More recently, however, as the downward-ratcheting logic of electoral politics has placed a death grip on their economies, they states have become – first and foremost – remarkably inefficient ...engines of wealth distribution. … Moreover, as the workings of genuinely global capital markets dwarf their ability to control exchange rates or protect their currency, nation-states have become inescapably vulnerable to the discipline imposed by economic choices made elsewhere by people and institutions over which they have no practical control. … Second, and more to the point, the nation-state is increasingly a nostalgic fiction.For creditor states, global finance is an opportunity moderated by a measured risk. For debtor states, it can be the new tyrant.When throngs of protestors mobilized around the Free Trade Area of the Americas (FTAA) summit in Quebec, the World Bank/International Monetary Fund (IMF) meetings in Washington and Prague, and the World Trade Organization (WTO) ministerial meetings in Seattle, their target was economic globalization. Although these activists represented a variety of interests and viewpoints, they shared a refrain: a narrow set of political elites, corporations, and investors were directing globalization and global economic institutions, making them unaccountable and inherently undemocratic. In the financial realm, protestors contend that government economic policies are chosen largely by an “electronic herd.” This herd represents the twenty-first century analog to the British prime minister Harold Wilson's “gnomes of Zurich” (an epithet for Swiss currency traders, said to necessitate the 1967 devaluation of the pound) and to the 1980s' “bond market vigilantes.”
Globalization is not a new phenomenon. Governments always have been constrained. Globalization really is a catch-word. … Domestic constraints still matter, and international constraints are not much ...different than they were during the 19th century.In its international methods, as in these internal methods, nineteenth century society was constricted by economics. The realm of fixed foreign exchanges was coincident with civilization. … Though, as a rule, such considerations the need for balanced budgets were not consciously present in the minds of statesmen, this was the case only because the requirements of the gold standard ranked as axiomatic. The uniform world pattern of monetary and representative institutions was the result of the rigid economy of the period.Polanyi's 1944 account of the collapse of the gold standard regime, and the international economic openness required and facilitated by that regime, implicates the primacy of market forces. Although economic integration was not, in and of itself, detrimental to the functioning of democratic societies, economic integration without an accompanying system of social protection was doomed to failure. Leaders gave priority to the maintenance of external balance over all other goals, but their publics ultimately rejected the notion that currency values were the penultimate policy achievement. If the gold standard's rules – coupled with the evolving domestic political ambitions of governments – sowed the seeds of its demise, can the same be said for contemporary financial globalization? To what extent are Polanyi's criticisms of the late nineteenth and early twentieth centuries relevant today?
Politics are much more important in developing countries than in developed markets. Every aspect of policy/performance generates politically-related concerns. Who governs matters in these markets. … ...It's hard to know what a government will do. … There are not necessarily clear priorities for these governments; there are so many issues, it's hard to know how they will prioritize. … The problems experienced in the developing world are totally non-existent in the developed world.I now turn to the question of financial market influence on government policy choices in the developing world. How does the influence of financial markets in developing nations differ from that in developed nations, and what explains the difference? In the preceding chapters, I have demonstrated that financial market influence on advanced industrial democracies is strong, but nevertheless narrow. As long as governments perform to financial market participants' satisfaction on a set of key indicators, they are relatively unconstrained in other policy areas. In general, differences in microlevel policy outputs or outcomes are not associated with the rate of interest charged on government bonds, and the implied effects of government partisanship on bond rates are small.In Chapter 2, I hypothesized that financial market influence on developing world governments with open capital accounts would be strong and broad. Investors are uncertain regarding these governments' types, and there is a significant probability that these governments are potential defaulters. Therefore, market participants rely on a wide set of economic policy indicators and political variables when making investment decisions.
Ideologically, most people in the industry are against big government; they would rather see things provided in the private sector. But in terms of the way the market moves, it doesn't make any ...difference. … There really is little attention to micro-policies, which have a great impact on the lives of citizens living there, but little on the markets.What sort of influence do investors have on the policies that affect the daily lives of citizens in advanced capitalist democracies? In this chapter, I use qualitative and quantitative evidence to evaluate the nature of the financial market influence on government policy choice in advanced industrial democracies. First, I analyze qualitative evidence regarding financial market influence in the contemporary era: is it, as I hypothesize in Chapter 2, strong and narrow for developed nations? If the constraint is narrow for developed nations, which indicators do financial market participants employ as information shortcuts? Next, I employ cross-sectional time series data to assess this expectation further. In Chapter 4, I focus on financial market–government relations in the developing world.Qualitative Evidence and “Strong but Narrow” Financial Market InfluenceInternational Capital Market Openness: A Background ConditionIn Chapter 2, I propose that the strength of financial market influence depends on two factors: a nation's level of capital market openness and the extent to which financial market participants rely on a similar set of decision-making indicators. In terms of cross-border capital mobility, the financial market constraint is relatively strong.
Governments can tax wealth in an open capital regime. … The reason they don't do this is because of domestic political concerns. … And governments need to realize that, by signing onto an open ...capital regime, they are signing on to certain constraints on their policy: they are making a deliberate choice, with foreseeable effects, so they should not complain about these effects in the future.The presence of all these international constraints means it is not parliament or public opinion that constitutes the most important sounding board for government policy but, rather, markets, and especially financial ones. Astute government officials will therefore anticipate and attend to the reactions of markets, and not to those of legislators, interest groups, or the public.How do domestic political factors interact with global economic forces, and with past choices regarding economic policy? The majority of this book is concerned with specifying the nature of financial market pressures on government policymaking. By providing a causal mechanism linking financial globalization with government policy outcomes, this endeavor greatly enhances our understanding of government policymaking in an era of financial globalization. In order to understand fully this linkage, and the process by which cross-national policy divergence occurs, however, a second causal mechanism – the effect of financial market pressures within domestic politics – is necessary. We need to connect events in global capital markets with changes in government policy, and we must consider how various domestic institutions and ideologies mediate these changes.
The government of an internationally integrated economy is far from powerless. It is merely somewhat constrained.The final years of the twentieth century witnessed a dramatic rise in grass-roots ...protests against the IMF, the WTO, the G-7, and the Organization of American States (OAS), among others. The common threat binding together these disparate protest actions was accountability: to what extent could intergovernmental organizations be held responsible by member governments and by individual citizens? Had the democratic process in these institutions become so indirect as to be meaningless? Did the focus on efficiency and effectiveness in international political and economic relations result in a failure to attend to issues of equity and representation? In many ways, this book addresses the same theme of accountability: to what extent, and via what mechanisms, do contemporary governments retain policymaking autonomy vis-à-vis international financial markets? Has the locus of government policymaking shifted from cabinets and legislatures to central banks and bond markets? Or do governments and domestic groups remain the ultimate arbiters of national policy choices? As many scholars of international institutions would point out, and as I demonstrate, governments' freedom of action is, in some ways, reduced by international involvement but remains intact, or is even expanded, in others.Key FindingsThis book contributes to a wide literature on economic globalization by focusing on the behavior of market participants and its implications for government policymaking. It offers answers to two questions: how do financial market participants evaluate government policy?
