ABDELAL, R. 2006. Writing the Rules of Global Finance: France, Europe, and Capital Liberalization. Review of International Political Economy 13, no. 1: 1-27.
Capital controls and their promotion: Why was it true that capital controls formed the cornerstone of the monetary system after WWII but were sacrilegious in the late 90s? This paper attempts to tell that story. There is a difference between how US and European leaders presented the promotion of global capital. The Europeans wanted a more globally managed diffusion of finance while the US was much more keenly interested in an ad hoc approach. The standard story focuses on the role of the US in promoting international finance; this story focuses much more on the European players.
Showing posts with label Finance Capital. Show all posts
Showing posts with label Finance Capital. Show all posts
Monday, March 23, 2009
Haggard and Maxfield: The Political Economy of Financial Internationalization in the Developing World
Haggard, S, and S Maxfield. 1999. The political economy of financial internationalization in the developing world. Issues and Agents in International Political Economy 50, no. 1: 35-68.
What about the internationalization of financial markets in less developing countries? For a very long time, financial markets were constrained through capital controls especially in less developing countries. These authors point out that this is transitioning and explore its effects. Table 1 (36) offers a taxonomy of different types of liberalization.
In an H-O model, K and L are substitutes, so, when K constraints are lifted, the relative cost of K decreases domestically. In a labor-rich environment, this benefits labor. However, this becomes more complex in a multi-sector model, where benefits may be distributed relatively unevenly. "In sum, increases in international trade and investment ties and the opportunities opened by the deepening of international financial markets should increase interest group pressures for financial internationalization, including from foreign firms, while decreasing the effectiveness of government controls. Yet such broad changes are more useful in explaining general trends than they are in accounting for why specific countries liberalize when they do. Crises play an important role in this regard" (40). There is a positive feedback look when there is a crisis after liberalization, as those who want more liberalization may benefit from the crisis and become more powerful.
"As the integration of financial markets deepens, accelerated by the very policy changes that we have analyzed here, international constraints will play an increasingly role in future policy decisions, not only with regard to the capital account but also with reference to economic policy more generally" (62).
What about the internationalization of financial markets in less developing countries? For a very long time, financial markets were constrained through capital controls especially in less developing countries. These authors point out that this is transitioning and explore its effects. Table 1 (36) offers a taxonomy of different types of liberalization.
In an H-O model, K and L are substitutes, so, when K constraints are lifted, the relative cost of K decreases domestically. In a labor-rich environment, this benefits labor. However, this becomes more complex in a multi-sector model, where benefits may be distributed relatively unevenly. "In sum, increases in international trade and investment ties and the opportunities opened by the deepening of international financial markets should increase interest group pressures for financial internationalization, including from foreign firms, while decreasing the effectiveness of government controls. Yet such broad changes are more useful in explaining general trends than they are in accounting for why specific countries liberalize when they do. Crises play an important role in this regard" (40). There is a positive feedback look when there is a crisis after liberalization, as those who want more liberalization may benefit from the crisis and become more powerful.
"As the integration of financial markets deepens, accelerated by the very policy changes that we have analyzed here, international constraints will play an increasingly role in future policy decisions, not only with regard to the capital account but also with reference to economic policy more generally" (62).
Obstfeld and Taylor: Globalization and Capital Markets
Obstfeld, M, and AM Taylor. 2003. Globalization and capital markets. Globalization in historical perspective: 121-187.
Over the past 50 odd years, the rise of capital markets represent a fundamental shift in the way that global economic events impact the rest of the world. This piece wonders what relationship this increasing preeminence of global financial capital has on state autonomy.
There is clear benefit from increased capital flows from the perspective of economic theory. If, however, there is clear benefit for increased capital flows, why were they not imposed after WWII? "What explains the long stretch of high capital mobility that prevailed before 18914, the subsequent breakdown in the interwar period, and the very slow postwar reconstruction of the world financial system? The answer is tied up with one of the central and visible areas in which openness to the world capital market constrains government power: the choice of an exchange rate regime" (13).
"In most of the world's economies, the exchange rate is a key instrument, target, or indicator for monetary policy. An open capital market, however, deprives a country's government of the ability simultaneously to target its exchange rate and to use monetary policy in pursuit of other economic objectives" (14). Excellent overview of the unholy trinity on 14.
"Eventually, the very success of the Bretton Woods system in spurring international trade and the related capital movements brought about its own collapse by resurrecting the 'inconsistent trinity.' For the United States, maintaining fixed exchange rates seemed to require high interest rates and slower growth; for Germany, fixed exchange rates seemed to require giving up domestic control over inflation. Even the relatively limited capital mobility that existed by the early 1970s allowed furious speculative attacks on the major currencies. After vain attempts to restore fixed dollar exchange rates, the industrial countries moved to floating rates early in 1973" (17).
There is a discussion as to the implications of capital mobility on tax structures as well as income distribution.
Over the past 50 odd years, the rise of capital markets represent a fundamental shift in the way that global economic events impact the rest of the world. This piece wonders what relationship this increasing preeminence of global financial capital has on state autonomy.
There is clear benefit from increased capital flows from the perspective of economic theory. If, however, there is clear benefit for increased capital flows, why were they not imposed after WWII? "What explains the long stretch of high capital mobility that prevailed before 18914, the subsequent breakdown in the interwar period, and the very slow postwar reconstruction of the world financial system? The answer is tied up with one of the central and visible areas in which openness to the world capital market constrains government power: the choice of an exchange rate regime" (13).
"In most of the world's economies, the exchange rate is a key instrument, target, or indicator for monetary policy. An open capital market, however, deprives a country's government of the ability simultaneously to target its exchange rate and to use monetary policy in pursuit of other economic objectives" (14). Excellent overview of the unholy trinity on 14.
"Eventually, the very success of the Bretton Woods system in spurring international trade and the related capital movements brought about its own collapse by resurrecting the 'inconsistent trinity.' For the United States, maintaining fixed exchange rates seemed to require high interest rates and slower growth; for Germany, fixed exchange rates seemed to require giving up domestic control over inflation. Even the relatively limited capital mobility that existed by the early 1970s allowed furious speculative attacks on the major currencies. After vain attempts to restore fixed dollar exchange rates, the industrial countries moved to floating rates early in 1973" (17).
There is a discussion as to the implications of capital mobility on tax structures as well as income distribution.
Hardie: The Power of the Markets?
Hardie, I. 2005. The power of the markets? The international bond markets and the 2002 elections in Brazil. Review of International Political Economy 13, no. 1: 53-77.
"The data show that international bond market investors did not exit Brazil before the elections, putting in question whether they were the source of the riser in the cost of government borrowing that Mosley and others see as indicative of the market's strength. This suggests that our understanding of the actors responsible for market movements remains incomplete. The article, therefore, challenges the idea, common within international political economy, of 'the market' as a single entity, with common actions and policy preferences. The data presented here strongly suggest 'the market' is in reality made up of multiple heterogeneous actors often lacking any unity of opinion or purpose. After Lula's election victory, market prices recovered and the data show that international investors increased their investments in Brazil, despite slower policy implementation than market practitioners desired and the new government's social agenda. This supports a questioning of the true breadth of investors' policy interests and, therefore, influence" (53; from abstract)
Mosley (2003) makes the claim that developed countries experience narrow constraints from financial markets and that developing countries experience broad constraints. This piece criticizes whether or not developing countries really experience broad constraints, arguing that Brazil was still able to operationalize its social policies. "Instead, the dramatic negative fall in market prices before the Brazilian election, which caused not only an increase in the cost of international borrowing but also a severe, at times total, reduction in its availability, suggests that the distinction between developed and developing world may more significantly be seen in the strength of overall market constraint than in its breadth" (55).
