Moran, “Foreign Expansion as an Institutional Necessity for US Corporate Capitalism: The Search for a Radical Model,” World Politics 25, no. 3 (1973): 369-386.
"Is foreign economic expansion in some sense an 'institutional necessity' for corporate capitalism in the United States? Is there something inherent in the internal dynamics of American capitalism that creates such strong pressures for foreign private investment that the US Government must consider the creation and preservation of an international system that facilitates such expansion to be among our most vital national interests? What yardstick can measure the opportunities, the needs, the necessity of investing abroad, or the cost and risk if the option of foreign private investment is threatened?" (369).
Moran explains briefly theories of imperialism stemming from developed countries' perceived inability to reabsorb surplus value or surplus capital. It is argued that these countries must absorb this excess production through conspicuous consumption, military growth or foreign investment. Moran argues that developed countries do not, in fact, have a hard time absorbing extra surplus, as they are the most attractive for capital investment. What about reliance on investment in under developed countries because of raw material dependencies? Moran also argues that the US could rely on domestic production of raw materials but does not. "...direct economic penetration to secure natural resources is not a compelling need for the functioning of corporate capitalism in the United States" (370).
"...foreign investment has always been and will continue to be a 'convenience' more than a 'necessity,' and foreign economic expansion is not an 'institutional need' of US corporate capitalism" (371).
"In this paper I will argue that an emphasis on the stake that multinational corporations have in direct foreign expansion is more plausible than the models of surplus capital" (371). "Concentrating only on US manufacturing companies, I will show why the pressures to invest abroad are much stronger and the costs of giving up the foreign option are much higher in corporate decision-making than conventionally understood by either neoclassical or neo-0Marxist analysis" (372).
"The study of corporate growth in the United States shows that economic expansion abroad results from the struggle to expand and defend the capacity to exact oligopoly rents" (379).
"The study of the product cycle and the growth of the firm explains why the largest, the fastest growing, and the most technologically advanced American manufacturing companies have been under intense pressures to expand into other countries, both developed and underdeveloped. This intensity is far greater than is revealed by conventional figures on relative profitability; it is an intensity that has indeed been intrinsic to the dynamics of unstable imperfect competition in the United States" (385).
"But there is something fundamental to American corporate capitalism...that creates strong pressures for foreign investment. As long as American corporations exercise their virtues of inventiveness and aggressiveness, their government will feel intense, even frantic pressures to create and preserve and international system that facilitates foreign economic expansion" (386).
Thursday, December 4, 2008
Krasner: Structural Conflict: The Third World Against Global Liberalism
SD Krasner, Structural Conflict: The Third World Against Global Liberalism (University of California Press, 1985).
The standard story told about North-South relations is that the South is poor, wants more wealth, and that the North should help them go about achieving this. Krasner tells a different tale. Not only do Southern countries want wealth, they also want power and influence. They are out to mitigate vulnerabilities and exploit opportunities. They do this through the promotion of trade regimes that are geared towards authoritative allocation in place of market-based allocation policies. "For developing countries, authoritative international regimes are attractive because they can provide more stable and predictable transaction flows" (5).
Firstly, Southern countries achieve this by promoting regimes that are structured towards one-country one-vote policies. Secondly, these states have fought to expand the role of sovereignty (6). They are successful in accomplishing these changes based on the role of three variables identified by Krasner: "...the nature of existing institutional structures; the ability to formulate a coherent system of ideas...and the attitude and power of the North...toward both the demands of the South and the forums in which they have been made" (7).
Krasner separates Southern behavior into either relational power strategies or meta-power strategies. The later represent strategies that attempt to change the status quo.
Ch 2: The Structural Causes of Third World Strategy
This chapter outlines domestic and international structural arguments for why Southern countries would be interested in changing international regimes in the interesting of mitigating vulnerability and improving their power position. It is relatively standard Realist fare, though the focus on two distinct levels of analysis vis-a-vis structure is unique. It ends with a case study of Mexico.
The standard story told about North-South relations is that the South is poor, wants more wealth, and that the North should help them go about achieving this. Krasner tells a different tale. Not only do Southern countries want wealth, they also want power and influence. They are out to mitigate vulnerabilities and exploit opportunities. They do this through the promotion of trade regimes that are geared towards authoritative allocation in place of market-based allocation policies. "For developing countries, authoritative international regimes are attractive because they can provide more stable and predictable transaction flows" (5).
