF Working Papers 98/83, International Monetary Fund.
    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. 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 1325-48, December.
    8. 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.
    9. 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.
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