One key aspect of this study, and building upon Mosely again and others, is the disaggregation of financial and market actors and an attempt to explore their separate motivations.
"The data show that international bond market investors did not exit Brazil before the elections, putting in question whether they were the source of the riser in the cost of government borrowing that Mosley and others see as indicative of the market's strength. This suggests that our understanding of the actors responsible for market movements remains incomplete. The article, therefore, challenges the idea, common within international political economy, of 'the market' as a single entity, with common actions and policy preferences. The data presented here strongly suggest 'the market' is in reality made up of multiple heterogeneous actors often lacking any unity of opinion or purpose. After Lula's election victory, market prices recovered and the data show that international investors increased their investments in Brazil, despite slower policy implementation than market practitioners desired and the new government's social agenda. This supports a questioning of the true breadth of investors' policy interests and, therefore, influence" (53; from abstract)
Mosley (2003) makes the claim that developed countries experience narrow constraints from financial markets and that developing countries experience broad constraints. This piece criticizes whether or not developing countries really experience broad constraints, arguing that Brazil was still able to operationalize its social policies. "Instead, the dramatic negative fall in market prices before the Brazilian election, which caused not only an increase in the cost of international borrowing but also a severe, at times total, reduction in its availability, suggests that the distinction between developed and developing world may more significantly be seen in the strength of overall market constraint than in its breadth" (55).
One key aspect of this study, and building upon Mosely again and others, is the disaggregation of financial and market actors and an attempt to explore their separate motivations.
Wednesday, March 11, 2009
Strange: Mad Money
Strange, S. 1998. Mad Money. Manchester University Press.
This is a wide ranging tale of financial markets gone wild. States no longer have the power, capabilities and/or will to control the forces of free flowing capital. The causes of this crisis, while being decisions made by actors, are generally seen as being deterministic. The solution to the problem requires swift and bold action.
Written after the SE Asian crisis of '97, this book contains much that should be considered in today's economic climate, and much that remains hyperbole.
The book begins by explaining why the author understands the current organization of the financial system to be "mad". One moment it is manic, the other it is depressed. The output of the system is, in effect, insane.
The themes of Casino Capitalism are explored: volatility; we're all "involuntary gamblers"; arose from 5 decisions that really weren't decisions.
Markets have outgrown the constraints of government. This is not the only problem that has become too large, complicated or forceful to move beyond the capacity of states to regulate (environment, technology, etc).
All areas of the economy move to the rhythm of finance. States have much less control over finance than they had previously. Financial concentration is increasingly a problematic reality. Excess leads to "moral contamination" (181). There are widening gaps (income gaps, gaps between large and small business, between large and small states).
This is a wide ranging tale of financial markets gone wild. States no longer have the power, capabilities and/or will to control the forces of free flowing capital. The causes of this crisis, while being decisions made by actors, are generally seen as being deterministic. The solution to the problem requires swift and bold action.
Written after the SE Asian crisis of '97, this book contains much that should be considered in today's economic climate, and much that remains hyperbole.
The book begins by explaining why the author understands the current organization of the financial system to be "mad". One moment it is manic, the other it is depressed. The output of the system is, in effect, insane.
The themes of Casino Capitalism are explored: volatility; we're all "involuntary gamblers"; arose from 5 decisions that really weren't decisions.
Markets have outgrown the constraints of government. This is not the only problem that has become too large, complicated or forceful to move beyond the capacity of states to regulate (environment, technology, etc).
All areas of the economy move to the rhythm of finance. States have much less control over finance than they had previously. Financial concentration is increasingly a problematic reality. Excess leads to "moral contamination" (181). There are widening gaps (income gaps, gaps between large and small business, between large and small states).
Friday, January 30, 2009
Isard: Globalization and the International Financial System
Isard, P. 2005. Globalization and the international financial system. Cambridge New York.
Ch. 2: The Evolution of the International Monetary System
"At the core of the international financial system is a set of official institutions and arrangements that govern payments between nations and exchange rates among currencies--a core referred to as the international monetary system" (13).
This system promotes stable exchanges of currencies, which is seen to expand international trade, which is then seen as driving economic growth and improved living standards.
The policy trilemma was explored explicitly by Mundell and Flemming in papers written in the early 1960s, but also must have been at least tacitly held by the framers of the IMF in the 1940s: the system was designed to achieve fixed exchange rates, domestic monetary and fiscal autonomy and constrained capital mobility.
The Gold Standard system that existed from 1870-WWI was based on convertibility of currency to gold reserves. This system suffered crises, which were mitigated in part through the cooperation of major players in the monetary system. "As these episodes suggest, preservation of the international gold standard regime required the core countries of the system not only to cooperate to help each other in times of crisis but also to accommodate over time the growing and somewhat volatile demand for gold in countries on the periphery of the system, including the United States...A second factor that contributed importantly to the credibility and longevity of the gold standard regime was a social and political environment in which it was feasible for national monetary authorities to give the maintenance of currency convertibility precedence over other possible goals of economic policy" (17).
After WWI, and a temporary stoppage of currency convertibility, countries began to return to the gold standard. First the US, and then other European countries pegged their currencies to gold and established currency exchanges, etc. The US left in 1933.
Then, after 1929, a global depression took hold, with production falling by a full 26%. "At least seven countries left the gold standard between 1929 and August 1931" (24).
During WWII, there were very tight exchange pegs.
At the end of WWII, the Bretton Woods institutions were formed, with an eye towards bridging the divide between those who ardently supported free trade agendas, and those who believed in full employment and government spending. "The outcome was a managed multilateral system that left individual countries with considerable autonomy to pursue domestic economic policy objectives but subjected their exchange rate practices and international trade and payments restrictions to international agreement" (28).
"Through period adjustments of exchange rates pegs and a resort to capital controls, the Bretton Woods system survived for a quarter century. The demise came after internationally mobile private capital had grown substantially in both volume and agility, thereby becoming a major force that was difficult to control" (30).
"The policy-oriented literature of the 1960s characterized the prevailing international monetary system as incapable of simultaneously resolving the problems of liquidity, adjustment, and confidence. With the production of new gold being inadequate to meet the increasing demand for official international reserves in a growing world economy, and with gold and reserve currencies comprising the principal reserve assets in the international monetary system, the liquidity problem could be solved, or so it was perceived, in only two ways: by continuing to increase the liabilities of the reserve-currency countries, especially those of the United States, or by raising the purchasing power of gold. This choice presented what was known as the Triffin dilemma. The first solution would lead to a persistent balance of payments deficit for the United States on an official settlements basis, which many economists viewed as an adjustment problem. The second solution, moreover, would create a confidence problem, undermining faith in the reserve system. In particular, an increase in the official dollar price of gold...could induce attempts by foreign governments to convert their dollar reserve holdings into gold and would also induce speculative investments in gold by private market participants. This would rapidly drain the gold reserves of the United States and destroy the ability of the US authorities to defend any fixed gold parity for the dollar" (32-3).
