Frieden: Invested Interests: The Politics of National Economic Policies in a World of Global Finance

Frieden, Jeffry A. (1991). "Invested Interests: The Politics of National Economic Policies in a World of Global Finance". International Organization, 45(4), 425-451. http://links.jstor.org/sici?sici=0020-8183%28199123%2945%3A4%3C425%3AIITPON%3E2.0.CO%3B2-Q

What happens to a country when there is increased capital flows? Do they lose their sovereignty? Do they lose a piece of their sovereignty? What groups in society win, and what groups lose? Where is there likely to be animosity between groups in a given society?

Frieden does a thorough job of outlining his hypothesis and providing clear conclusions. His paper is organized to firstly show the mobility of capital when he is writing. This section argues that financial capital in particular is very mobile. Secondly, he examines, “the policy preferences of various socioeconomic groups toward financial integration” (426). In this section, he concludes that, in the long-run, the fluidity of capital favors capital over labor. In the short-run, capital movement favors those who have it, and don’t have it tied down in a particular sector like farming. Thirdly, this article what increased financial flexibility in transactions implies for policy preferences in regard to macroeconomic policy and exchange rate policy. It concludes by arguing that increased financial capital flows tends to change the nature of national political interactions and traditional policy decision-making and lobbying.

His article proceeds to support his different hypotheses and conclusions systematically. At this, he does a good job. I will pick up with what I found interesting and helpful.

He moved to talk about the Mundell-Flemming approach, which indicates that country has the option to have only two of the following three policy options: a fixed exchange rate, monetary policy autonomy and/or capital mobility (431). And I quote:

“Without capital mobility, national authorities can adopt and sustain a monetary policy that differs from the policies of the rest of the world and can hold their exchange rate constant; however, with mobile capital, the attempt will be contravened by financial flows. Assume the authorities want an expansionary monetary policy. Without capital mobility, a fall in interest rates will lead to a rise in demand, and the economy will be stimulated (we ignore longer-term effects on the payments balance). With capital mobility, reduced domestic interest rates will lead to an outflow of capital in search of higher interest rates abroad, and long before monetary policy has a real effect, interest rates will be bid back up to world levels” (431).

To conclude this section: increased financial capital mobility does not make macro-economic national economic policy obsolete, but it does change the focus from a policy that emphasized interest rates to a policy that emphasized exchange rates (433).

Frieden then looks at how a world of high capital mobility should affect economic actors by using the Hechscher-Ohlin (HO) trade model, which posits that, “the effects of goods movements on returns to factors will vary according to whether the factors are locally scarce or abundant” (435). Trade protection promotes industry that relies on locally relatively scare factors, and vice-versa. Thus, people with lots of capital in the developed world probably benefited by exporting it to places with less capital. People who benefited from that capital (i.e., US factory workers), ended up loosing out.

While the HO model is helpful, it becomes difficult to measure more than two factors. Frieden turns, therefore, to a specific factors model, which does a more robust job of looking at the short-term effects of increased capital mobility. This approach also eschews a class-based analytic approach, and imagines that people are more tied to their specific factor of production (i.e., steel as opposed to cotton), than to broader class interest (either capital or labor). Finally, this approach sees some factors as being immobile and others mobile.

He then looks at the effects of these policies on different interest groups, and presents a diagram that sums up his argument. In this diagram there are four boxes. The y axis is labeled, “Preferred degree of exchange rate flexibility and national monetary policy autonomy”. The x axis is labeled, “Preferred level of the exchange rate.” Both x and y are separated into High and Low. In box 1, or High x and Low y, there are Import-competing producers of tradable goods for the domestic market. In box 2, or Low x Low y, there are Export orientated producers of tradable goods. In box 3, or High y High x, there are producers of non-tradable goods and services. IN box 4, or High y Low x, there are international traders and investors.

In conclusion, Frieden states that countries still have policy tools that allow them to make sovereign decisions, however, “these weapons may not be as sharp or numerous as before” (451). Additionally, he notes that owners of capital have gained relatively the most, and that owners who work in specific sectors have probably lost and face, “serious costs in adjusting to increased capital mobility” (451).