Invested Interests:The Politics of National Economic Policies in a World of Global STOR Finance Jeffry A.Frieden International Organization,Vol.45,No.4.(Autumn,1991),pp.425-451. Stable URL: http://links.istor.org/sici?sici=0020-8183%28199123%2945%3A4%3C425%3AIITPON%3E2.0.CO%3B2-Q International Organization is currently published by The MIT Press. Your use of the JSTOR archive indicates your acceptance of JSTOR's Terms and Conditions of Use,available at http://www.istor org/about/terms.html.JSTOR's Terms and Conditions of Use provides,in part,that unless you have obtained prior permission,you may not download an entire issue of a journal or multiple copies of articles,and you may use content in the JSTOR archive only for your personal,non-commercial use. Please contact the publisher regarding any further use of this work.Publisher contact information may be obtained at http://www.istor org/journals/mitpress.html. Each copy of any part of a JSTOR transmission must contain the same copyright notice that appears on the screen or printed page of such transmission. The JSTOR Archive is a trusted digital repository providing for long-term preservation and access to leading academic journals and scholarly literature from around the world.The Archive is supported by libraries,scholarly societies,publishers, and foundations.It is an initiative of JSTOR,a not-for-profit organization with a mission to help the scholarly community take advantage of advances in technology.For more information regarding JSTOR,please contact support@jstor.org. http://www.jstor.org Fri Feb819:01:532008
Invested Interests: The Politics of National Economic Policies in a World of Global Finance Jeffry A. Frieden International Organization, Vol. 45, No. 4. (Autumn, 1991), pp. 425-451. Stable URL: http://links.jstor.org/sici?sici=0020-8183%28199123%2945%3A4%3C425%3AIITPON%3E2.0.CO%3B2-Q International Organization is currently published by The MIT Press. Your use of the JSTOR archive indicates your acceptance of JSTOR's Terms and Conditions of Use, available at http://www.jstor.org/about/terms.html. JSTOR's Terms and Conditions of Use provides, in part, that unless you have obtained prior permission, you may not download an entire issue of a journal or multiple copies of articles, and you may use content in the JSTOR archive only for your personal, non-commercial use. Please contact the publisher regarding any further use of this work. Publisher contact information may be obtained at http://www.jstor.org/journals/mitpress.html. Each copy of any part of a JSTOR transmission must contain the same copyright notice that appears on the screen or printed page of such transmission. The JSTOR Archive is a trusted digital repository providing for long-term preservation and access to leading academic journals and scholarly literature from around the world. The Archive is supported by libraries, scholarly societies, publishers, and foundations. It is an initiative of JSTOR, a not-for-profit organization with a mission to help the scholarly community take advantage of advances in technology. For more information regarding JSTOR, please contact support@jstor.org. http://www.jstor.org Fri Feb 8 19:01:53 2008
Invested interests:the politics of national economic policies in a world of global finance Jeffry A.Frieden A striking characteristic of the contemporary international economy is the great mobility of capital across national borders.Technological innovations, economic trends,and government policies have brought international invest- ment to extremely high levels.Many business executives,politicians,and observers believe that capital now moves so freely that the financial markets of industrialized countries are essentially subsets of one global market.This is widely regarded as a fundamental change in the international economy- something new or at least not seen since the classic gold standard.It is also widely believed to have generated such prominent developments as European Community (EC)movement toward a single currency,harmonization of taxes across national borders,and international convergence of macroeconomic policies. Economists have devoted a great deal of time and energy to analyzing the economic implications of the movement of capital across national borders. Other social scientists have also analyzed the political implications of interna- tional investment.The studies of this latter group have tended to focus on one or another subset of the issue,such as multinational corporations in developed and developing countries,foreign borrowing by developing nations,and the politics of international banking.'Despite the quantity and quality of work on I am grateful to the Social Science Research Council,the German Marshall Fund,the UCLA Academic Senate Committee on Research,and the UCLA International Studies and Overseas Programs for their financial support.I also thank Benjamin J.Cohen,Barry Eichengreen,Judith Goldstein,Joanne Gowa,Robert Keohane,Stephen Krasner,David Lake,Edward Leamer, Timothy McKeown,Louis Pauly,Frances Rosenbluth,John Ruggie,and Michael Wallerstein for their helpful comments and suggestions. 1.For prominent examples from each of these issue-areas,see Helen V.Milner,Resisting Protectionism:Global Industries and the Politics of Interational Trade (Princeton,N.J.:Princeton University Press,1988);Peter Evans,Dependent Development:The Alliance of Multinational,State, and Local Capital in Brazil (Princeton,N.J.:Princeton University Press,1979);David G.Becker et al.,Postimperialism:International Capitalism and Development in the Late Twentieth Century (Boulder,Colo.:Lynne Rienner,1987);Robert Kaufman and Barbara Stallings,eds.,Debt and International Organization 45,4,Autumn 1991 1991 by the World Peace Foundation and the Massachusetts Institute of Technology