In order to solve this conundrum, special drawing rights (SDRs) were created. This was a new asset held by the IMF in reserve.
The Euro-Dollar market was created. These were dollars held in banks primarily in Britain. This eventually led to speculation on the dollar that caused Nixon to suspend convertibility in 1971. By 1973 the international monetary system had moved to a floating exchange rate system.
In the 70s, the countries of Europe moved towards creating a monetary union.
The remainder of the chapter deals with the different kinds of forms that monetary systems and policies can take in the post-Bretton Woods system, as well as the implications of moving to fiat money and relatively floating exchange rates.
Ch. 2: The Evolution of the International Monetary System
"At the core of the international financial system is a set of official institutions and arrangements that govern payments between nations and exchange rates among currencies--a core referred to as the international monetary system" (13).
This system promotes stable exchanges of currencies, which is seen to expand international trade, which is then seen as driving economic growth and improved living standards.
The policy trilemma was explored explicitly by Mundell and Flemming in papers written in the early 1960s, but also must have been at least tacitly held by the framers of the IMF in the 1940s: the system was designed to achieve fixed exchange rates, domestic monetary and fiscal autonomy and constrained capital mobility.
The Gold Standard system that existed from 1870-WWI was based on convertibility of currency to gold reserves. This system suffered crises, which were mitigated in part through the cooperation of major players in the monetary system. "As these episodes suggest, preservation of the international gold standard regime required the core countries of the system not only to cooperate to help each other in times of crisis but also to accommodate over time the growing and somewhat volatile demand for gold in countries on the periphery of the system, including the United States...A second factor that contributed importantly to the credibility and longevity of the gold standard regime was a social and political environment in which it was feasible for national monetary authorities to give the maintenance of currency convertibility precedence over other possible goals of economic policy" (17).
After WWI, and a temporary stoppage of currency convertibility, countries began to return to the gold standard. First the US, and then other European countries pegged their currencies to gold and established currency exchanges, etc. The US left in 1933.
Then, after 1929, a global depression took hold, with production falling by a full 26%. "At least seven countries left the gold standard between 1929 and August 1931" (24).
During WWII, there were very tight exchange pegs.
At the end of WWII, the Bretton Woods institutions were formed, with an eye towards bridging the divide between those who ardently supported free trade agendas, and those who believed in full employment and government spending. "The outcome was a managed multilateral system that left individual countries with considerable autonomy to pursue domestic economic policy objectives but subjected their exchange rate practices and international trade and payments restrictions to international agreement" (28).
"Through period adjustments of exchange rates pegs and a resort to capital controls, the Bretton Woods system survived for a quarter century. The demise came after internationally mobile private capital had grown substantially in both volume and agility, thereby becoming a major force that was difficult to control" (30).
"The policy-oriented literature of the 1960s characterized the prevailing international monetary system as incapable of simultaneously resolving the problems of liquidity, adjustment, and confidence. With the production of new gold being inadequate to meet the increasing demand for official international reserves in a growing world economy, and with gold and reserve currencies comprising the principal reserve assets in the international monetary system, the liquidity problem could be solved, or so it was perceived, in only two ways: by continuing to increase the liabilities of the reserve-currency countries, especially those of the United States, or by raising the purchasing power of gold. This choice presented what was known as the Triffin dilemma. The first solution would lead to a persistent balance of payments deficit for the United States on an official settlements basis, which many economists viewed as an adjustment problem. The second solution, moreover, would create a confidence problem, undermining faith in the reserve system. In particular, an increase in the official dollar price of gold...could induce attempts by foreign governments to convert their dollar reserve holdings into gold and would also induce speculative investments in gold by private market participants. This would rapidly drain the gold reserves of the United States and destroy the ability of the US authorities to defend any fixed gold parity for the dollar" (32-3).
In order to solve this conundrum, special drawing rights (SDRs) were created. This was a new asset held by the IMF in reserve.
The Euro-Dollar market was created. These were dollars held in banks primarily in Britain. This eventually led to speculation on the dollar that caused Nixon to suspend convertibility in 1971. By 1973 the international monetary system had moved to a floating exchange rate system.
In the 70s, the countries of Europe moved towards creating a monetary union.
The remainder of the chapter deals with the different kinds of forms that monetary systems and policies can take in the post-Bretton Woods system, as well as the implications of moving to fiat money and relatively floating exchange rates.
Wednesday, January 14, 2009
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).
"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).
Sunday, December 21, 2008
Summers: International Financial Crises: Causes, Prevention, and Cures
Summers, LH. 2005. International Financial Crises: Causes, Prevention, and Cures. Economic Globalization In Asia.
This is a lecture.
Summers begins by noting how important applied economic research is to policy decisions, and how frequently it is used to make decisions that affect the lives of millions. Today he is talking about crises. There are four points that he outlines that he will address: 1.) what is the relationship between efficiency in financial architecture and system performance? 2.) what are the sources of crises? 3.) how best should the financial architecture be structured either internationally or nationally? 4.) what should nations do when a crisis occurs? (2).
Summers analogizes the advent of jet-engine technology to that of financial capital flows: the jet improved international travel immensely, even though there were spectacular crashes that occurred, especially earlier in the adoption of the technology. In this same way, finance capital can also stream-line international capitalism, though it may also be prone to spectacular crashes.
"International financial crises can be defined in many ways and can take many forms. What I mean by an international financial crisis is a situation where the international dimension substantially worsens a crisis in ways that would not occur in a closed economy" (5).
"There have been six major international financial crises during the 1000's: Mexico in 1995; Thailand, Indonesia, and South Korea in 1997-1998; Russia in 1998; and Brazil in 1998-1999" (6).
There are three general trends that can be inferred from these crises: "First, after a period of substantial capital inflows, investors...decide to reduce the stock of their assets in the affected country in response to a change in its fundamentals...Second, after this process went on for some time in these emerging-market countries, investors shifted their focus from evaluating the situation in the country to evaluating the behavior of other investors...Third, the withdrawal of capital and the associated sharp swing in the exchange rate and reduced access to capital exacerbated fundamental weakness, in turn exacerbating the financial-market response" (6).
Contagion is also another crucial factor in determining the severity and breadth. The author lists seven different ways that contagion can take effect.
"Just as better airplanes and airports are good in ways that go beyond accident-prevention, all of these steps are valuable not simply as crisis prevention measures, but in their own right, as proven strategies for promoting economic efficiency and growth" (9).
"Crisis response, like crisis prevention, has two dimensions: national policies that can restore confidence and international efforts to finance a credible path out of crises. Of these, by the far the [sic] most important is the response of national authorities in the countries concerned" (10).
Summers outlines potentially helpful national and international responses to financial crises.
This is a lecture.
