Abdelal: Writing the Rules of Global Finance

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.

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.

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 Maastricht criteria suggest that, under certain conditions, governments are quite capable of manipulating financial market behavior” (766).

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).

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 Japan, German, France and Italy. Special attention is paid to why these movements occurred at different times in different countries, and the conclusions that are drawn are congruent with the broader conclusions of the paper.

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).