Austerity Breeds Financial Protectionism
This article explores the historical relationship between welfare states and capital controls, arguing that countries with strong social safety nets often rely on financial protectionism. It traces this dynamic from the Bretton Woods era to modern globalized markets.
Why it matters
It provides a macroeconomic perspective on why governments continue to restrict capital flows despite decades of financial liberalization.
Advanced economies did not simply abandon capital controls after the 1944 Bretton Woods Agreement. Martino Comelli and Pedro Perfeito Da Silva show that welfare states quietly took over their job. Countries that protect workers can afford open financial borders. Countries that spend mainly on pensioners still police the movement of money
In 1944, defending the Bretton Woods plans in the House of Lords, John Maynard Keynes celebrated a conversion: 'the plan accords to every member Government the explicit right to control all capital movements. What used to be a heresy is now endorsed as orthodox'. Capital controls are rules that limit how money moves across borders, from taxes on foreign inflows to restrictions on taking money out of the country. The postwar financial order stayed on a national leash, and governments used this policy space to pursue full employment and build welfare states.
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