Summers begins by noting how important applied economic research is to policy decisions, and how frequently it is used to make decisions that affect the lives of millions. Today he is talking about crises. There are four points that he outlines that he will address: 1.) what is the relationship between efficiency in financial architecture and system performance? 2.) what are the sources of crises? 3.) how best should the financial architecture be structured either internationally or nationally? 4.) what should nations do when a crisis occurs? (2).
Summers analogizes the advent of jet-engine technology to that of financial capital flows: the jet improved international travel immensely, even though there were spectacular crashes that occurred, especially earlier in the adoption of the technology. In this same way, finance capital can also stream-line international capitalism, though it may also be prone to spectacular crashes.
"International financial crises can be defined in many ways and can take many forms. What I mean by an international financial crisis is a situation where the international dimension substantially worsens a crisis in ways that would not occur in a closed economy" (5).
"There have been six major international financial crises during the 1000's: Mexico in 1995; Thailand, Indonesia, and South Korea in 1997-1998; Russia in 1998; and Brazil in 1998-1999" (6).
There are three general trends that can be inferred from these crises: "First, after a period of substantial capital inflows, investors...decide to reduce the stock of their assets in the affected country in response to a change in its fundamentals...Second, after this process went on for some time in these emerging-market countries, investors shifted their focus from evaluating the situation in the country to evaluating the behavior of other investors...Third, the withdrawal of capital and the associated sharp swing in the exchange rate and reduced access to capital exacerbated fundamental weakness, in turn exacerbating the financial-market response" (6).
Contagion is also another crucial factor in determining the severity and breadth. The author lists seven different ways that contagion can take effect.
"Just as better airplanes and airports are good in ways that go beyond accident-prevention, all of these steps are valuable not simply as crisis prevention measures, but in their own right, as proven strategies for promoting economic efficiency and growth" (9).
"Crisis response, like crisis prevention, has two dimensions: national policies that can restore confidence and international efforts to finance a credible path out of crises. Of these, by the far the [sic] most important is the response of national authorities in the countries concerned" (10).
Summers outlines potentially helpful national and international responses to financial crises.
Saturday, December 20, 2008
Armijo: Political Geography of World Financial Reform
Armijo, LE. 2001. Political Geography of World Financial Reform: Who Wants What and Why, The. Global Governance 7: 379.
Ever since the latter third of the 1990s and the collapse of many economies in South East Asia, there have been many calls for finance reforms. "The purpose of this essay is to demystify some of the major reform proposals, and to understand which countries and interests back them. I suggest that the reforms proposed by a loose coalition of 'financial stabilizers' make the most sense on economy efficiency grounds, but that the bargaining structure of the issue area is such that the reforms most likely to be implemented are those of the 'transparency advocates'" (1).
How does one define "Financial Architecture"? "Not unexpectedly, the definition of the beast is elastic. To multinational bankers and institutional. investors, reforms of the financial architecture means consensual global implementation of best practice standards of accounting and reporting of national and corporate financial information in developing countries. To many members of the U.S. Congress, it means that the [IMF]... and World Bank should slim down and stop wasting taxpayers' money. To Japan and many Western European governments it means that the U.S. government should cease acting like a one-man band in responding to global financial crises. To finance ministers in very poor countries, as well as to many middle class activists in the advanced industrial democracies, global financial reform means debt forgiveness...And to incumbent policy makers in the so-called emerging market countries...reform of the world's financial architecture usually implies creation of a global lender of last resort with deeper pockets than the present IMF" (2).
"For purposes of this essay, the global financial architecture is an 'international regime,' designating a set of 'principles, norms, rules and procedures' in an international issue area...The international financial regime includes but is not limited to norms and institutions governing exchange rate practices, regulation of all private cross-border financial flows, and management of the 'international financial institutions'..." (2).
Four groups are identified that are interested in financial reform, but that are motivated by different drivers. These are the following: laissez faire liberalizer, transparency advocates, financial stabilizers and anti-globalizers (3). Detailed overviews of each of these groups is presented. The author argues, as noted earlier, that the financial stabilizers are those that should be listened to, but that this is unlikely to actually happen.
Ever since the latter third of the 1990s and the collapse of many economies in South East Asia, there have been many calls for finance reforms. "The purpose of this essay is to demystify some of the major reform proposals, and to understand which countries and interests back them. I suggest that the reforms proposed by a loose coalition of 'financial stabilizers' make the most sense on economy efficiency grounds, but that the bargaining structure of the issue area is such that the reforms most likely to be implemented are those of the 'transparency advocates'" (1).
How does one define "Financial Architecture"? "Not unexpectedly, the definition of the beast is elastic. To multinational bankers and institutional. investors, reforms of the financial architecture means consensual global implementation of best practice standards of accounting and reporting of national and corporate financial information in developing countries. To many members of the U.S. Congress, it means that the [IMF]... and World Bank should slim down and stop wasting taxpayers' money. To Japan and many Western European governments it means that the U.S. government should cease acting like a one-man band in responding to global financial crises. To finance ministers in very poor countries, as well as to many middle class activists in the advanced industrial democracies, global financial reform means debt forgiveness...And to incumbent policy makers in the so-called emerging market countries...reform of the world's financial architecture usually implies creation of a global lender of last resort with deeper pockets than the present IMF" (2).
"For purposes of this essay, the global financial architecture is an 'international regime,' designating a set of 'principles, norms, rules and procedures' in an international issue area...The international financial regime includes but is not limited to norms and institutions governing exchange rate practices, regulation of all private cross-border financial flows, and management of the 'international financial institutions'..." (2).
Four groups are identified that are interested in financial reform, but that are motivated by different drivers. These are the following: laissez faire liberalizer, transparency advocates, financial stabilizers and anti-globalizers (3). Detailed overviews of each of these groups is presented. The author argues, as noted earlier, that the financial stabilizers are those that should be listened to, but that this is unlikely to actually happen.
Hirst and Thompson: Globalization in Question
Hirst, PQ, and G Thompson. Globalization in question. Polity Press.
Ch. 5: The Developing Economies and Globalization:
In the early to mid 90s, around the first edition of this book, the authors claim that there was much hype surrounding the idea that developing countries would continue to grow rapidly, and that they would soon reach parity with more developed countries. It was argued that China would represent the world's largest economy by 2020. These proponents believed that this represented a wonderful trend that would also benefit rich countries, as previously poor countries would now have a demand for the more complicated service items that the developed world has specialized in for some time. However, others argued that this would mark a race to the bottom, where capital, being unrestricted in its movement, would search out the lowest cost for production. This would cause poor countries to have to fight to lower their wages to attract capital. This would also destroy low-skilled employment opportunities in developed countries.
Financial crises in Korea, Latin America and Thailand are explored. Each of these was caused by a different complex mixture of events and factors.
"It should now be obvious that the combination of thoroughgoing internal and external financial liberalization combined with a rigidly pegged exchange rate is a disaster for developing countries. Given the relative shallowness of their financial markets and the difficulty of constructing appropriate regimes of supervision by domestic authorities and practices of transparency by local firms, the tendencies toward exuberant over borrowing and the excessive growth of credit are difficult to prevent. When capital flight begins, attempts to contain it by defending the exchange rate by the use of foreign currency reserves are generally futile" (151).
