Rogowski: Commerce and Coalitions

Rogowski, Ronald. (1989). Commerce and coalitions : how trade affects domestic political alignments. Princeton, N.J.: Princeton University Press.

This text posits that there will be domestic political coalitions or divisions based on a country’s natural relative endowments if they engage in free trade. He creates a handy metric for determining whether or not there will be tension in a given country that is a 2x2 box. Along the x-axis there is a distinction made between countries that are relatively abundant in land or labor. Along the Y axis, countries are separated into relatively capital rich and poor nations.

This is not an attempt to explain all of the effects of trade, but rather to provide a metric that can potentially be useful in determining some of the effects of increased or decreased trade on different coalitions in a given nation. The remainder of the text is an attempt to apply the theory to historical example. At times this is seamless and elegant, and other times it stretches too far to make causal connections that do not exist.

Hunter, et. al.: World Bank Directives, Domestic Interests, and the Politics of Human Capital Investmenet in Latin America

Hunter, Wendy, & Brown, David S. (2000). "World Bank Directives, Domestic Interests, and the Politics of Human Capital Investment in Latin America". Comparative Political Studies, 33(1), 113-143. http://www.csa.com/ids70/gateway.php?mode=pdf&doi=10.1177%2F0010414000033001005&db=sagepol-set-c&s1=80ee883868977a98ef5390896262f864&s2=33b0a246702c8a4b341473fa4c93e069

“Do international financial institutions significantly affect the development strategies their borrowers pursue over do domestic forces prevail over IFI influence?” (113). IOs are teachers, tutors, etc., but are the countries learning? This study focuses on the learning end of the relationship. “Our findings suggest that the World Bank has not had a significant impact on human capital investment in Latin America. Instead, powerful domestic forces tend to override World Bank directives” (115).

This article then turns its focus to the varying returns on investment in different areas of human capital development. It states that the empirical work of Schultz (1959, 1963) show that, “social returns on investments in human capital are greater than those on physical capital in the developing world, and…investments in basic education yield higher returns than those in higher education” (115). The argument is extended casually, and our authors posit that most of the beneficiaries of higher education investment are those who are already well off and who do not need the investment. “…an integral tenet of neoliberal social reform is that public resources [must] not be allocated to those who can afford to pay for private social services” (116). And, “…IMF officials are particularly determined to eliminate market distorting mechanisms like price supports and subsidies as well as nonessential social items. Cutting out free university education is consistent with this approach” (118).

The study then deploys an analytical approach to answering its hypothesis. They want to see whether or not significant investment in a country by BWIs will be answered with adequate change in social programs on the ground. It should be shown that as WB investment in countries increases, government subsidies to higher education decrease. This will happen partially by a virtue of the influence of technicos, or technocrats who are trained in the West and who carry western values.

Their dependent variables are central bank, “expenditures on both education and health,” expressed as a relation to GDP (122). There are four DVs. The independent variables are as follows: concentration of world bank project lending, lagged DVs, gross domestic product per capita, economic growth, debt service ratio, domestic political institutions and population (122-5).

The results: “The consistent finding across such a wide array of indicators offers strong evidence that the concentration of World Bank funding exerts little influence on social policy…it appears that the World Bank’s efforts to persuade its clients to shift spending toward programs that invest in human capital have met with little success” (127). The statistically significant variables are the lagged DV and GDP growth with an overall r-squared of over 95%. Further results show that World Bank lending to education doesn’t match up with government spending (or rather, how governments should be spending according to World Bank assumptions).

The author then draws on examples from Brazil and Chile to explain their results. In Brazil, it was not possible to charge tuition because students rioted and the government appeased them. IN Chile, students pay for higher education. This is partially because the Pinochet government was highly successful at lobbying for reforms. (!)

They conclude that their, “…field research suggests that domestic political forces prevail over international technocratic linkages when it comes to redistributive social policy making” (138). One explanation for this in relation to earlier periods is that, “early stabilization measures and market reforms were launched by a small number of high-level officials in an atmosphere of secrecy and crisis. Current reforms, by contrast, are taking place during a longer time frame and in a relatively open political atmosphere, inviting politicians and interest groups to intervene” (139).

Gould: Money Talks

Gould, Erica R. (2003). "Money Talks: Supplementary Financiers and International Monetary Fund Conditionality". International Organization, 57(03), 551-586.

This article examines IMF conditionality. The IMF was originally created to monitor and offer short-term loans to support and stabilize the international exchange rate regime. In 1952, it started to place conditionalities with their loans, things that countries had to do in order to meet the requirements of the loan. Gould would like to examine why conditionalities are the way that they are. What factors and variables have contributed to their current state of being.

She argues that, “…Fund conditionality is influenced by the private and official financiers who supplement the Fund’s loan to borrowers” (552). These supplementary financiers are the agents who provide additional capital to countries when they are going through a short-term liquidity problem. These financiers can be grouped into three categories: creditor states, private financial institutions (PFIs) and multilateral organizations. Gould focuses on PFIs.

