Financial Openness, Democracy, and Redistributive Policy

The debate about the relationship between democratic forms of government and the free movement of capital across borders dates to the 18th century. It has regained prominence as capital on a massive scale has become increasingly mobile and as free...

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Main Author:	Dailami, Monsoor
Format:	Policy Research Working Paper
Language:	English en_US
Published:	World Bank, Washington, DC 2014
Subjects:	AGGREGATE DEMAND AGRICULTURE ASSET MANAGEMENT AUTONOMY BALANCE OF PAYMENTS BANK LOANS BANK RUN BANKING REGULATION BANKING SUPERVISION BENEFIT ANALYSIS BONDS BORROWING BORROWING COSTS CAPITAL ACCOUNT CAPITAL CONTROLS CAPITAL FLIGHT CAPITAL FLOWS CAPITAL MARKETS CAPITAL MOBILITY CAPITALIZATION CENTRAL BANK CENTRAL BANK GOVERNORS CHRONIC INFLATION CIVIL SOCIETY CONSOLIDATION CONSUMER PREFERENCES CORPORATE GOVERNANCE COST OF CAPITAL CRITICAL SOCIAL CURRENT ACCOUNT DEBT DEMOCRATIC INSTITUTIONS DEMOCRATIC SOCIETIES DEVELOPING COUNTRIES ECONOMIC ACTIVITY ECONOMIC CONDITIONS ECONOMIC EFFICIENCY ECONOMIC GROWTH ECONOMIC RESEARCH EMERGING MARKET ECONOMIES EMPIRICAL ANALYSIS EMPIRICAL EVIDENCE EMPIRICAL RESEARCH EXCHANGE RATE EXCHANGE RATE ARRANGEMENTS EXCHANGE RATE REGIME EXCHANGE RATES EXPORTS EXTERNAL DEBT FINANCIAL CRISES FINANCIAL CRISIS FINANCIAL ENVIRONMENT FINANCIAL INNOVATION FINANCIAL INSTITUTIONS FINANCIAL INTEGRATION FINANCIAL MARKET VOLATILITY FINANCIAL MARKETS FINANCIAL OPENNESS FINANCIAL REGULATION FINANCIAL RESOURCES FINANCIAL SECTOR FINANCIAL SERVICES FINANCIAL STABILITY FINANCIAL SYSTEM FINANCIAL TRANSACTIONS FINANCIAL VOLATILITY FISCAL DEFICITS FISCAL POLICY FOREIGN ASSETS FOREIGN EXCHANGE FOREIGN EXCHANGE MARKETS FREE MARKETS FULL EMPLOYMENT GDP GLOBALIZATION GOVERNMENT EXPENDITURES GOVERNMENT INTERVENTION HUMAN CAPITAL IMPORTS INCOME INDUSTRIAL COUNTRIES INFLATION INFLATION RATES INSURANCE INTEREST RATE INTEREST RATES INTERNATIONAL BANKING INTERNATIONAL FINANCIAL TRANSACTIONS INTERNATIONAL POLICY COORDINATION INTERNATIONAL TRADE INVESTMENT OPPORTUNITIES LIQUID ASSETS LIQUIDITY MACRO POLICY MACROECONOMIC MANAGEMENT MACROECONOMIC POLICY MACROECONOMIC STABILITY MACROECONOMIC STABILIZATION MACROECONOMIC VARIABLES MACROECONOMICS MARGINAL COST MARGINAL WELFARE COSTS MARKET INTEGRATION MARKET VALUE MATURITIES MONETARY AUTHORITIES MONETARY POLICY MORAL HAZARD NATIONAL ECONOMIES OIL OIL PRICES PAYMENT IMBALANCES PER CAPITA INCOME POLICY RESEARCH POLITICAL ECONOMY PORTFOLIO DIVERSIFICATION POVERTY ALLEVIATION POVERTY REDUCTION PRICE STABILITY PRIVATIZATION PROPERTY RIGHTS PUBLIC ENTERPRISES PUBLIC EXPENDITURES PUBLIC GOODS REDISTRIBUTIVE TAXATION REGULATORY RESPONSES RENT SEEKING RENT SEEKING BEHAVIOR RISK AVERSE RISK AVERSION RISK DIVERSIFICATION RISK PREMIA SAVINGS SECURITIES SHORT-TERM TRANSACTIONS SOCIAL COSTS SOCIAL SECURITY SOCIAL SERVICES STANDARD DEVIATION STOCK MARKETS TRADE LIBERALIZATION TRANSACTION COSTS TRANSFER PAYMENTS TRANSPARENCY UNEMPLOYMENT WEALTH WELFARE ECONOMICS WELFARE GAINS
Online Access:	http://documents.worldbank.org/curated/en/2000/06/437065/financial-openness-democracy-redistributive-policy http://hdl.handle.net/10986/19832

id	okr-10986-19832
recordtype	oai_dc
repository_type	Digital Repository
institution_category	Foreign Institution
institution	Digital Repositories
building	World Bank Open Knowledge Repository
collection	World Bank
