Dailami, Monsoor2014-08-282014-08-282000-06https://hdl.handle.net/10986/19832The 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.en-USCC BY 3.0 IGOAGGREGATE DEMANDAGRICULTUREASSET MANAGEMENTAUTONOMYBALANCE OF PAYMENTSBANK LOANSBANK RUNBANKING REGULATIONBANKING SUPERVISIONBENEFIT ANALYSISBONDSBORROWINGBORROWING COSTSCAPITAL ACCOUNTCAPITAL CONTROLSCAPITAL FLIGHTCAPITAL FLOWSCAPITAL MARKETSCAPITAL MOBILITYCAPITALIZATIONCENTRAL BANKCENTRAL BANK GOVERNORSCHRONIC INFLATIONCIVIL SOCIETYCONSOLIDATIONCONSUMER PREFERENCESCORPORATE GOVERNANCECOST OF CAPITALCRITICAL SOCIALCURRENT ACCOUNTDEBTDEMOCRATIC INSTITUTIONSDEMOCRATIC SOCIETIESDEVELOPING COUNTRIESECONOMIC ACTIVITYECONOMIC CONDITIONSECONOMIC EFFICIENCYECONOMIC GROWTHECONOMIC RESEARCHEMERGING MARKET ECONOMIESEMPIRICAL ANALYSISEMPIRICAL EVIDENCEEMPIRICAL RESEARCHEXCHANGE RATEEXCHANGE RATE ARRANGEMENTSEXCHANGE RATE REGIMEEXCHANGE RATESEXPORTSEXTERNAL DEBTFINANCIAL CRISESFINANCIAL CRISISFINANCIAL ENVIRONMENTFINANCIAL INNOVATIONFINANCIAL INSTITUTIONSFINANCIAL INTEGRATIONFINANCIAL MARKET VOLATILITYFINANCIAL MARKETSFINANCIAL OPENNESSFINANCIAL REGULATIONFINANCIAL RESOURCESFINANCIAL SECTORFINANCIAL SERVICESFINANCIAL STABILITYFINANCIAL SYSTEMFINANCIAL TRANSACTIONSFINANCIAL VOLATILITYFISCAL DEFICITSFISCAL POLICYFOREIGN ASSETSFOREIGN EXCHANGEFOREIGN EXCHANGE MARKETSFREE MARKETSFULL EMPLOYMENTGDPGLOBALIZATIONGOVERNMENT EXPENDITURESGOVERNMENT INTERVENTIONHUMAN CAPITALIMPORTSINCOMEINDUSTRIAL COUNTRIESINFLATIONINFLATION RATESINSURANCEINTEREST RATEINTEREST RATESINTERNATIONAL BANKINGINTERNATIONAL FINANCIAL TRANSACTIONSINTERNATIONAL POLICY COORDINATIONINTERNATIONAL TRADEINVESTMENT OPPORTUNITIESLIQUID ASSETSLIQUIDITYMACRO POLICYMACROECONOMIC MANAGEMENTMACROECONOMIC POLICYMACROECONOMIC STABILITYMACROECONOMIC STABILIZATIONMACROECONOMIC VARIABLESMACROECONOMICSMARGINAL COSTMARGINAL WELFARE COSTSMARKET INTEGRATIONMARKET VALUEMATURITIESMONETARY AUTHORITIESMONETARY POLICYMORAL HAZARDNATIONAL ECONOMIESOILOIL PRICESPAYMENT IMBALANCESPER CAPITA INCOMEPOLICY RESEARCHPOLITICAL ECONOMYPORTFOLIO DIVERSIFICATIONPOVERTY ALLEVIATIONPOVERTY REDUCTIONPRICE STABILITYPRIVATIZATIONPROPERTY RIGHTSPUBLIC ENTERPRISESPUBLIC EXPENDITURESPUBLIC GOODSREDISTRIBUTIVE TAXATIONREGULATORY RESPONSESRENT SEEKINGRENT SEEKING BEHAVIORRISK AVERSERISK AVERSIONRISK DIVERSIFICATIONRISK PREMIASAVINGSSECURITIESSHORT-TERM TRANSACTIONSSOCIAL COSTSSOCIAL SECURITYSOCIAL SERVICESSTANDARD DEVIATIONSTOCK MARKETSTRADE LIBERALIZATIONTRANSACTION COSTSTRANSFER PAYMENTSTRANSPARENCYUNEMPLOYMENTWEALTHWELFARE ECONOMICSWELFARE GAINS10.1596/1813-9450-2372