The Impact of Welfare on Capital Controls

This paper investigates the relationship between welfare state and capital flow management. Using macro-sociological data, it assesses the impact of social spending on the level of capital controls. With the aim of complementing the literature on the implications of financial liberalization for welfare regimes, we argue that the amount of welfare spending and, more importantly, its coverage and direction affect the degree of capital account openness. In theoretical terms, such relationship is consistent with protective and productive functions of welfare states. Empirically, both correlational and anecdotical evidence indicate that countries with more traditional approaches to welfare - that segment the working class and redistribute horizontally - tend to adopt higher levels of capital controls; while countries with more active welfare measures and more inclusive social policies tend to be less reliant on capital account restrictions. In a context shaped by recurrent financial instability, the paper encourages the view of welfare states as macro-prudential tools that allow states to conciliate the requirements of capital accumulation and the need for sociopolitical cohesion.