"The excessive optimism of the early 1990s about the prospects for economic growth in the developing world has rapidly turned sour. It is quite clear that the economic liberal vision of a world transformed by the power of free markets has failed" (160).
Ch. 5: The Developing Economies and Globalization:
In the early to mid 90s, around the first edition of this book, the authors claim that there was much hype surrounding the idea that developing countries would continue to grow rapidly, and that they would soon reach parity with more developed countries. It was argued that China would represent the world's largest economy by 2020. These proponents believed that this represented a wonderful trend that would also benefit rich countries, as previously poor countries would now have a demand for the more complicated service items that the developed world has specialized in for some time. However, others argued that this would mark a race to the bottom, where capital, being unrestricted in its movement, would search out the lowest cost for production. This would cause poor countries to have to fight to lower their wages to attract capital. This would also destroy low-skilled employment opportunities in developed countries.
Financial crises in Korea, Latin America and Thailand are explored. Each of these was caused by a different complex mixture of events and factors.
"It should now be obvious that the combination of thoroughgoing internal and external financial liberalization combined with a rigidly pegged exchange rate is a disaster for developing countries. Given the relative shallowness of their financial markets and the difficulty of constructing appropriate regimes of supervision by domestic authorities and practices of transparency by local firms, the tendencies toward exuberant over borrowing and the excessive growth of credit are difficult to prevent. When capital flight begins, attempts to contain it by defending the exchange rate by the use of foreign currency reserves are generally futile" (151).
"The excessive optimism of the early 1990s about the prospects for economic growth in the developing world has rapidly turned sour. It is quite clear that the economic liberal vision of a world transformed by the power of free markets has failed" (160).
Thursday, December 18, 2008
Walter: Understanding Financial Globalization
Walter, A. 2002. Understanding Financial Globalization. Institute of Defense & Strategic Studies.
"This paper makes three main arguments. First, it is implausible to claim that contemporary levels of financial integration remain low by historical standards...Second, I argue that it is now reasonably well-established that financial globalization is not (or at least not yet) the great 'leveling force' implied in some of the earlier literature, where it was seen as an increasingly powerful structural constraint upon national policy autonomy in all countries...Third, I argue that it would be wrong to conclude from this somewhat Euro-centric literature that financial globalization has had little effects at all. The emergent international financial structure constrains governments, but very unequally: most of the costs and risks it entails falls largely upon developing countries" (1).
The author argues that global financial flows have grown considerably since the 70s, and that this represents a unique global phenomena. However, measures of these global transfers are not perfect, and Walter goes about exploring a few different metrics for thinking about changes in and different types of international financial tools. The author argues that financial global integration has not been benign, or simply beneficial for less developed countries: "...the costs of financial integration have been substantial" (5).
While these costs have been high, and the author argues that they are higher than anticipated, it is a wonder that countries who have suffered through the ill effects of increased financial costs (ie., the SE Asian financial crisis) have not imposed capital controls (with the notable exception of Malaysia). "Three main approaches in the existing political economy literature to explain financial globalization may be identified: technological determinism...hegemonic power approaches...and rational interest group approaches" (5).
The author then goes on to provide literature reviews of each of these three explanations for the increase in financial interdependence.
"I have argued that structural theories, including technological determinism and hegemonic power theories, are better at explaining the broad trend towards financial opening since the 1970s. However, they largely fail to explain the large differences in patterns across countries. Rationalist interest group approaches, supplemented by institutional analysis, provides considerably greater insight into the cross-country pattern of financial liberalization, but perhaps inevitably does so at the cost of much greater analytical complexity" (14).
"This paper makes three main arguments. First, it is implausible to claim that contemporary levels of financial integration remain low by historical standards...Second, I argue that it is now reasonably well-established that financial globalization is not (or at least not yet) the great 'leveling force' implied in some of the earlier literature, where it was seen as an increasingly powerful structural constraint upon national policy autonomy in all countries...Third, I argue that it would be wrong to conclude from this somewhat Euro-centric literature that financial globalization has had little effects at all. The emergent international financial structure constrains governments, but very unequally: most of the costs and risks it entails falls largely upon developing countries" (1).
The author argues that global financial flows have grown considerably since the 70s, and that this represents a unique global phenomena. However, measures of these global transfers are not perfect, and Walter goes about exploring a few different metrics for thinking about changes in and different types of international financial tools. The author argues that financial global integration has not been benign, or simply beneficial for less developed countries: "...the costs of financial integration have been substantial" (5).
While these costs have been high, and the author argues that they are higher than anticipated, it is a wonder that countries who have suffered through the ill effects of increased financial costs (ie., the SE Asian financial crisis) have not imposed capital controls (with the notable exception of Malaysia). "Three main approaches in the existing political economy literature to explain financial globalization may be identified: technological determinism...hegemonic power approaches...and rational interest group approaches" (5).
The author then goes on to provide literature reviews of each of these three explanations for the increase in financial interdependence.
"I have argued that structural theories, including technological determinism and hegemonic power theories, are better at explaining the broad trend towards financial opening since the 1970s. However, they largely fail to explain the large differences in patterns across countries. Rationalist interest group approaches, supplemented by institutional analysis, provides considerably greater insight into the cross-country pattern of financial liberalization, but perhaps inevitably does so at the cost of much greater analytical complexity" (14).
Knight: Developing Countries and the Globalization of Financial Markets
M Knight, “Developing countries and the globalization of financial markets,” World Development 26, no. 7 (1998): 1185-1200.
The author notes that, throughout the beginning of the 90s, there was a substantive move towards the globalization of financial markets. "These developments create the prospect of a more efficient worldwide allocation of savings and investment than was possible in the past4, when domestic investment in most countries was constrained by domestic caving" (1185). While there are upsides, the financial crisis of the late 90s demonstrated the risks.
"This paper analyzes the recent globalization of financial markets, considers some features that may raise concerns about financial stability in DTEs [developing and transition economies] and outlines recent initiatives to enhance the safety and stability of financial systems. In particular, it focuses on imperfect competition and gaps in the structure of financial markets as elements of financial instability in DTEs, and discusses the complementary roles of market discipline and official oversight as essential elements of a robust financial system" (1185).
"We consider an economy where domestic bank credit is the only source of financing for capital investment by productive enterprises, and examine the consequences of the structure of competition in the banking sector for the overall stability of the financial system. The key element of the analysis is that, in evaluating credit risks, banks assess the underlying profitability of the project they are considering financing using a different information set from that available to the prospective borrower. They therefore provide a valuable service to the productive firms: that of giving a 'second opinion' on the expected profitability of the project. The efficiency with which banks provide this financial service depends on a number of factors, including the structure of competition in the banking sector and the state of the macro economy" (1189).
"This analysis suggests that an imperfectly competitive banking system responds to bad loan problems by reducing lending and raising intermediation spreads" (1191).
"The discussion in the preceding sections shows that a number of factors--both microeconomic and macroeconomic--can cause financial problems in DTEs, and that regulatory oversight and market discipline are, in principle, complementary means for achieving a stable and robust financial system...The basic elements of a sound financial system are a supportive legal and regulatory environment, strong internal governance, external discipline provided by market forces, and external governance provided by regulation and supervision at both the domestic and international level" (1197).