Firstly, Southern countries achieve this by promoting regimes that are structured towards one-country one-vote policies. Secondly, these states have fought to expand the role of sovereignty (6). They are successful in accomplishing these changes based on the role of three variables identified by Krasner: "...the nature of existing institutional structures; the ability to formulate a coherent system of ideas...and the attitude and power of the North...toward both the demands of the South and the forums in which they have been made" (7).
Krasner separates Southern behavior into either relational power strategies or meta-power strategies. The later represent strategies that attempt to change the status quo.
Ch 2: The Structural Causes of Third World Strategy
This chapter outlines domestic and international structural arguments for why Southern countries would be interested in changing international regimes in the interesting of mitigating vulnerability and improving their power position. It is relatively standard Realist fare, though the focus on two distinct levels of analysis vis-a-vis structure is unique. It ends with a case study of Mexico.
Kindleberger: The Rise of Free Trade in Western Europe
CP Kindleberger, The Rise of Free Trade in Western Europe, 1820-1875 (MIT, 1974).
The piece begins by exploring exactly what the effects of an imposed tariff on trade are for a given country. There are ten, but not all of these need to be taken into consideration for this study ("...on price, trade, production..., consumption, revenue, terms of trade, internal income distribution, monopoly, employment and the balance of payments" (20)).
A tariff increases domestic prices above world prices. This reduces domestic demand, spurns domestic production and reduces domestic consumption.
As a note on collective action: "That diffuse interests are less well served than concentrated ones in the legislative process is widely accepted in the theory of tariff formation in comparing producers and final consumers. Households count for little in tariff-making since the interest of any one is too small to stir it to the political effort and financial cost necessary to achieve results" (22).
There are a variety of explanations for why free trade took hold when it did. Some claim that it was promoted by vested interests. Others claim it was a result of increasing democratization. Kindleberger tells the story in great detail on a case-study basis, of which, I skimmed.
"My first conclusion reached from this survey was that free trade in Europe in the period from 1820 to 1875 had many different causes. Whereas after 1879, various countries reacted quite differently to the single stimulus of the fall in the price of wheat...before that the countries of Europe all responded to different stimuli in the same way. Free trade was a part of a general response to the breakdown of the manor and guild system" (49-50).
The piece begins by exploring exactly what the effects of an imposed tariff on trade are for a given country. There are ten, but not all of these need to be taken into consideration for this study ("...on price, trade, production..., consumption, revenue, terms of trade, internal income distribution, monopoly, employment and the balance of payments" (20)).
A tariff increases domestic prices above world prices. This reduces domestic demand, spurns domestic production and reduces domestic consumption.
As a note on collective action: "That diffuse interests are less well served than concentrated ones in the legislative process is widely accepted in the theory of tariff formation in comparing producers and final consumers. Households count for little in tariff-making since the interest of any one is too small to stir it to the political effort and financial cost necessary to achieve results" (22).
There are a variety of explanations for why free trade took hold when it did. Some claim that it was promoted by vested interests. Others claim it was a result of increasing democratization. Kindleberger tells the story in great detail on a case-study basis, of which, I skimmed.
"My first conclusion reached from this survey was that free trade in Europe in the period from 1820 to 1875 had many different causes. Whereas after 1879, various countries reacted quite differently to the single stimulus of the fall in the price of wheat...before that the countries of Europe all responded to different stimuli in the same way. Free trade was a part of a general response to the breakdown of the manor and guild system" (49-50).
Wednesday, December 3, 2008
Keohane and Nye: Power and Interdependence
RO Keohane and JS Nye, Power and interdependence (Longman New York, 2001).
"We live in an era of interdependence. This vague phrase expresses a poorly understood but widespread feeling that the very nature of world politics is changing" (3).
Some see the traditional state as unraveling and being supplanted by newer actors. Traditionalists call this view "globaloney", according to the authors (3).
"Our task in this book is not to argue either the modernist or traditionalist position. Because our era is marked by both continuity and change, this would be fruitless. Rather, our task is to provide a means fo distilling and blending the wisdom in both positions by developing a coherent theoretical framework for the political analysis of interdependence" (4).
