CESifo working paper: Monetary Policy and International Finance 3715
We analyze whether or not the globalization of capital, disciplines governments and improves governance. We demonstrate that globalization affects governance, by increasing a country's vulnerability to sudden capital flight. This increased threat of capital flight can discipline governments and improve governance and welfare by placing countries in a golden straitjacket. However, globalization may also overdiscipline governments - resulting in a perverse impact on governmental incentives that catalyzes (mis)governance. Accordingly, the paper suggests a novel (and qualified) role for capital controls. Finally, we provide some suggestive evidence consistent with the predictions from our theoretical framework.
globalization governance capital flight capital controls discipline