The author notes that, throughout the beginning of the 90s, there was a substantive move towards the globalization of financial markets. "These developments create the prospect of a more efficient worldwide allocation of savings and investment than was possible in the past4, when domestic investment in most countries was constrained by domestic caving" (1185). While there are upsides, the financial crisis of the late 90s demonstrated the risks.
"This paper analyzes the recent globalization of financial markets, considers some features that may raise concerns about financial stability in DTEs [developing and transition economies] and outlines recent initiatives to enhance the safety and stability of financial systems. In particular, it focuses on imperfect competition and gaps in the structure of financial markets as elements of financial instability in DTEs, and discusses the complementary roles of market discipline and official oversight as essential elements of a robust financial system" (1185).
"We consider an economy where domestic bank credit is the only source of financing for capital investment by productive enterprises, and examine the consequences of the structure of competition in the banking sector for the overall stability of the financial system. The key element of the analysis is that, in evaluating credit risks, banks assess the underlying profitability of the project they are considering financing using a different information set from that available to the prospective borrower. They therefore provide a valuable service to the productive firms: that of giving a 'second opinion' on the expected profitability of the project. The efficiency with which banks provide this financial service depends on a number of factors, including the structure of competition in the banking sector and the state of the macro economy" (1189).
"This analysis suggests that an imperfectly competitive banking system responds to bad loan problems by reducing lending and raising intermediation spreads" (1191).
"The discussion in the preceding sections shows that a number of factors--both microeconomic and macroeconomic--can cause financial problems in DTEs, and that regulatory oversight and market discipline are, in principle, complementary means for achieving a stable and robust financial system...The basic elements of a sound financial system are a supportive legal and regulatory environment, strong internal governance, external discipline provided by market forces, and external governance provided by regulation and supervision at both the domestic and international level" (1197).
Thursday, January 17, 2008
Maxfield: Gatekeepers of Growth (Chapters 1-4)
Maxfield, Sylvia. (1997). Gatekeepers of growth : the international political economy of central banking in developing countries. Princeton, N.J.: Princeton University Press.
Maxfield examines the rise of central bank independence in the 90s and attempts to outline some of the drivers of this change. Firstly, the rise of central bank independence may seem counterintuitive, especially for someone who deploys a rationalist framework: why would political leaders give up control of such a powerful took that could effect their future power to such a great degree? Maxfield argues that the increasing globalization of financial markets if, “of central importance” (4). The cause of financial market’s increasing control over the independent decision making of politicians is the attempt to, “signal their [the politician’s] nation’s creditworthiness to potential investors” (4). “Specially, this book argues that the likelihood politicians will use central bank independence to try to signal creditworthiness is greater 1.) the larger their country’s need for balance of payments support, 2.) the greater the expected effectiveness of signaling, 3.) the more secure their tenure as politicians, and 4.) the fewer their country’s restrictions on international financial transactions” (4).
She then goes on to briefly, and helpfully, outline some of the main functions of central banks. “To control inflation policymakers seek an anchor for prices. The exchange rate system devised in Bretton Woods…provided an exchange rate anchor” (7). This broke down after the move to fiat money. This is one of the reasons that there needed to be a new anchor for the international financial system: central bank independence with a mandate to control for price flux.
One reason that central banks need to be independent is because market actors can anticipate the policy moves of politicized government groups more easily (8). Another reason is the great power of finance in the age of increased economic interdependence (9). Another reason that this has become a more important issue is the Maastricht Treaty for conformity with EU rules (10). The increasing focus on rationalism as a social science methodology helped to promote the move to central banks (11). There are “normative” arguments for the move to central banks, like increased economic performance, policy coordination, democratic accountability, though I found these to be a bit problematic (12-7).
Maxfield then goes on, in chapter 2 to highlight the political source of central bank independence (also the title of the chapter). She highlights different studies that identify different sources of the independence of central banks. Some identify the need for highly trained and independent technocrats. Some believe that there is more independence if there is less political polarization in a country, others if there is more. Some that sectors of the economy will press for independence because it is in their interest. Another main group looks at how central bank independence is contingent on the need of governments to raise finance. Yet another group looks at ideology as a factor in determining whether or not the central bank is independent.
“A potential explanation for the contradictory findings reported above is that financier’s abilities to exploit a nation’s international economic vulnerabilities shape the effectiveness of financial sector demands on government to protect central bank independence” (33).
She then highlights the ways in which international finance can incentivise the move on the part of states to make their central banks independent. She looks at FDI, foreign equity shares, international bank loans and foreign government bonds. She finds that the first three are relatively not going to effect the move towards an independent bank. However, foreign government bonds do much to signal a country’s creditworthiness to international finance.
The final chapters of the book examine different case studies. I did not read these.
Kirshner: The Political Economy of Low Inflation
Kirshner, Jonathan. (2001). "The Political Economy of Low Inflation". Journal of Economic Surveys, 15(1), 41. http://search.ebscohost.com/login.aspx?direct=true&db=buh&AN=4374154&site=ehost-live
First, Kirshner claims that the politics of low inflation have been under theorized by IPE scholars. He is about to remedy this problem by looking at current literature on the politics of inflation generally and focusing on three themes: “the economic costs of inflation, the concept of monetary neutrality from economic and political perspectives, and the importance of disaggregating economic growth statistics” (41). He then goes on to map out his approach to looking at the political implications of low inflation.
The first perspective on inflation examined is the sociological perspective. This sees inflation as an escape valve for societies to release sociological tension. “Inflation is a ‘bad thing’, although perhaps at times a necessary evil, because it is the symptom of underlying social conflicts within society” (43).
The next perspective examined is the neoclassical. This perspective emphasizes the assumption that inflation has economic costs. Actors will change their behavior in response to the perceived actions of governments in the face of inflationary pressures. “In order to avoid the costs of inflation and the pain of subsequent disinflation, it is crucial that monetary policy be de-politicized, that is, insulated from short term political pressures emanating from both interest groups and the government itself" (44).
The third perspective is that of the modern political economist. From this point of view the bad-guy is the state, who is responsible for inflationary pressures. From here, the state is looking out for its own interests, as an egoistic rent maximizer. “Inflation can help the government by increasing its wealth and by affecting its ability to stay in power” (44). Inflation can act as a tax on “cash holdings” (45). This causes the need to depoliticize the monetary process, thus the need for a central bank.
Kirshner then goes on to claim that most economic perspectives claim that there is an economic cost to inflation, but that this cost has never been empirically verified. He looks at literature and models on the subject and finds them to be inconclusive. “In sum, the deductive arguments regarding inflation are indeterminate” (48). “Thus, there is no good reason to believe that moderate inflation has a significant effect on economic performance, or that moderate inflation should be met with aggressive anti-inflationary policies” (50).
Then, why are there so many central banks being depoliticized, especially throughout the 90’s? “The solution to this puzzle is that the opposition to inflation lies in its political effects, not in its economic ones” (51). Inflation affects different groups differently. “Unanticipated inflation…benefits debtors at the expense of creditors, one reason why financiers have always been strong proponents of price stability” (52). The emphasis on price stability can be best understood through a micro-politics perspective, claims the author. From here, it becomes possible to see that there are distributional effects to inflation policy, and that these effects have real political consequences.
