International institutions and domestic compensation: The IMF and the politics of capital account liberalization

Subhanan Mukherjee, David Andrew Singer

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30 Scopus citations

Abstract

Certain governments have been faster than others in relaxing their restrictions on the cross-border movement of capital. How can we explain the timing and extent of financial liberalization across countries since the 1970s? We argue that IMF stabilization programs provide a window of opportunity for governments to initiate financial reforms, but that policy makers are more likely to seize this opportunity when welfare expenditures are high. Large loans from the IMF shield policy makers from the costs of financial reform, while welfare expenditures provide credibility to the government's ex ante promises of compensation to individuals who are harmed by the reforms. We test this hypothesis on data for 87 countries from 1975 to 2002. We employ a spatial autoregressive error sample selection model which accounts for the nonrandom participation of countries in IMF programs as well as the processes of international policy diffusion. The results provide strong support for the interactive effect of IMF programs and domestic welfare expenditures on financial liberalization.

Original languageEnglish (US)
Pages (from-to)45-60
Number of pages16
JournalAmerican Journal of Political Science
Volume54
Issue number1
DOIs
StatePublished - Jan 1 2010

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All Science Journal Classification (ASJC) codes

  • Sociology and Political Science
  • Political Science and International Relations

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