abstract

Can different adjustment strategies to the volatile globalizing economy be attributed to domestic regimes? This paper tests the hypotheses that the different threats to the political survival of leaders shape their adjustment policies, when faced with an economic crisis. Whereas democratic leaders promote financial liberalization to avoid blame of economic incompetence and partisan rent seeking, leaders in non-democracies retain control of the economy since criticism of their policies can be equated to an attack on the political regime. The analysis finds that in the pursuit of stable exchange rates to promote international trade and investment, democracies prioritize capital openness and financial liberalization, while non-democracies depend on monetary independence. As such, this paper has provided a domestic political foundation to explain the difference in international financial policies, providing new insights to the current policy debates among advanced and developing countries over ways to rectify global imbalances.