State in Control: Fragmented Liberalization in Financial Services

• In Event: Banking and Finance Regulations

Abstract

Why do countries vary in their level of financial liberalization? While previous scholarship on liberalization has emphasized regime types, partisanship, or the level of economic and financial development to explain which countries liberalize and why, I argue these studies overlook the dual preference of government - as a political body as well as a state-owned firm – in financial liberalization. Governments not only represent domestic industrial firms, which would benefit from financial liberalization, but also participate directly in the financial market through state-owned financial firms, which face competition with foreign financial firms. This dual preference leads governments to liberalize but embed restrictions to protect their control of the financial market. This article evaluates this argument using a new database of financial entry restrictions in 102 countries. I find that the greater the state control over the financial industry, the more entry barriers governments are likely to introduce during liberalization, and these restrictions are more severe. The results have implications for the politics of financial liberalization.

Author

• Clara Park, Duke University