She then examines the historical arguments for IO influence. She looks at liberal theory and generalizes that IOs help, “…facilitate mutually beneficial exchange between international actors” (554). IOs are seen as being Pareto improving because they change the incentive structure between states. Much previous literature on this subject has focused on the state-as-an-actor assumption. Looking at PFIs provides a different perspective.

“Supplementary financiers and the IMF are locked in a mutually dependent relationship. The Fund depends on supplementary financiers to help ensure the success of its loan programs and its future bargaining leverage with borrowers. In turn, supplementary financiers depend on the Fund to help facilitate their financing transactions and make borrowers’ commitments more credible. As a result, supplementary financiers are both able and willing to influence the Fund’s activities” (555). “The empirical section focuses on one element of the design of Fund programs that best isolates the influence of PFIs: a certain class of binding conditions, labeled ‘bank-friendly’ conditions, which specify that the country must pay back a commercial bank creditor as a condition of its Fund loan” (560). “In short, the supplementary financier suggests that PFIs will be able to influence the terms of Fund conditionality arrangements when they can generat3e a credible threat to withhold necessary supplementary financing if their demands are not met. The PFIs’ threat will only be credible under certain conditions: if they are organized and if the threat is ex post incentive-compatible” (562).

The method involves using 249 cases from 20 countries, which she claims are generally representative. Table 1 lists different examples of bank friendly conditions that may be attached to loans. Figure 1 graphs the rise of conditionality verses the rise of conditions that involve bank-friendly measures, and is quite telling. The dependent variable is binary: “whether or not a given conditionality agreement includes a bank-friendly binding condition” (565). The IVs are private influence, US influence, salary increase for IMF workers, reserve size, tranche, constant GSP, and year.

The results: “…these results lend support to the supplementary financier argument, and cast doubt on the realist and bureaucratic alternative arguments. There is a strong relationship between the PRIVATE INFLUENCE variable and the bank-friendly dependent variable. The next section clarifies how that relationship works” (573). Private influence is significant and positively correlated in three models, where overall r-squared is about 50% and the n is relatively low (76 in model 2). No other IV is relatively as significant and influential.

Gould then attempts to casually map this linkage. She examines Mexico and Turkey. She concludes that PFIs have been able to influence the Fund because the Fund is partially reliant on PFIs for their policy success.

Buria: The Bretton Woods Institutions

Buria, Ariel. (2005). "The Bretton Woods Institutions: Governance Without Legitimacy?" CSGR Working Paper No. 180/05.

This article starts out with a quote from Douglas North: “Institutions are not…created to be socially efficient; rather they, or at least the formal rules, are created to serve the interests of those with the bargaining power to create new rules” (2).

The voting structure of BWIs is examined in this article and it is found to be highly correlated with the influence of countries who contribute more quota money to funds. The attempt is to then create a different metric whereby countries could be given voting rights in these institutions. This new metric would do much to skew voting power away from traditional hegemons and towards newly industrializing countries. “…present day quotas…represented the economic structure of the world in 1944 are far from representative of the current sizes of economies, of their ability to contribute resources to the Fund or of their importance in world trade and financial markets” (5).

There was a quota review group. They attempted to make changes to this regime. However, while they were given a mandate to make these changes, they did not take into account developing countries (6). The review group was an iteration of vested interests having their way in an IO.

The first metric that Buria examines is the measurement of GDP in determining voting rights. “The majority favored conversion at market exchange rates, averaged over several years, but a minority preferred to measure GDP for purposes of the quota calculations using PPP-based exchange rates. They considered that market exchange rates do not necessarily equalize prices of tradable goods across countries, even after taking into account transport costs and quality differences, and that this creates an index numbers problem in which the GDP in developing countries is understated in relation to developed countries if market exchange rates are used” (9).

In this world, Japan is seen as being a higher potential contributor than China, France more than India.

The quota system is also skewed in favor of developing countries in that it does poor job of measuring inter-European trade.

Buria then shows that, “…the measurement of GDP in terms of PP favors an increase in the quota share of all developing countries by eliminating a measurement bias against them. The introduction of volatility as a factor in the quota formula also favors developing countries, particularly exporters of primary products” (16).

She then looks at the eroded legitimacy of BWIs. The Fund ahs lost all influence over industrial countries. International financial markets have given countries access to other forms of financing. There is a, “…growing chasm between shareholders and stakeholders, between those who determine IMF policies and decisions and those to whom those decisions and polices are applied” (18). Also, the rapid expansion of NICs is highlighted with their growing coffers of financial reserves.

In conclusion, this article claims that the quota formulas need to reflect a changed global economy, where the influence of the economic powers of 1944 is decreased and the influence of the economic powers of the 21^st century is increased. “…the determination of quotas is as much a political as a technical exercise” (26).

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).