The authors explore how increasing economic interdependence is changing politics. They also are interested in how politics is changing the nature of economic interdependence, and refer to governmental programs and actions designed to create procedures, rules, etc., as international regimes. They wonder how and why these international regimes are alter over time.
They explore the rhetoric of interdependence.
Some believe that interdependence will lessen conflict. This is naïve, and interdependence could just as easily increase conflict. This empirical question aside, the more likely claim is that interdependence will change the nature of conflict. Also, interdependnece is not synonymous with mutual benefit. Cases of mutual dependence, where both do not benefit but both are still wedded represent interdependence. Also, interdependence will change the cost of interaction because it has the potential to restrict autonomy.
The authors explore the distinction between joint gains and how those gains are divided. Economists typically address the former, not the later.
"We must therefore be cautious about the prospect that rising interdependence is creating a brave new world of cooperation to replace the bad old world of international conflict" (10).
Power and Interdependence:
"Power can be thought of as the ability of an actor to get others to do something they otherwise would not do...Power can also be conceived in terms of control over outcomes. In either case, measurement is not simple" (11).
The authors make a distinction between sensitivity and vulnerability. The former is how responsive changes in one country make impacts in other countries. "Sensitivity interdependence is created by interactions within a framework of policies" (12). "Vulnerability can be defined as an actor's liability to suffer costs imposed by external events even after policies have been altered...Vulnerability dependence can be measured only by the costliness of making effective adjustments to a changed environment over a period of time" (13).
International Regime Change:
International regimes are not insignificant, though they may lack serious teeth, ie., enforcement mechanisms.
"International regimes are intermediate factors between the power structure of an international system and the political and economic bargaining that takes place within it. The structure of the system...profoundly affects the nature of the regime...The regime, in turn, affects and to some extent governs the political bargaining and daily decision-making that occurs within the system" (21).
Ch 2: Realism and Complex Interdependence:
"The realist assumptions about world politics can be seen as defining an extreme set of conditions or ideal type. One could also imagine very different conditions. In this chapter, we shall construct another ideal type, the opposite of realism. We call it complex interdependence" (23).
Realists focus on power and international anarchy.
Three factors give rise to complex interdependence: linkage strategies; agenda setting; transnational and transgovernmental relations.
"We live in an era of interdependence. This vague phrase expresses a poorly understood but widespread feeling that the very nature of world politics is changing" (3).
Some see the traditional state as unraveling and being supplanted by newer actors. Traditionalists call this view "globaloney", according to the authors (3).
"Our task in this book is not to argue either the modernist or traditionalist position. Because our era is marked by both continuity and change, this would be fruitless. Rather, our task is to provide a means fo distilling and blending the wisdom in both positions by developing a coherent theoretical framework for the political analysis of interdependence" (4).
The authors explore how increasing economic interdependence is changing politics. They also are interested in how politics is changing the nature of economic interdependence, and refer to governmental programs and actions designed to create procedures, rules, etc., as international regimes. They wonder how and why these international regimes are alter over time.
They explore the rhetoric of interdependence.
Some believe that interdependence will lessen conflict. This is naïve, and interdependence could just as easily increase conflict. This empirical question aside, the more likely claim is that interdependence will change the nature of conflict. Also, interdependnece is not synonymous with mutual benefit. Cases of mutual dependence, where both do not benefit but both are still wedded represent interdependence. Also, interdependence will change the cost of interaction because it has the potential to restrict autonomy.
The authors explore the distinction between joint gains and how those gains are divided. Economists typically address the former, not the later.
"We must therefore be cautious about the prospect that rising interdependence is creating a brave new world of cooperation to replace the bad old world of international conflict" (10).
Power and Interdependence:
"Power can be thought of as the ability of an actor to get others to do something they otherwise would not do...Power can also be conceived in terms of control over outcomes. In either case, measurement is not simple" (11).
The authors make a distinction between sensitivity and vulnerability. The former is how responsive changes in one country make impacts in other countries. "Sensitivity interdependence is created by interactions within a framework of policies" (12). "Vulnerability can be defined as an actor's liability to suffer costs imposed by external events even after policies have been altered...Vulnerability dependence can be measured only by the costliness of making effective adjustments to a changed environment over a period of time" (13).
