Austerity Breeds Financial Protectionism
10 hours ago
- After the 1944 Bretton Woods Agreement, advanced economies did not fully abandon capital controls; welfare states took over their role, with worker protection enabling open financial borders, while pension-heavy spending kept money controls.
- Development of the welfare state in Europe occurred alongside tight capital controls, both serving similar goals: capital controls managed external financial flight, and welfare handled internal social support.
- Despite liberalization, most economies still restrict cross-border finance; compensation theory misses that the mix of welfare spending (protective, productive, or passive) determines financial openness, with protective and productive spending supporting open borders and pensions leading to controls.
- A cluster analysis of OECD countries shows comprehensive welfare states have open capital accounts, post-communist economies with pension-heavy welfare have tight restrictions, liberal economies rely on banking and housing wealth, and thin welfare states maintain controls.
- Global data reveals that broad social assistance coverage correlates with open capital accounts, while narrow coverage links to controls; welfare acts as macroprudential policy to absorb financial shocks, and dismantling it risks demands for border closures.