"bank run" in domestic settings, adding a non-cooperation premium on top of other country risk premia.<sup>16</sup> Thus, it is increasingly being argued that under some circumstances, i.e., weakness in local financial markets, euphoria and panic behavior of foreign investors, and structural balance of payments problems, there exists a case for deploying capital controls, particularly on shortterm flows, to reduce volatility. In this respect, Chile's capital controls experience has attracted considerable interest, partly because of its market-based nature, transparency, and the fact that it is easier to phase out restrictions based on taxation than those on quantitative controls.'<sup>7</sup> Indeed, the social costs associated with the recent crises in emerging market economies have been substantial. According to a recent study by Stiglitz and Bhattacharya (1999), unemployment doubled in Thailand and tripled in Korea over the course of a year during the recent crises, while standards of living declined 14% and 22%, respectively; Indonesia also experienced a 25% decrease in standard of living. Not quantifiable are further costs such as lost schooling, malnutrition among some, and political strife.<sup>18</sup> In the face of these apparent constraints, then, what accounts for the fact that virtually all modern advanced democracies are today also open to international capital movements and indeed, by the early 1 990s had all achieved capital account convertibility on their currencies?<sup>19</sup> It will be argued below that there are two dimensions to this explanation: on the domestic side, redistribution; and on the international side, policy and regulatory coordination. In other words, since global financial risks have both macroeconomic and distributional consequences, the appropriate policy responses would entail both macroeconomic and social policy responses, i.e. redistributive measures such as transfer payments and higher public expenditures on areas such as health and education. At the same time, since financial liberalization implies global welfare gains, there exists a rationale for international financial assistance, or in other words, insurance at the global level.

# **Redistribution As Income Insurance**

The most relevant aspect of redistribution that is germane to the debate on the link between democracy and the globalization of finance is its recent articulation within the scope of constitutional political economy {Kliemt (1993); Wessels (1993); and Buchanan, Tullock (1 962)}. In contrast to much of traditional Pareto welfare economics, which focuses on aggregate welfare and thus has little to contribute to the theory of redistribution, the literature on constitutional political economy explicitly incorporates a consideration of institutions and the public choice process though which income redistribution can be implemented in a democratic society. Thus, the question of why citizens in a democratic society consent to an involuntary redistribution scheme has generated two sets of justifications: First, is the idea that redistribution

**16** See Haldane (1999) for further elaboration of this point.

**17** For further analysis, see Sebastian Edwards (1998), _Gai Flo, Real Ex&,W Rates, and Capita Con&l Sone Latin Ametrca Expeins._ Working Paper from National Bureau of Economic Research, Inc. and Leonardo Hemandez and Klaus Schmidt-Hebbel (1999), _Capitl Cls in Gile Efftize? Eff:ici? Enduable?_ Paper Presented at the World Bank conference on Capital Flows, Financial Crisis and Policies, April 15-16, 1999.

**18** For further discussion of the poverty implications of financial instabiltiy see Dailami (2000).

19 See Goodman and Pauly (1993) 10