Introduction

The free mobility of capital across national borders presents grave risks for developing and emerging economies. Yet, one country after another jumped to the bandwagon of deregulating the movement of capital flows by liberalizing their capital account during the 1980s and 1990s. This chapter shows that the key to understand the origins as well as the timing and type of capital account liberalization lies in distributional relations. It makes the case that conflictual distributional relations significantly increase the likelihood of capital account liberalization. Furthermore, countries that liberalize in the most reckless and comprehensive manner are also likely to be the countries characterized by a high degree of distributional conflict. That is because conflictual distributional relations erode institutions and alter the balance of power that otherwise maintain existing institutional arrangements. In addition, distributional conflict provides strong incentives to social groups and power-holders to refashion or radically alter the existing institutions pertaining to capital account.