Garrett: Global Markets and National Politics

Garrett, G. 2005. Global Markets and National Politics: Collision Course or Virtuous Circle? International Organization 52, no. 04: 787-824.

"The nation-state is purportedly an outmoded and beleaguered institutional form, on a collision course with the ever more international scale of markets. Policy autonomy, if not de jure sovereignty, is considered the primary casualty. Governments competing for mobile economic resources are thought to have little choice but to engage in a policy race to the neoliberal bottom, imperiling the efficacy and legitimacy of the democratic process itself" (787-8).

"This article puts under the analytic microscope the proposition that global markets trump national politics as social forces. I focus on the relationships between three dimensions of integration into international markets-trade in goods and services, the multinationalization of production, and financial capital mobility-and the macroeconomic policy choices of the advanced industrial countries up until the mid-1990s" (788).

It is possible to look at globalization as the cause of constraints on domestic policy, especially in certain cases in regard to finance capitalism. However, it is not the case that domestic policies have been uniformly constrained.

"There are two basic reasons why globalization constraints on policy choice are weaker than much contemporary rhetoric suggests. First, market integration has not only increased the exit options of producers and investors; it has also heightened feelings of economic insecurity among broader segments of society...Second, although there are costs associated with interventionist government...numerous government programs generate economic benefits that are attractive to mobile finance and production" (788-9).

"It should be a central objective of globalization research to see how these two sets of dynamics-capital's exit threats versus popular demands for redistribution, and the economic costs and benefits of interventionist government-play out in different contexts. In this article I point to two sources of variation. The first concerns differences among various facets of market integration and aspects of government policy choice...The second source of variation concerns domestic political conditions. Countries in which the balance of political power is tilted to the left continue to be more responsive to redistributive demands than those dominated by center-right parties...In summary, I do not believe that 'collision course' is the correct metaphor to apply to the panoply of relationships between interventionist national economic policies and global markets. Peaceful coexistence is probably a better general image...One might go further to argue that, even in a world of capital mobility, there is still a virtuous circle between activist government and international openness. The government interventions emblematic of the modern welfare state provide buffers against the kinds of social and political backlashes that undermined openness in the first half of the twentieth century" (789).

"Market integration is thought to affect national policy autonomy through three basic mechanisms. These are trade competitiveness pressures, the multinationalization of production, and the integration of financial markets" (791). Governments stand in the way of efficient trade blocs, and thus are pressured to reduce their size to become more competitive. If governments spend, they must recoup that through taxes or borrowing, one of which harms firms' competitiveness and the other makes money more expensive through raising interest rates. The ability of firms to export production easily is another concern of globalization theorists. If companies can take their production and easily emigrate to another country who has a more favorable production environment, this will help to spurn on the race to the bottom. The third point in this discussion involves the integration of finance. This wave of money can move around the globe at the speed of light, threatening stability if governments do not meet their demands.

"In this section I have made two basic points. First, there are three different facets of globalization that many consider to constrain national autonomy...Second, contemporary arguments about these globalization pathways are nothing new. One could transplant much of the work published in IO in the 1970s on interdependence and dependency into the 1990s globalization literature without fearing for its rejection as outmoded. Indeed, with appropriate changes in lexicon, the same could be said for Adam Smith" (795-6).

"First, there are strong parallels between recent arguments about the constraining effects of globalization on national autonomy and those all the way back to the eighteenth century about the domestic effects of market integration...My second point is that, up until the mid-1990s, globalization has not prompted a pervasive policy race to the neoliberal bottom among OECD countries, nor have governments that have persisted with interventionist policies invariably been hamstrung by damaging capital flight...This is not to say, however, that no facet of globalization significantly constrains national policy options. In particular, the integration of financial markets is more constraining than either trade or the multinationalization of production. But even here, one must be very careful to differentiate among various potential causal mechanisms. Talk of lost monetary autonomy only makes sense if one believes that the integration of financial markets forces governments to peg their exchange rates to external anchors of stability. On recent evidence, the credibility gains of doing so are far from overwhelming; indeed, noncredible pegs...have promoted the most debilitating cases of financial speculation and instability. On the other hand, the costs of giving up the exchange rate as a tool of economic adjustment are great, and economies that allow their currencies to float freely seem to benefit as a result. Governments simply should not feel any compunction to give up monetary autonomy in the era of global financial markets" (823).

"My analysis is...considerably more bullish about the future of the embedded liberalism compromise than some of its earlier advocates suggest" (824).