August 2009

No. 4338: Financial Liberalization and Democracy: The Role of Reform Reversals

published as 'Financial liberalization and reversals: political and economic determinants' in: Economic Policy, 2012, 27 (71), 483-513

The relationship between economic and political liberalization has received a great deal of attention lately, yet the possibility of a nonlinear relationship and the role of reversals remain largely neglected. Focusing on democratization and financial reform, this paper offers evidence for a U-shaped relationship across countries, over time as well as in a panel setting using a wide range of estimators for various reform measures. We link this non-linear relationship to the notion of partial or captured democracy. We provide as well econometric support showing that even when de facto is modelled as a function of de jure financial liberalization, this non-linearity obtains.