From the micro-politics perspective, “The level of inflation is the outcome of an interest group conflict regarding the level of inflation. The economic effects of inflation are dwarfed by these political factors” (59).
Notermans: Policy Continuity, Poilcy Change, and the Political Power fo Economic Ideas
Notermans, Ton. (1999). "Policy Continuity, Policy Change, and the Political Power of Economic Ideas". Acta Poiltica, 34(3), 22-48.
Notermans argues that changes in economic policy stem not from ideational forces, but from material forces. Ideational forces are brought into the picture to simply justify the policy decision. Additionally, different theoretical frameworks can be manipulated in various ways to justify the needed policy response to the material drivers that a nation confronts.
“This article argues that the view that new economic ideas determine the character of new policies reverses cause and effect. More specifically, three hypotheses are advanced: 1.) Ideas exert n independent causal influence on policies by providing for continuity rather than change because economic policy-makers cling to the ideas and policies that were adopted in response to a traumatic event, even if the original constellation justifying such policies has long disappeared. 2.) The changes in macroeconomic policy regimes during this century have been driven by the need to correct cumulative price level disturbances… 3.) Because the timing and character of a regime change is determined by developments in financial and labour markets, it is largely exogenous to the political system” (23).
“In spite of fundamental theoretical differences between the two approaches, it is possible to derive Keynesian-type policies from neoclassical views and vice versa” (26). Notermans believes that, no matter what ideational approach you use, you will be able to manipulate that to produce any economic policy result. This means that people are just responding to material forces, and that ideational forces are tossed about. Eventually, this can be seen as securing economic policy that is more in line with neoclassical models, which tend to reflect reality more accurately. “Hence, policy convergence with the (long-term) neoclassical model is complete: macroeconomic policies need to prioritize price stability, and unemployment is to be tackled by supply-side policies” (27).
Notermans posits in section 4 of his article that ideas do not have a causal influence, even if different policy makers who hold different ideas posit different policies. This could simply mean that their interests diverge and that they are responding to material forces that they encounter. After making this claim, Notermans goes on to say that, since ideas are insufficient to explain macroeconomic change within the economic policies of
Only firms who respond to the dictates of the market will survive. However, a Darwinistic approach must take into account the idea of path-dependency, as opposed to pure environmental determinism. “…because the behavior an individual market actor faces is largely determined by the behavior of the other market actors, the case for environmental determination of economic outcomes is much weaker than commonly assumed” (32).
However, this aside, the current nature of the market necessitates price stability as the mechanism of Darwinistic selection and adaptation. “In a world where money serves as a store of value, price flexibility no longer necessarily serve s as the device through which markets will quickly return to equilibrium Instead, excessive changes of the general price level may severely disrupt the willingness to engage in productive activity and hence precipitate rather than mitigate economic crises” (33). Therefore, price stability is the holy grail, and markets will orientate around that for material reasons.
“Whereas ideas play no significant role in explaining regime changes, they do play an important role in accounting for regime inertia” (37). “In sum, to the extent that ideas do influence the development of macroeconomic management their influence is generally moderate as they tend to perpetuate a given regime even if the conditions which gave rise to that regime have long disappeared” (37).
Notermans goes on to highlight this ascertain by looking at the cases of
Thursday, January 10, 2008
Lenin: Imperialism: The Highest Stage of Capitalism
Lenin, Vladimir Il Ich. (1996). Imperialism: The Highest Stage of Capitalism: Pluto Press.
This text, originally published in 1916, explains a historical materialist perspective on the imperialism of the early twentieth century. Lenin describes how imperialism is a late, in his word “moribund” stage of capitalist development that came about after the monopolization of production domestically and the need to search for markets abroad. This eventually led to the partition of the globe into different spheres of economic and political influence which also contributed to imperialist wars either between different imperial powers or to subdue native populations.
The first chapter of this book is used to outline the beginning development of late capitalist production’s tendency towards monopolization. “The enormous growth of industry and the remarkably rapid process of concentration of production in ever-larger enterprises represents one of the most characteristic features of capitalism” (11). Enterprises grow, eat other enterprises and eventually become monopolies. These grow into cartels and these cartels eventually grow and become imperial in nature. Another characteristic of this production is that it has become social—the factory has grown to the size of a corporate, social endeavor—however, the “appropriation remains private” (20).
The second chapter is dedicated to the new role of the bank in this late capitalist development. However, because this industry also has a tendency to monopolize, “they become powerful monopolies having at their command almost the whole of the money capital of all the capitalists and small businessmen and also a large part of the means of production and of the sources of raw materials of the given country and in a number of countries” (27). This development both highlights and promotes the next driver of imperialism that Lenin highlights: that of finance capital.
Chapter 3 is dedicated to this factor. “Capitalism, which began its development with petty usury capital, ends its development with gigantic usury capital” (52). Countries are now able to, with the power that they wield through their consolidated banks and finance capital, sit back and lend money to industry which goes out and invests and is productive. The financier sits back and reaps the rewards while having not produced anything.
Chapter 4 looks at the process of exporting capital abroad. “Under the old capitalism, when free competition prevailed, the export of goods was the most typical feature. Under modern capitalism, when monopolies prevail, the export of capital has become the typical feature” (61). Lenin also criticizes those who would like to redistribute the profit to those who are less well off. He says that, “…if capitalism did these things it would not be capitalism; for uneven development and wrenched conditions of the masses are fundamental and inevitable conditions and premises of this mode of production. As long as capitalism remains what it is, surplus capital will never be utilized for the purpose of raising the standard of living of the masses in a given country, for this would mean a decline in the profits for the capitalist” (62).
The next chapter is titled, “The division of the world among capitalist combines”. The word “combine” here should be read as the word “cabal”. At this even higher stage of capitalist production, “we see plainly here how private monopolies and state monopolies are bound up together in the age of finance capital; how both are but separate links in the imperialist struggle between the big monopolists for the division of the world” (72-3).
The next chapter deals with the colonial division of the globe by the superpowers of Lenin’s time. He makes a point that there is a deterministic link between the movement from monopoly capitalism, to finance capitalism and then to colonialism (79). He also highlights how different proletariat groups are united under their imperialist flag, and against the internationalist cause (80). While colonialism has existed at least since the Romans, this is the first time that all of the raw materials were held in the hands of so few private interests.
Chapter 7 is about imperialism and how it represents a unique stage in the development of capitalism. The briefest definition of imperialism by Lenin is that of monopoly capitalism, but this is too parsimonious. He lists 5 characteristics: 1. concentration of production in monopolies; 2. merging of bank and industrial capital; 3. export of capital; 4. international capitalist monopolies dominate and divide globe; 5. territorial separation of world by capitalist powers. (90). This then leads to a struggle amongst existing world imperial powers and newly arrived imperial powers (see
Chapter 8 regards the decay of capitalism, and highlights an earlier theme of laziness and usury. There is, in Lenin’s eyes, a tendency to stagnation and decay. Chapter 9 is a critique of imperialism focusing on its ineffectual nature. Chapter 10 places imperialism in a historical context and argues against other theorists who do not conform to Lenin’s theoretical framework.