Invested interests: the politics of national economic policies in a world of global finance Jeffry A. Frieden A striking characteristic of the contemporary international economy is the great mobility of capital across national borders. Technological innovations, economic trends, and government policies have brought international investment to extremely high levels. Many business executives, politicians, and observers believe that capital now moves so freely that the financial markets of industrialized countries are essentially subsets of one global market. This is widely regarded as a fundamental change in the international economysomething new or at least not seen since the classic gold standard. It is also widely believed to have generated such prominent developments as European Community (EC) movement toward a single currency, harmonization of taxes across national borders, and international convergence of macroeconomic policies. Economists have devoted a great deal of time and energy to analyzing the economic implications of the movement of capital across national borders. Other social scientists have also analyzed the political implications of international investment. The studies of this latter group have tended to focus on one or another subset of the issue, such as multinational corporations in developed and developing countries, foreign borrowing by developing nations, and the politics of international banking.' Despite the quantity and quality of work on I am grateful to the Social Science Research Council, the German Marshall Fund, the UCLA Academic Senate Committee on Research, and the UCLA International Studies and Overseas Programs for their financial support. I also thank Benjamin J. Cohen, Barry Eichengreen, Judith Goldstein, Joanne Gowa, Robert Keohane, Stephen Krasner, David Lake, Edward Leamer, Timothy McKeown, Louis Pauly, Frances Rosenbluth, John Ruggie, and Michael Wallerstein for their helpful comments and suggestions. 1. For prominent examples from each of these issue-areas, see Helen V. Milner, Resisting Protectionism: Global Industries and the Politics of International Trade (Princeton, N.J.: Princeton University Press, 1988); Peter Evans, Dependent Development: The Alliance of Multinational, State, and Local Capital in Brazil (Princeton, N.J.: Princeton University Press, 1979); David G. Becker et al., Postimperialism: International Capitalism and Development in the Late Twentieth Century (Boulder, Colo.: Lynne Rienner, 1987); Robert Kaufman and Barbara Stallings, eds., Debt and International Organization 45,4, Autumn 1991 o 1991 by the World Peace Foundation and the Massachusetts Institute of Technology
426 International Organization specific aspects of the politics of cross-border investment,this literature remains disjointed and short on general analytic principles. This article proposes a framework for analyzing the politics of international capital mobility.It focuses on the distributional implications of cross-border capital movements and on the distributional implications of various economic policies in light of the high degree of international capital mobility. The first section describes just how mobile capital is today and discusses the implications of existing levels of financial integration for national economic policy autonomy.It argues that while financial capital is extremely mobile across borders,other types of investment (especially in equities and sector- specific capital)are far less mobile.In this context,foreseeable levels of international capital mobility restrict but do not eliminate the possibility for national economic policies.Sectoral policies remain feasible,as do policies whose goals directly or indirectly involve the exchange rate. The second section of the article examines the policy preferences of various socioeconomic groups toward financial integration.It emphasizes the differen- tial effects of the increase in capital mobility and focuses on questions concerning which actors are better (or worse)off after financial integration than before and how the various actors can be expected to respond politically to this change in the economic environment.The conclusion here is twofold.Over the long run,international financial integration tends to favor capital over labor,especially in developed countries.But in the shorter run,which is more relevant to politics and policies,the issue is more complex:in the developed world,financial integration favors capitalists with mobile or diversified assets and disfavors those with assets tied to specific locations and activities such as manufacturing or farming. The third section of the article explores what high levels of financial integration imply for the policy preferences of economic interest groups in regard to such other issues as macroeconomic policy and the exchange rate. The section takes a high level of capital mobility as given,to see how various interest groups are expected to behave in this environment.It argues that international