The Dilemma of Financial Liberalization: State Autonomy and Societal Demands Quan Li The Pennsylvania State University Dale L+ Smith Florida State University Under what conditions do governments shift their capital control policies toward liberalization? Under what conditions do societal supporters influence that liberalization? We postulate the fol- lowing: (1) The desire to maintain state autonomy leads all governments to prefer capital controls to their liberalization, but strong governments, regardless of partisanship, are more able to act on that preference and more likely to maintain controls longer than weak governments. (2) Strong partisan governments are influenced toward liberalization if their core societal constituency increas- ingly supports it—skilled labor for the left government, multinational corporations (MNCs) and commercial banks for the right government. (3) Skilled labor, MNCs, and banks may also influ- ence capital decontrol, regardless of whether its political party is in power, if the group has broad national significance and captures government policy making. Our theory extends beyond existing pluralist and statist explanations. In an empirical test of 17 OECD countries over 22 years, the evidence largely supports our theoretical expectations. T he study of financial globalization is a rapidly expanding research program in the field of international political economy, and a large body of literature addressing the causes of financial liberalization has accumulated. 1 A central question is why states choose to liberalize the controls they impose on capital account transactions. The pluralist approach to political economy considers lib- eralization the outcome of the balance of power among competing socioeco- nomic groups. Where influential societal interests are in favor of the free movements of capital, controls over capital transactions are reduced or re- voked. Alternatively, the statist approach sees characteristics of government, particularly its partisanship, as important in explaining liberalization. Left gov- ernments favor capital controls while right governments support their liberal- We thank Bill Berry, William Jacoby, Lanny Martin, GeorgVanberg, and three anonymous ref- erees for comments and suggestions. We also thank Dennis Quinn and Jaap Woldendorp for their generous help with data. 1 For comprehensive reviews of this literature, see Cohen (1996) andAndrews and Willett (1997). For an empirical test of these competing explanations, see, for example, Li and Smith (forthcoming). THE JOURNAL OF POLITICS, Vol+ 64, No+ 3, August 2002, Pp+ 764–790 © 2002 Southern Political Science Association