International Regime Change:
International regimes are not insignificant, though they may lack serious teeth, ie., enforcement mechanisms.
"International regimes are intermediate factors between the power structure of an international system and the political and economic bargaining that takes place within it. The structure of the system...profoundly affects the nature of the regime...The regime, in turn, affects and to some extent governs the political bargaining and daily decision-making that occurs within the system" (21).
Ch 2: Realism and Complex Interdependence:
"The realist assumptions about world politics can be seen as defining an extreme set of conditions or ideal type. One could also imagine very different conditions. In this chapter, we shall construct another ideal type, the opposite of realism. We call it complex interdependence" (23).
Realists focus on power and international anarchy.
Three factors give rise to complex interdependence: linkage strategies; agenda setting; transnational and transgovernmental relations.
Ikenberry: A World Economy Restored
GJ Ikenberry, “A World Economy Restored: Expert Consensus and the Anglo-American Postwar Settlement,” International Organization 46, no. 1 (1992): 289-321.
How was it possible for the post war international economic order to emerge from the chaos of WWII? This article explores how British and American experts found areas of consensus in order to push forward a vision of the world that was neither emphasized old imperial economic orders or entirely free trade.
"I argue that the policy ideas inspired by Keynesianism and embraced by a group of well-placed British and American economists and policy specialists were crucial in defining government conceptions of postwar interests, building coalitions in support of the postwar settlement, and legitimating the exercise of American power. By shifting the focus from trad3e issues, which were highly contentious, to monetary issues, about which there was an emerging 'middle ground' created by Keynesian ideas, these experts helped overcome political stalemate both within and between the two governments. Put simply, this group of British and American experts intervened at a particularly fluid moment in history to help the British and American political establishments identify their interests, thereby creating the basses of postwar economic cooperation" (291).
Ikenberry goes on to list seven key features of this group of policy experts and the context in which they were making decisions.
"The group of economists and policy specialists involved in the postwar settlement, however, did not fully constitute an epistemic community, nor did the manner in which these experts influenced the terms of the settlement conform to the strict logic of epistemic community influence that is proposed elsewhere in this volume" (293). Firstly, this was not a scientific community affecting policy, but a group brought together in the interest of solving a problem. Secondly, the ideas of the group were not as homogenous or as deeply rooted in tenants of a theory as would be the ideas of an epistemic community. Thirdly, this group did not drive policy adoption, but rather, political needs drove the selection of this group.
This story is then told in great detail and I skimmed it.
How was it possible for the post war international economic order to emerge from the chaos of WWII? This article explores how British and American experts found areas of consensus in order to push forward a vision of the world that was neither emphasized old imperial economic orders or entirely free trade.
"I argue that the policy ideas inspired by Keynesianism and embraced by a group of well-placed British and American economists and policy specialists were crucial in defining government conceptions of postwar interests, building coalitions in support of the postwar settlement, and legitimating the exercise of American power. By shifting the focus from trad3e issues, which were highly contentious, to monetary issues, about which there was an emerging 'middle ground' created by Keynesian ideas, these experts helped overcome political stalemate both within and between the two governments. Put simply, this group of British and American experts intervened at a particularly fluid moment in history to help the British and American political establishments identify their interests, thereby creating the basses of postwar economic cooperation" (291).
Ikenberry goes on to list seven key features of this group of policy experts and the context in which they were making decisions.
"The group of economists and policy specialists involved in the postwar settlement, however, did not fully constitute an epistemic community, nor did the manner in which these experts influenced the terms of the settlement conform to the strict logic of epistemic community influence that is proposed elsewhere in this volume" (293). Firstly, this was not a scientific community affecting policy, but a group brought together in the interest of solving a problem. Secondly, the ideas of the group were not as homogenous or as deeply rooted in tenants of a theory as would be the ideas of an epistemic community. Thirdly, this group did not drive policy adoption, but rather, political needs drove the selection of this group.
This story is then told in great detail and I skimmed it.
Tuesday, December 2, 2008
Hall and Soskice: Varieties of Capitalism
PA Hall and DW Soskice, Varieties of Capitalism: The Institutional Foundations of Comparative Advantage (Oxford University Press, USA, 2001).