capital mobility tends to remake political coalitions by way of its impact on the effects of national policies.The political division between producers of tradable goods and producers of nontradable goods and services is likely to become more important,as are distinctions between internationally diversified and undiversified investors.All of these factors have significant implications for the analysis of politics and economic policy in the advanced industrialized nations. Development in Latin America (Boulder,Colo.:Westview Press,1989);Benjamin J.Cohen,In Whose Interest?Intemnational Banking and American Foreign Policy (New Haven,Conn.:Yale University Press,1987);and Charles Lipson,Standing Guard:Protecting Foreign Capital in the Nineteenth and Twentieth Centuries(Berkeley:University of California Press,1985).The bodies of literature,of course,are far too large to cite or discuss here
426 International Organization specific aspects of the politics of cross-border investment, this literature remains disjointed and short on general analytic principles. This article proposes a framework for analyzing the politics of international capital mobility. It focuses on the distributional implications of cross-border capital movements and on the distributional implications of various economic policies in light of the high degree of international capital mobility. The first section describes just how mobile capital is today and discusses the implications of existing levels of financial integration for national economic policy autonomy. It argues that while financial capital is extremely mobile across borders, other types of investment (especially in equities and sectorspecific capital) are far less mobile. In this context, foreseeable levels of international capital mobility restrict but do not eliminate the possibility for national economic policies. Sectoral policies remain feasible, as do policies whose goals directly or indirectly involve the exchange rate. The second section of the article examines the policy preferences of various socioeconomic groups toward financial integration. It emphasizes the differential effects of the increase in capital mobility and focuses on questions concerning which actors are better (or worse) off after financial integration than before and how the various actors can be expected to respond politically to this change in the economic environment. The conclusion here is twofold. Over the long run, international financial integration tends to favor capital over labor, especially in developed countries. But in the shorter run, which is more relevant to politics and policies, the issue is more complex: in the developed world, financial integration favors capitalists with mobile or diversified assets and disfavors those with assets tied to specific locations and activities such as manufacturing or farming. The third section of the article explores what high levels of financial integration imply for the policy preferences of economic interest groups in regard to such other issues as macroeconomic policy and the exchange rate. The section takes a high level of capital mobility as given, to see how various interest groups are expected to behave in this environment. It argues that international capital mobility tends to remake political coalitions by way of its impact on the effects of national policies. The political division between producers of tradable goods and producers of nontradable goods and services is likely to become more important, as are distinctions between internationally diversified and undiversified investors. All of these factors have significant implications for the analysis of politics and economic policy in the advanced industrialized nations. Development in Latin America (Boulder, Colo.: Westview Press, 1989); Benjamin J. Cohen, In Whose Interest? International Banking and American Foreign Policy (New Haven, Conn.: Yale University Press, 1987); and Charles Lipson, Standing Guard: Protecting Foreign Capital in the Nineteenth and Twentieth Centuries (Berkeley: University of California Press, 1985). The bodies of literature, of course, are far too large to cite or discuss here
Global finance 427 The relationship between international capital mobility and national policies is a prominent example of the much-discussed impact of external conditions on domestic politics.?Elucidating this specific relationship thus also serves the broader purpose of clarifying the domestic effects of international trends.The article,then,both develops an integrated approach to the politics of interna- tional capital movements and addresses more general conceptual issues about the interaction of the domestic and international political economies.In so doing,it presents a summary and empirical illustrations not only of the direct impact of international capital mobility on the effectiveness of national economic policy but also of the distributional effects of capital mobility on the social groups whose demands themselves affect national economic policy. Capital mobility and national economic policies It would be foolish to inquire about the effects of integrated international capital markets on interest group competition over national economic policy if such policy could not be implemiented in a financially integrated world or if contemporary international capital markets were not in fact highly integrated. The initial question