The Political Economy of Market Liberalization.

Abstract

In the dissertation I explore the political sources of market liberalization and market protection. In Chapter II, I argue that autocratic leaders use liberalization either to stimulate the economy in their country and thereby preserve their autocracy, or, when preservation is prohibitively costly, they use liberalization to constrain future tax rates and protect their wealth in democracy. In stable autocracies, liberalization bolsters the economy, thereby making revolution less attractive to the political opposition. In democracy, liberalization makes assets more mobile and provides asset owners with a credible exit option, thereby limiting redistribution. Chapter III explores the impact of economic sanctions on future trade and financial policies. Regardless of whether sanctions are effective in achieving concessions, sanctions restrict international trade flows, creating rents for import-competing producers, who are protected from international competition. These rents can then be used to pressure the government to implement protectionist policies. Thus, sanctions create powerful interest groups in the sanctioned country who seek market protection. In Chapter IV, I distinguish between two types of financial restrictions: inflow restrictions, which limit the entry of capital into the country, and outflow restrictions, which limit capital exit from the country. Inflow restrictions benefit domestic capital owners, who compete with foreign capital owners, while outflow restrictions benefit labor at the expense of domestic capital owners, who lose the bargaining power associated with a credible exit option. I derive and evaluate predictions for inflow and outflow restrictions based on political institutions and market structure.