language	English en_US
topic	AGGREGATE DEMAND AGRICULTURE ASSET MANAGEMENT AUTONOMY BALANCE OF PAYMENTS BANK LOANS BANK RUN BANKING REGULATION BANKING SUPERVISION BENEFIT ANALYSIS BONDS BORROWING BORROWING COSTS CAPITAL ACCOUNT CAPITAL CONTROLS CAPITAL FLIGHT CAPITAL FLOWS CAPITAL MARKETS CAPITAL MOBILITY CAPITALIZATION CENTRAL BANK CENTRAL BANK GOVERNORS CHRONIC INFLATION CIVIL SOCIETY CONSOLIDATION CONSUMER PREFERENCES CORPORATE GOVERNANCE COST OF CAPITAL CRITICAL SOCIAL CURRENT ACCOUNT DEBT DEMOCRATIC INSTITUTIONS DEMOCRATIC SOCIETIES DEVELOPING COUNTRIES ECONOMIC ACTIVITY ECONOMIC CONDITIONS ECONOMIC EFFICIENCY ECONOMIC GROWTH ECONOMIC RESEARCH EMERGING MARKET ECONOMIES EMPIRICAL ANALYSIS EMPIRICAL EVIDENCE EMPIRICAL RESEARCH EXCHANGE RATE EXCHANGE RATE ARRANGEMENTS EXCHANGE RATE REGIME EXCHANGE RATES EXPORTS EXTERNAL DEBT FINANCIAL CRISES FINANCIAL CRISIS FINANCIAL ENVIRONMENT FINANCIAL INNOVATION FINANCIAL INSTITUTIONS FINANCIAL INTEGRATION FINANCIAL MARKET VOLATILITY FINANCIAL MARKETS FINANCIAL OPENNESS FINANCIAL REGULATION FINANCIAL RESOURCES FINANCIAL SECTOR FINANCIAL SERVICES FINANCIAL STABILITY FINANCIAL SYSTEM FINANCIAL TRANSACTIONS FINANCIAL VOLATILITY FISCAL DEFICITS FISCAL POLICY FOREIGN ASSETS FOREIGN EXCHANGE FOREIGN EXCHANGE MARKETS FREE MARKETS FULL EMPLOYMENT GDP GLOBALIZATION GOVERNMENT EXPENDITURES GOVERNMENT INTERVENTION HUMAN CAPITAL IMPORTS INCOME INDUSTRIAL COUNTRIES INFLATION INFLATION RATES INSURANCE INTEREST RATE INTEREST RATES INTERNATIONAL BANKING INTERNATIONAL FINANCIAL TRANSACTIONS INTERNATIONAL POLICY COORDINATION INTERNATIONAL TRADE INVESTMENT OPPORTUNITIES LIQUID ASSETS LIQUIDITY MACRO POLICY MACROECONOMIC MANAGEMENT MACROECONOMIC POLICY MACROECONOMIC STABILITY MACROECONOMIC STABILIZATION MACROECONOMIC VARIABLES MACROECONOMICS MARGINAL COST MARGINAL WELFARE COSTS MARKET INTEGRATION MARKET VALUE MATURITIES MONETARY AUTHORITIES MONETARY POLICY MORAL HAZARD NATIONAL ECONOMIES OIL OIL PRICES PAYMENT IMBALANCES PER CAPITA INCOME POLICY RESEARCH POLITICAL ECONOMY PORTFOLIO DIVERSIFICATION POVERTY ALLEVIATION POVERTY REDUCTION PRICE STABILITY PRIVATIZATION PROPERTY RIGHTS PUBLIC ENTERPRISES PUBLIC EXPENDITURES PUBLIC GOODS REDISTRIBUTIVE TAXATION REGULATORY RESPONSES RENT SEEKING RENT SEEKING BEHAVIOR RISK AVERSE RISK AVERSION RISK DIVERSIFICATION RISK PREMIA SAVINGS SECURITIES SHORT-TERM TRANSACTIONS SOCIAL COSTS SOCIAL SECURITY SOCIAL SERVICES STANDARD DEVIATION STOCK MARKETS TRADE LIBERALIZATION TRANSACTION COSTS TRANSFER PAYMENTS TRANSPARENCY UNEMPLOYMENT WEALTH WELFARE ECONOMICS WELFARE GAINS
spellingShingle	AGGREGATE DEMAND AGRICULTURE ASSET MANAGEMENT AUTONOMY BALANCE OF PAYMENTS BANK LOANS BANK RUN BANKING REGULATION BANKING SUPERVISION BENEFIT ANALYSIS BONDS BORROWING BORROWING COSTS CAPITAL ACCOUNT CAPITAL CONTROLS CAPITAL FLIGHT CAPITAL FLOWS CAPITAL MARKETS CAPITAL MOBILITY CAPITALIZATION CENTRAL BANK CENTRAL BANK GOVERNORS CHRONIC INFLATION CIVIL SOCIETY CONSOLIDATION CONSUMER PREFERENCES CORPORATE GOVERNANCE COST OF CAPITAL CRITICAL SOCIAL CURRENT ACCOUNT DEBT DEMOCRATIC INSTITUTIONS DEMOCRATIC SOCIETIES DEVELOPING COUNTRIES ECONOMIC ACTIVITY ECONOMIC CONDITIONS ECONOMIC EFFICIENCY ECONOMIC GROWTH ECONOMIC RESEARCH EMERGING MARKET ECONOMIES EMPIRICAL ANALYSIS EMPIRICAL EVIDENCE EMPIRICAL RESEARCH EXCHANGE RATE EXCHANGE RATE ARRANGEMENTS EXCHANGE RATE REGIME EXCHANGE RATES EXPORTS EXTERNAL DEBT FINANCIAL