Comparative political economy is the study of differences between political-economic systems across national boundaries. "The object of this book is to elaborate a new framework for understanding the institutional similarities and differences among the developed economies, one that offers a new and intriguing set of answers to such questions" (1-2).
The authors identify three strands of thought in the varieties of capitalism literature. The first, or modernization approach, grew out of post WWII rebuilding and focused on governmental ability to create growth. The second, or neo-corporatism, built upon the work of Olsen, for example, and argued that it was the ability of groups in society to work together that created growth. The third group, or social systems of production literature, focused more heavily on changing structures in production and focused heavily on regional and sectoral institutions (4). "where we break most fundamentally from these approaches, however, is in our conception of how behavior is affected by the institutions of the political economy. Three frameworks for understanding this relationship dominate the analysis of comparative capitalism" (4-5). These frameworks are as follows: institutions socialize; institutions arise from power, and institutions form a matrix of sanctions and incentives (5).
"The varieties of capitalism approach to the political economy is actor-centered, which is to say we see the political economy as a terrain populated by multiple actors, each of whom seeks to advance his interests in a rational way in strategic interaction with others...The relevant actors may be individuals, firms, producer groups, or governments. However, this is a firm-centered political economy that regards companies as the crucial actors in a capitalist economy. They are the key agents of adjustment in the face of technological change or international competition whose activities aggregate into overall levels of economic performance" (6).
Following this approach, the firm is viewed relationally, and according to five issue areas. These are the following: industrial relations, vocational training and education, corporate governance, inter-firm relations and employee relations. Different national political economic organizations can be compared looking at these five nodes. The authors divide different organization in the following way: "The core distinction we draw is between two types of political economies, liberal market economies and coordinated market economies, which constitute ideal types at the poles of a spectrum along which many nations can be arrayed" (8).
"In short, deliberative institutions can provide the actors in a political economy with strategic capacities they would not otherwise enjoy; and we think cross-national comparison should be attentive to the presence of facilities for deliberation as well as institutions that provide for the exchange of information in other forms, monitoring, and the enforcement of agreements" (12).
The authors also diverge from other theories of comparative political economy as they focus on the role of culture, history and norms in their analysis.
The chapter continues in great detail about the implications of political economic analysis through the comparative political economy method. The roles of America and Germany are explored separately. The homogenizing effects of globalization are questioned and the implications of this method can be seen to change the analysis of social policy and coordination in the economic realm.
UPDATE:
"The developed economies are currently experiencing profound changes. A technological revolution is creating entirely new sectors, based on biotechnology, microprocessors, and telecommunications, whose products are transforming business practices across the economy" (54). "If technology provided the spark for this revolution, the accelerant has been liberalization in the international economy" (55). "For political economy, the principal issue raised by globalization concerns the stability of regulatory regimes and national institutions in the face of heightened competitive pressure...Will institutional differences among nations of th sort we have identified remain significant or will the process of competitive deregulation unleashed by international integration drive all economies toward a common market model" (55). Some argue that globalization has tipped the scales in favor of international capital, as it is free to move but labor is constricted. This school of thought also explores the possibilities of a homogenizing effects being imposed upon firms to conform to the logic of capital accumulation. Some disagree that global capital is overly constraining the ability of states to act. They claim that international integration is not as intense as we would imagine or that governments are actually manipulating the actions of international institutions in the interest of national power.
"The varieties of capoitalism approach calls into question each of the assumptions underpinning the conventional view of globalization. First, it suggests that firms are not essentially similar across nations..Second, our perspective suggests that firms wil lnot automatically move their activities off-shore when offered low-cost labor abroad...Finally, our perspective calls into question the monolithic political dynamic conventionally associated with globalization" (56-7).
Comparative political economy is the study of differences between political-economic systems across national boundaries. "The object of this book is to elaborate a new framework for understanding the institutional similarities and differences among the developed economies, one that offers a new and intriguing set of answers to such questions" (1-2).
