Fear Factor: How Political Insecurity Shapes the Diffusion of Financial Market Deregulation
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.
|Date of creation:||2004|
|Date of revision:|
|Contact details of provider:|| Postal: Harold Hankins Building, Precinct Centre, Booth Street West, Manchester, M13 9QH|
Web page: http://www.sed.manchester.ac.uk/idpm
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Asli DemirgÃ¼Ã§-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.
- Reinhart, Carmen & Kaminsky, Graciela, 1999.
"The twin crises: The causes of banking and balance of payments problems,"
14081, University Library of Munich, Germany.
- 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.
- Graciela L. Kaminsky & Carmen M. Reinhart, 1996. "The twin crises: the causes of banking and balance-of-payments problems," International Finance Discussion Papers 544, Board of Governors of the Federal Reserve System (U.S.).
- Reinhart, Carmen & Kaminsky, Graciela, 2000.
"Las crisis gemelas: las causas de los problemas bancarios y de balanza de pagos
[The twin crises: Te causes of banking and balance of payments problems]," MPRA Paper 13842, University Library of Munich, Germany.
- 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.
- Wyplosz, Charles, 2001.
"How Risky is Financial Liberalization in the Developing Countries?,"
CEPR Discussion Papers
2724, C.E.P.R. Discussion Papers.
- Charles WYPLOSZ, 2001. "How Risky Is Financial Liberalization In The Developing Countries?," G-24 Discussion Papers 14, United Nations Conference on Trade and Development.
- 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.
- Love, Inessa, 2001. "Financial development and financing constraints - international evidence from the structural investment model," Policy Research Working Paper Series 2694, The World Bank.
- 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.
- Enrica Detragiache & Asli DemirgÃ¼Ã§-Kunt, 1998.
"Financial Liberalization and Financial Fragility,"
IMF Working Papers
98/83, International Monetary Fund.
- repec:idb:wpaper:318 is not listed on IDEAS
- 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.
- Broz, J. Lawrence, 2002. "Political System Transparency and Monetary Commitment Regimes," International Organization, Cambridge University Press, vol. 56(04), pages 861-887, September.
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)
If references are entirely missing, you can add them using this form.