CRISES FINANCIAL CRISIS FINANCIAL ENVIRONMENT FINANCIAL INNOVATION FINANCIAL INSTITUTIONS FINANCIAL INTEGRATION FINANCIAL MARKET VOLATILITY FINANCIAL MARKETS FINANCIAL OPENNESS FINANCIAL REGULATION FINANCIAL RESOURCES FINANCIAL SECTOR FINANCIAL SERVICES FINANCIAL STABILITY FINANCIAL SYSTEM FINANCIAL TRANSACTIONS FINANCIAL VOLATILITY FISCAL DEFICITS FISCAL POLICY FOREIGN ASSETS FOREIGN EXCHANGE FOREIGN EXCHANGE MARKETS FREE MARKETS FULL EMPLOYMENT GDP GLOBALIZATION GOVERNMENT EXPENDITURES GOVERNMENT INTERVENTION HUMAN CAPITAL IMPORTS INCOME INDUSTRIAL COUNTRIES INFLATION INFLATION RATES INSURANCE INTEREST RATE INTEREST RATES INTERNATIONAL BANKING INTERNATIONAL FINANCIAL TRANSACTIONS INTERNATIONAL POLICY COORDINATION INTERNATIONAL TRADE INVESTMENT OPPORTUNITIES LIQUID ASSETS LIQUIDITY MACRO POLICY MACROECONOMIC MANAGEMENT MACROECONOMIC POLICY MACROECONOMIC STABILITY MACROECONOMIC STABILIZATION MACROECONOMIC VARIABLES MACROECONOMICS MARGINAL COST MARGINAL WELFARE COSTS MARKET INTEGRATION MARKET VALUE MATURITIES MONETARY AUTHORITIES MONETARY POLICY MORAL HAZARD NATIONAL ECONOMIES OIL OIL PRICES PAYMENT IMBALANCES PER CAPITA INCOME POLICY RESEARCH POLITICAL ECONOMY PORTFOLIO DIVERSIFICATION POVERTY ALLEVIATION POVERTY REDUCTION PRICE STABILITY PRIVATIZATION PROPERTY RIGHTS PUBLIC ENTERPRISES PUBLIC EXPENDITURES PUBLIC GOODS REDISTRIBUTIVE TAXATION REGULATORY RESPONSES RENT SEEKING RENT SEEKING BEHAVIOR RISK AVERSE RISK AVERSION RISK DIVERSIFICATION RISK PREMIA SAVINGS SECURITIES SHORT-TERM TRANSACTIONS SOCIAL COSTS SOCIAL SECURITY SOCIAL SERVICES STANDARD DEVIATION STOCK MARKETS TRADE LIBERALIZATION TRANSACTION COSTS TRANSFER PAYMENTS TRANSPARENCY UNEMPLOYMENT WEALTH WELFARE ECONOMICS WELFARE GAINS Dailami, Monsoor Financial Openness, Democracy, and Redistributive Policy
relation	Policy Research Working Paper;No. 2372
description	The debate about the relationship between democratic forms of government and the free movement of capital across borders dates to the 18th century. It has regained prominence as capital on a massive scale has become increasingly mobile and as free economies experience continuous pressure from rapidly changing technology, market integration, changing consumer preferences, and intensified competition. These changes imply greater uncertainty about citizens' future income positions, which could prompt them to seek insurance through the marketplace or through constitutionally arranged income redistribution. As more countries move toward democracy, the availability of such insurance mechanisms to citizens is key if political pressure for capital controls is to be averted and if public support for an open, liberal international financial order is to be maintained. The author briefly reviews how today's international financial system evolved from one of mostly closed capital accounts immediately after World War II to today's enormous, largely free-flowing market. Drawing on insights from the literature on public choice and constitutional political economy, the author develops an analytical framework for a welfare cost-benefit analysis of financial openness to international capital flows. The main welfare benefits of financial openness derive from greater economic efficiency and increased opportunities for risk diversification. The welfare costs relate to the cost of insurance used as a mechanism for coping with the risks of financial