The authors identify three strands of thought in the varieties of capitalism literature. The first, or modernization approach, grew out of post WWII rebuilding and focused on governmental ability to create growth. The second, or neo-corporatism, built upon the work of Olsen, for example, and argued that it was the ability of groups in society to work together that created growth. The third group, or social systems of production literature, focused more heavily on changing structures in production and focused heavily on regional and sectoral institutions (4). "where we break most fundamentally from these approaches, however, is in our conception of how behavior is affected by the institutions of the political economy. Three frameworks for understanding this relationship dominate the analysis of comparative capitalism" (4-5). These frameworks are as follows: institutions socialize; institutions arise from power, and institutions form a matrix of sanctions and incentives (5).
"The varieties of capitalism approach to the political economy is actor-centered, which is to say we see the political economy as a terrain populated by multiple actors, each of whom seeks to advance his interests in a rational way in strategic interaction with others...The relevant actors may be individuals, firms, producer groups, or governments. However, this is a firm-centered political economy that regards companies as the crucial actors in a capitalist economy. They are the key agents of adjustment in the face of technological change or international competition whose activities aggregate into overall levels of economic performance" (6).
Following this approach, the firm is viewed relationally, and according to five issue areas. These are the following: industrial relations, vocational training and education, corporate governance, inter-firm relations and employee relations. Different national political economic organizations can be compared looking at these five nodes. The authors divide different organization in the following way: "The core distinction we draw is between two types of political economies, liberal market economies and coordinated market economies, which constitute ideal types at the poles of a spectrum along which many nations can be arrayed" (8).
"In short, deliberative institutions can provide the actors in a political economy with strategic capacities they would not otherwise enjoy; and we think cross-national comparison should be attentive to the presence of facilities for deliberation as well as institutions that provide for the exchange of information in other forms, monitoring, and the enforcement of agreements" (12).
The authors also diverge from other theories of comparative political economy as they focus on the role of culture, history and norms in their analysis.
The chapter continues in great detail about the implications of political economic analysis through the comparative political economy method. The roles of America and Germany are explored separately. The homogenizing effects of globalization are questioned and the implications of this method can be seen to change the analysis of social policy and coordination in the economic realm.
UPDATE:
"The developed economies are currently experiencing profound changes. A technological revolution is creating entirely new sectors, based on biotechnology, microprocessors, and telecommunications, whose products are transforming business practices across the economy" (54). "If technology provided the spark for this revolution, the accelerant has been liberalization in the international economy" (55). "For political economy, the principal issue raised by globalization concerns the stability of regulatory regimes and national institutions in the face of heightened competitive pressure...Will institutional differences among nations of th sort we have identified remain significant or will the process of competitive deregulation unleashed by international integration drive all economies toward a common market model" (55). Some argue that globalization has tipped the scales in favor of international capital, as it is free to move but labor is constricted. This school of thought also explores the possibilities of a homogenizing effects being imposed upon firms to conform to the logic of capital accumulation. Some disagree that global capital is overly constraining the ability of states to act. They claim that international integration is not as intense as we would imagine or that governments are actually manipulating the actions of international institutions in the interest of national power.
"The varieties of capoitalism approach calls into question each of the assumptions underpinning the conventional view of globalization. First, it suggests that firms are not essentially similar across nations..Second, our perspective suggests that firms wil lnot automatically move their activities off-shore when offered low-cost labor abroad...Finally, our perspective calls into question the monolithic political dynamic conventionally associated with globalization" (56-7).
Grabel: Ideology, Power and the Rise of Independent Monetary Institutions in Emerging Economies
I Grabel, “Ideology, Power, and the Rise of Independent Monetary Institutions in Emerging Economies,” Monetary Orders: Ambiguous Economics, Ubiquitous Politics (2003).
"Stated plainly, the effort to depoliticize financial policy via the creation of independent central banks and currency boards is ineluctably political" (26). The establishment of central bank independence in order to make monetary policy a-political was spurned on, so argues Grabel, by the power of the neo-classical theory of policy credibility. Grabel argues that this policy has been "elevated to a singular truth" and that it is unfalsifiable and must be taken on faith (26). Secondly, the policy-credibility theory overlooks and thus obscures potential different group interests that arise from distinct monetary policies; in other words, the theory is placed above and beyond the other social processes that may have distinct and differing opinions about policy recommendations.
