Mosley, Layna. (2000). "Room to Move: International Financial Markets and National Welfare States". International Organization, 54(4), 737-773. http://links.jstor.org/sici?sici=0020-8183%28200023%2954%3A4%3C737%3ARTMIFM%3E2.0.CO%3B2-F
To what degree does increased capital mobility influence governments? “To what extent does international capital mobility limit government policy choices?” (737). “I argue that the influence of international financial markets on the governments of advanced industrial democracies is somewhat strong, but also somewhat narrow. Capital market openness allows participants in financial markets to react dramatically to changes in government policy outcomes. Market participants, however, consider only a small set of government policies when deciding how to allocate their assets. Therefore, governments face pressures to adopt market-pleasing policies in aggregate policy areas but retain ‘room to move’ in many other policy areas” (737).
Mosley then goes on to look at the recent literature on private economic agents and their influence on governments. She categorizes this literature into two groups: convergence and divergence (738). “Convergence scholars argue that growing trade and financial internationalization seriously impinge on government policy autonomy. At one extreme, global markets become masters over governments and eviscerate the authority of national states” (738). On the other hand, people who write in the divergence vein, “take issue with the theoretical framework and empirical evidence implying cross-national convergence” (738). This school of thought sees increased financial capital movement as increasing the need of individual governments to step in and create mitigating policy. Mosley concludes that both of these schools of thought are flawed because, “little of this research explores the causal mechanisms underlying government policy selection” (739).
Mosley argues that the, “influence of financial markets on government policy choice is ‘strong but narrow’” (740). She goes on and deploys her methodology: she is looking at interest rate premiums. She wants to identify drivers of change in the levels that these rates are charged to governments, or, “the price of policy divergence” (740). She then looks at three aspects of “financial market influence on government,” “the level of international capital mobility, the use of similar indicators by a range of market participants, and financial market participants’ incentives to collect and employ information” (741).
Her methodology involves interviews with those involved in the financial sector. She does this for the three factors of influence described above, as well as for three additional factors. She then looks at quantitative data regarding financial market influence. She wants to see if the interviews conform to data on the ground in their effect on interest rates.
She then looks at how government policy responds to changes in the institution of finance capital. “First, other things being equal, governments will be less willing to pursue policies that are more costly…Second, the impact of interest rates on the domestic economy, and on government actions, might differ cross-nationally” (764). “Third, we can expect governments to consider the impact of changes in interest rates on debt financing costs” (765).
Conclusion (in part): “Despite financial globalization, the motivations for many government policies remain rooted in domestic politics and institutions. Governments concede to financial market pressures in a few areas, but they retain autonomy in any other areas. Moreover, evidence regarding market participants’ use of the
Important question, and highlight of limited scope of project: “…what might these findings reveal about financial market influences in the developing world?”