volatility. These insurance costs are the economic losses associated with redistribution, including moral hazard, rent-seeking, and rent-avoidance. A cross-sectional analysis of a large sample of developed and developing countries shows the positive correlation between democracy (as defined by political and civil liberty) and financial openness. More rigorous econometric investigation using logit analysis and controlling for level of income also shows that redistributive social policies are key in determining the likelihood that countries can successfully combine an openness to international capital mobility with democratic forms of government.
format	Publications & Research :: Policy Research Working Paper
author	Dailami, Monsoor
author_facet	Dailami, Monsoor
author_sort	Dailami, Monsoor
title	Financial Openness, Democracy, and Redistributive Policy
title_short	Financial Openness, Democracy, and Redistributive Policy
title_full	Financial Openness, Democracy, and Redistributive Policy
title_fullStr	Financial Openness, Democracy, and Redistributive Policy
title_full_unstemmed	Financial Openness, Democracy, and Redistributive Policy
title_sort	financial openness, democracy, and redistributive policy
publisher	World Bank, Washington, DC
publishDate	2014
url	http://documents.worldbank.org/curated/en/2000/06/437065/financial-openness-democracy-redistributive-policy http://hdl.handle.net/10986/19832
_version_	1764441520432218112
spelling	okr-10986-198322021-04-23T14:03:46Z Financial Openness, Democracy, and Redistributive Policy Dailami, Monsoor AGGREGATE DEMAND AGRICULTURE ASSET MANAGEMENT AUTONOMY BALANCE OF PAYMENTS BANK LOANS BANK RUN BANKING REGULATION BANKING SUPERVISION BENEFIT ANALYSIS BONDS BORROWING BORROWING COSTS CAPITAL ACCOUNT CAPITAL CONTROLS CAPITAL FLIGHT CAPITAL FLOWS CAPITAL MARKETS CAPITAL MOBILITY CAPITALIZATION CENTRAL BANK CENTRAL BANK GOVERNORS CHRONIC INFLATION CIVIL SOCIETY CONSOLIDATION CONSUMER PREFERENCES CORPORATE GOVERNANCE COST OF CAPITAL CRITICAL SOCIAL CURRENT ACCOUNT DEBT DEMOCRATIC INSTITUTIONS DEMOCRATIC SOCIETIES DEVELOPING COUNTRIES ECONOMIC ACTIVITY ECONOMIC CONDITIONS ECONOMIC EFFICIENCY ECONOMIC GROWTH ECONOMIC RESEARCH EMERGING MARKET ECONOMIES EMPIRICAL ANALYSIS EMPIRICAL EVIDENCE EMPIRICAL RESEARCH EXCHANGE RATE EXCHANGE RATE ARRANGEMENTS EXCHANGE RATE REGIME EXCHANGE RATES EXPORTS EXTERNAL DEBT FINANCIAL CRISES FINANCIAL CRISIS FINANCIAL ENVIRONMENT FINANCIAL INNOVATION FINANCIAL INSTITUTIONS FINANCIAL INTEGRATION FINANCIAL MARKET VOLATILITY FINANCIAL MARKETS FINANCIAL OPENNESS FINANCIAL REGULATION FINANCIAL RESOURCES FINANCIAL SECTOR FINANCIAL SERVICES FINANCIAL STABILITY FINANCIAL SYSTEM FINANCIAL TRANSACTIONS FINANCIAL VOLATILITY FISCAL DEFICITS FISCAL POLICY FOREIGN ASSETS FOREIGN EXCHANGE FOREIGN EXCHANGE MARKETS FREE MARKETS FULL EMPLOYMENT GDP GLOBALIZATION GOVERNMENT EXPENDITURES GOVERNMENT INTERVENTION HUMAN CAPITAL IMPORTS INCOME INDUSTRIAL COUNTRIES INFLATION INFLATION RATES INSURANCE INTEREST RATE INTEREST RATES INTERNATIONAL BANKING INTERNATIONAL FINANCIAL TRANSACTIONS INTERNATIONAL POLICY COORDINATION INTERNATIONAL TRADE INVESTMENT OPPORTUNITIES LIQUID ASSETS LIQUIDITY MACRO POLICY MACROECONOMIC MANAGEMENT MACROECONOMIC POLICY MACROECONOMIC STABILITY MACROECONOMIC STABILIZATION MACROECONOMIC VARIABLES MACROECONOMICS MARGINAL COST MARGINAL WELFARE COSTS MARKET INTEGRATION MARKET VALUE MATURITIES MONETARY