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Financial Liberalisation and Political Variables: a response to Abiad and Mody

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  • Brian Burgoon
  • Panicos Demetriades
  • Geoffrey Underhill

Abstract

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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  • Brian Burgoon & Panicos Demetriades & Geoffrey Underhill, 2008. "Financial Liberalisation and Political Variables: a response to Abiad and Mody," Discussion Papers in Economics 08/30, Division of Economics, School of Business, University of Leicester.
    • Handle: RePEc:lec:leecon:08/30
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    References listed on IDEAS

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    Cited by:

    1. Underhill, Geoffrey, 2010. "Theory and the Market after the Crisis: the Endogeneity of Financial Governance," CEPR Discussion Papers 8164, C.E.P.R. Discussion Papers.
    2. Thibault Darcillon, 2011. "Political Partisanship and Financial Reforms in Advanced Countries," Post-Print halshs-00639840, HAL.
    3. Susie Lee & Ingmar Schumacher, 2011. "When does financial sector (in)stability induce financial reforms?," Working Papers hal-00637954, HAL.

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