Throughout the 1990s there was a move towards more central bank independence (CBI). Grabel argues that the goals of these newly independent banks were relatively well understood and standardized. However, the increasing independence also caused an increase in currency boards, which do not enjoy the same level of agreed upon practices. At their most basic level, currency boards issue local currency backed by reserve currency and fix exchange rates between local and foreign currency. "Currency boards complement the operations of independent central banks by providing an additional means by which the private sector can be assured that monetary management will proceed undisturbed by political pressures. Indeed, the credibility of currency boards is seen to exceed that of independent central banks because currency boards have the single responsibility of maintaining exchange rate fixity, while central banks...have a broad range of responsibilities. Currency boards help fill the 'credibility deficit' that confronts even independent central banks in countries where these institutions are new or where they have a poor track record" (28).
The issue of policy credibility became much more important after neo-liberal economic policies throughout the developing world were not universally successful throughout the 1970s and 80s. It was argued that the reason that some of these policies failed was because people acting in the markets did not believe that they were going to be followed through upon, or did not understand them to have the necessary credibility to be successful. This brought about a process of making monetary institutions independent so that the policy decisions that were made were given more credibility, as they were not going to be tampered with by political pressures.
"Against the new-classical economic explanation for the rise of independent central banks and currency boards, I argue that political factors chiefly explain the emergence of these institutions. Specifically, the creation of monetary and exchange rate institutions that are independent of elected governments stems from the widespread acceptance of the ideological aspects of the theory of policy credibility and from the exercise of political and economic power by influential actors" (35).
The ideological foundations of the policy credibility theory are two-fold: first, it is not falsifiable and secondly, the policy is solely reliant on faith in the power of neo-classical economic theory.
The remainder of the chapter explores how the role of ideology interacts with political power in order to justify the creation and establishment of central banks and currency boards that attempt to break the linkage between politics and economics.
"Stated plainly, the effort to depoliticize financial policy via the creation of independent central banks and currency boards is ineluctably political" (26). The establishment of central bank independence in order to make monetary policy a-political was spurned on, so argues Grabel, by the power of the neo-classical theory of policy credibility. Grabel argues that this policy has been "elevated to a singular truth" and that it is unfalsifiable and must be taken on faith (26). Secondly, the policy-credibility theory overlooks and thus obscures potential different group interests that arise from distinct monetary policies; in other words, the theory is placed above and beyond the other social processes that may have distinct and differing opinions about policy recommendations.
Throughout the 1990s there was a move towards more central bank independence (CBI). Grabel argues that the goals of these newly independent banks were relatively well understood and standardized. However, the increasing independence also caused an increase in currency boards, which do not enjoy the same level of agreed upon practices. At their most basic level, currency boards issue local currency backed by reserve currency and fix exchange rates between local and foreign currency. "Currency boards complement the operations of independent central banks by providing an additional means by which the private sector can be assured that monetary management will proceed undisturbed by political pressures. Indeed, the credibility of currency boards is seen to exceed that of independent central banks because currency boards have the single responsibility of maintaining exchange rate fixity, while central banks...have a broad range of responsibilities. Currency boards help fill the 'credibility deficit' that confronts even independent central banks in countries where these institutions are new or where they have a poor track record" (28).
The issue of policy credibility became much more important after neo-liberal economic policies throughout the developing world were not universally successful throughout the 1970s and 80s. It was argued that the reason that some of these policies failed was because people acting in the markets did not believe that they were going to be followed through upon, or did not understand them to have the necessary credibility to be successful. This brought about a process of making monetary institutions independent so that the policy decisions that were made were given more credibility, as they were not going to be tampered with by political pressures.
"Against the new-classical economic explanation for the rise of independent central banks and currency boards, I argue that political factors chiefly explain the emergence of these institutions. Specifically, the creation of monetary and exchange rate institutions that are independent of elected governments stems from the widespread acceptance of the ideological aspects of the theory of policy credibility and from the exercise of political and economic power by influential actors" (35).
The ideological foundations of the policy credibility theory are two-fold: first, it is not falsifiable and secondly, the policy is solely reliant on faith in the power of neo-classical economic theory.
The remainder of the chapter explores how the role of ideology interacts with political power in order to justify the creation and establishment of central banks and currency boards that attempt to break the linkage between politics and economics.
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