Mosley: Room to Move: International Financial Markets and National Welfare States
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?”
Chwieroth: Neoliberal Economists and Capital Account Liberalization in Emerging Markets
Chwieroth, Jeffrey. (2007). "Neoliberal Economists and Capital Account Liberalization in Emerging Markets". International Organization, 61(2), 443-463. http://search.ebscohost.com/login.aspx?direct=true&db=buh&AN=25008468&site=ehost-live
This paper focuses on the rise of finance capital mobility and one aspect of ideational drivers that can account for this movement away from capital controls. “What this view overlooks [the view that the implementation of capital controls from a policy perspective is indeterminate] is that capital mobility—as with all material trends—must be socially mediated and interpreted by policymakers” (444). Chwieroth then attempts to map out the movement, increase and influence of groups of neoliberal economists as they are placed in positions of policy control in different countries and how this effects the relevance of capital controls. “When these economists form a coherent policy making team, capital account policy is more likely to be liberalized” (445).
The first stage of his methodology explores the drivers of job appointments. Here he finds, “that both credibility concerns and political interests matter” (445). The second stage of this methodology, “indicate[s] that formation of a coherent policymaking team of neoliberal economists significantly influenced the decision to liberalize” (445).
In explaining “epistemic communities and policy reforms”, Chwieroth highlights the beneficial process of orthodoxy in promoting policy: “In the absence of competing ideas to guide policy, coherence ensures consistent advice and increases the likelihood that the chief of government and other politicians will view the interpretations these economists offer as ‘correct’,” (447). “Coherence also increases the insulation of policymakers from societal demands by shielding the decision-making process from alternative views” (447).
There is then a brief sketch of the movement from a Keynesian approach which highlighted the possible necessity of capital controls and their historic benefit on developing countries to a neoliberal emphasis on the freedom of the restraint of capital controls. “Despite ambiguous empirical basis for capital account liberalization in emerging markets, neoliberal economists also often present their recommendations as the only ‘credible’ policy available to appease market sentiment” (450).
Chwieroth then goes on to test this hypothesis using mainly indicators of capital account openness as well as degree of neoliberalness in policy advocation. The methodology seems solid, though I skimmed over it mostly. The conclusion was that, basically, his hypothesis stood on solid ground. More neoclassical economists created a need for the appointment of more neoclassical economists and thus more neoliberal economic policy.
He concludes that, “the results suggest that existing explanations of capital account liberalization are incomplete” and that, “the results suggest the conclusion that economists are an important conduit through which ideas diffuse and are implemented into policy” (459).
Tuesday, January 8, 2008
Goodman & Pauly: The Obsolescence of Capital Controls?
Goodman, John B., & Pauly, Louis W. (1993). "The Obsolescence of Capital Controls?: Economic Management in an Age of Global Markets". World Politics, 46(1), 50-82. http://links.jstor.org/sici?sici=0043-8871%28199310%2946%3A1%3C50%3ATOOCCE%3E2.0.CO%3B2-3
“In this article, our principle aim is to address two prior puzzles: First, why did policies of capital decontrol converge across a rising number of industrial states between the late 1970s and the early 1990s? Second, why did some states move to eliminate controls more rapidly than others?” The answers to these questions are not the result of broad, ideational shifts on the part of improving the lot of capital mobility. However, these changes can be identified with broader structural changes in, “international production and financial intermediation, which made it easier and more urgent for private firms…effectively to pursue strategies of evasion and exit. For governments, the utility of controls declined as their perceived cost thereby increased” (51).
This article then goes on to outline why this conclusion is the correct one by looking at the cases of movements away from capital controls in
It is clear in this paper that, “global financial structures affect the dynamics of national policy-making by changing and privileging the interests and actions of certain types of firms” (52). This privileging of interest and actions on the domestic level can be seen clearly in the ways in which finance capital interests neglect and evade capital controls when they can. This practice of “evasion and exit” can eventually prove too costly for a country to combat. Thus, they are forced to remove their capital controls.
Initially, this article makes clear that capital controls were a part of the Bretton Woods international economic structure. They were seen as being a crucial tool that domestic economies could use to reign in capital flight and to rebuild. This was even, and still the case with the IMF Articles of Agreement in 1976.
In the 1970s, “two developments dramatically reduced the usefulness of capital controls. The first was the transformation and rapid growth of international financial markets…Just as these changes were occurring, a related development was taking place—an increasing number of businesses were moving toward a global configuration” (57). Both of these changes changed the cost benefit analysis that a nation could use when they were deciding whether or not to implement capital controls. While there were other factors that played roles in this development, these were mainly secondary roles (80).
Frieden: Global Capitalism: Its Fall and Rise in the Twentieth Century (Chapter 15)
Frieden, Jeffry A. (2006). Global capitalism : its fall and rise in the twentieth century (1st ed.). New York: W.W. Norton. (Chapter 15)
This chapter is an interesting and lively telling of the causes and the tension surrounding the movement away from the gold standard by Nixon in August of 1971. This policy change represented the unraveling of the Bretton Woods agreement made amongst many of the Western Allies in the last stages of WWII. Part of this agreement was that the US dollar would be convertible to gold at the rate of 35$ per ounce.
The decision was made by Nixon amid pressure from both the international monetary order and domestic policies. The expectation was that the dollar would be devalued. This was causing a run on the dollar, as people tried to convert it to gold before the devaluation occurred. The
After Nixon made the move to fiat money, the dollar devalued rapidly. However, everything returned to normal after successive devaluations in 1973. This effectively killed the Bretton Woods agreement.
“The Bretton Woods system combined freedom to address national concerns with international economic integration” (342). It was an agreement born out of WWII. It created a situation that Frieden highlights as eventually causing the following trends that eventually brought about its own demise. Firstly, it created a regime whereby international finance could gain footing, strength and influence. The second change that brought about the death of Bretton Woods, as highlighted by Frieden, was the pressure that was subsequently placed on the dollar by the strength of economic recovery, especially in
Eventually, the cause of the rupture in the international monetary order stemmed from the success of the Bretton Woods agreement, and because the
The effects of the movement away from gold convertibility were seen throughout the world. Some of these effects able to be felt in policies that evolved to create nationalist economic protection in developed countries that did not rely on the antiquated gold standard. Other effects were occurring in less developed countries. The process of development in the 70’s can be seen generally to have caused deficits, inflation, political upheaval, urbanization and inequality. These effects were not universal, as
“The postwar era ended in the early 1970s. The developed capitalist world had come out of World War II with a compromise that blended international economic integration with national policy independence, the market with the welfare state” (359). This sounds much like Ruggie’s Embedded Liberalism thesis. The 70’s represented a rupture away from post WWII development. Frieden ends by making the claim that, while the 70’s saw a hemorrhage in the development of developed countries, less developed countries and socialist countries, this was after each of these respective groups were very successful in achieving what they wanted after WWII: respectively, an international trade and finance integration, industrialization, and industrialization.
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