AUTHORITIES MONETARY POLICY MORAL HAZARD NATIONAL ECONOMIES OIL OIL PRICES PAYMENT IMBALANCES PER CAPITA INCOME POLICY RESEARCH POLITICAL ECONOMY PORTFOLIO DIVERSIFICATION POVERTY ALLEVIATION POVERTY REDUCTION PRICE STABILITY PRIVATIZATION PROPERTY RIGHTS PUBLIC ENTERPRISES PUBLIC EXPENDITURES PUBLIC GOODS REDISTRIBUTIVE TAXATION REGULATORY RESPONSES RENT SEEKING RENT SEEKING BEHAVIOR RISK AVERSE RISK AVERSION RISK DIVERSIFICATION RISK PREMIA SAVINGS SECURITIES SHORT-TERM TRANSACTIONS SOCIAL COSTS SOCIAL SECURITY SOCIAL SERVICES STANDARD DEVIATION STOCK MARKETS TRADE LIBERALIZATION TRANSACTION COSTS TRANSFER PAYMENTS TRANSPARENCY UNEMPLOYMENT WEALTH WELFARE ECONOMICS WELFARE GAINS The debate about the relationship between democratic forms of government and the free movement of capital across borders dates to the 18th century. It has regained prominence as capital on a massive scale has become increasingly mobile and as free economies experience continuous pressure from rapidly changing technology, market integration, changing consumer preferences, and intensified competition. These changes imply greater uncertainty about citizens' future income positions, which could prompt them to seek insurance through the marketplace or through constitutionally arranged income redistribution. As more countries move toward democracy, the availability of such insurance mechanisms to citizens is key if political pressure for capital controls is to be averted and if public support for an open, liberal international financial order is to be maintained. The author briefly reviews how today's international financial system evolved from one of mostly closed capital accounts immediately after World War II to today's enormous, largely free-flowing market. Drawing on insights from the literature on public choice and constitutional political economy, the author develops an analytical framework for a welfare cost-benefit analysis of financial openness to international capital flows. The main welfare benefits of financial openness derive from greater economic efficiency and increased opportunities for risk diversification. The welfare costs relate to the cost of insurance used as a mechanism for coping with the risks of financial volatility. These insurance costs are the economic losses associated with redistribution, including moral hazard, rent-seeking, and rent-avoidance. A cross-sectional analysis of a large sample of developed and developing countries shows the positive correlation between democracy (as defined by political and civil liberty) and financial openness. More rigorous econometric investigation using logit analysis and controlling for level of income also shows that redistributive social policies are key in determining the likelihood that countries can successfully combine an openness to international capital mobility with democratic forms of government. 2014-08-28T18:23:35Z 2014-08-28T18:23:35Z 2000-06 http://documents.worldbank.org/curated/en/2000/06/437065/financial-openness-democracy-redistributive-policy http://hdl.handle.net/10986/19832 English en_US Policy Research Working Paper;No. 2372 CC BY 3.0 IGO http://creativecommons.org/licenses/by/3.0/igo/ World Bank, Washington, DC Publications & Research :: Policy Research Working Paper Publications & Research

Financial Openness, Democracy, and Redistributive Policy

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