Politics in the Third Age of Global Finance: Choosing Capital Controls

Abstract

The backlash to globalized markets is often framed as governments allowing for the exploitation of domestic actors to serve global elites. However, considering the level of integration and expansion that characterizes global markets, do governments have a choice in how to open or close their domestic markets? Within this project, I look at this question focusing specifically on the flows on capital regulated by countries using capital controls. With no clear consensus on the effectiveness of different forms of capital controls, I argue that the decision to use one type of control over another is a political one. When facing the decision to restrict capital governments must decide whose capital they're going to restrict. I build from the \textit{partisan theory of investment} and argue that choice between the different types of controls is driven by the constituency of the government and their expected welfare from restricting a type of capital flow. I find evidence that governments do respond to their constituencies preferences, but that these preferences do not extend to all types of capital controls and are not constant over time and space. The contributions of this project are to emphasize that the type of control matters, that constituent preferences over controls are dynamic and varied, and that these preferences are informed by the expected impact of the control on the constituents' welfare. Together this suggests that governments are not solely driven by international pressures to open or close their markets, but that they respond to the demands of their constituencies.