therefore concerns the degree to which national economic policy autonomy is compromised by existing levels of international capital mobility. The events of the 1970s and the 1980s have led many to conclude that capital mobility severely limits or contravenes national policy.Between 1978 and 1982, for example,private financial inflows swamped Chile's conservative policies even as private financial outflows thwarted Mexico's free-spending policies.In mid-1981,the economic expansion attempted by the new French Socialist government rapidly confronted a large capital outflow and a run on the franc, leading to a reversal of the policies soon after their adoption.3 Parallel stories about government efforts hampered by capital and currency movements could be told about many other developing and developed countries in the past two decades.Some observers have drawn dire conclusions,such as that of John Freeman,who observed that in the context of the globalization of finance "the nation state has become at best immobilized and at worst obsolete."4 2.The two quintessential works on this subject are Peter Gourevitch's Politics in Hard Times: Comparative Responses to Intemational Economic Crises (Ithaca,N.Y.:Cornell University Press, 1986)and Ronald Rogowski's Commerce and Coalitions:How Trade Affects Domestic Political Alignments(Princeton,N.J.:Princeton University Press,1989). 3.Jeffrey Sachs and Charles Wyplosz,"The Economic Consequences of President Mitterand," Economic Policy 2(April 1986),pp.262-322. 4.See John Freeman,"Banking on Democracy?International Finance and the Possibilities for Popular Sovereignty,"mimeograph,University of Minnesota,1990.From a politically different quarter,former Citibank chief executive officer Walter Wriston has said similar things about the impact of financial internationalization-but approvingly:"It's a new world and the concept of sovereignty is going to change....The idea of fifteenth-century international law is gone.It hasn't laid down yet,but it's dead.It's like the three-mile limit in a world of Inter-Continental Ballistic
Global finance 427 The relationship between international capital mobility and national policies is a prominent example of the much-discussed impact of external conditions on domestic politic^.^ Elucidating this specific relationship thus also serves the broader purpose of clarifying the domestic effects of international trends. The article, then, both develops an integrated approach to the politics of international capital movements and addresses more general conceptual issues about the interaction of the domestic and international political economies. In so doing, it presents a summary and empirical illustrations not only of the direct impact of international capital mobility on the effectiveness of national economic policy but also of the distributional effects of capital mobility on the social groups whose demands themselves affect national economic policy. Capital mobility and national economic policies It would be foolish to inquire about the effects of integrated international capital markets on interest group competition over national economic policy if such policy could not be implem'ented in a financially integrated world or if contemporary international capital markets were not in fact highly integrated. The initial question therefore concerns the degree to which national economic policy autonomy is compromised by existing levels of international capital mobility. The events of the 1970s and the 1980s have led many to conclude that capital mobility severely limits or contravenes national policy. Between 1978 and 1982, for example, private financial inflows swamped Chile's conservative policies even as private financial outflows thwarted Mexico's free-spending policies. In mid-1981, the economic expansion attempted by the new French Socialist government rapidly confronted a large capital outflow and a run on the franc, leading to a reversal of the policies soon after their adoptiom3 Parallel stories about government efforts hampered by capital and currency movements could be told about many other developing and developed countries in the past two decades. Some observers have drawn dire conclusions, such as that of John Freeman, who observed that in the context of the globalization of finance "the nation state has become at best immobilized and at worst ob~olete."~ 2. The two quintessential works on this subject are Peter Gourevitch's Politics in Hard Times: Comparative Responses to International Economic Crises (Ithaca, N.Y.: Cornell University Press, 1986) and Ronald Rogowski's Commerce and Coalitions: How Trade Affects Domestic Political Alignments (Princeton, N.J.: Princeton University Press, 1989). 3. Jeffrey Sachs and Charles Wyplosz, "The Economic Consequences of President Mitterand," Economic Policy 2 (April 1986), pp. 262-322. 4. See John Freeman, "Banking on Democracy? International Finance and the Possibilities for Popular Sovereignty," mimeograph, University of Minnesota, 1990. From a politically different quarter, former Citibank chief executive officer Walter Wriston has said similar things about the impact of financial internationalization-but approvingly: "It's a new world and the concept of sovereignty is going to change. . . . The idea of fifteenth-century international law is gone. It hasn't laid down yet, but it's dead. It's like the three-mile limit in a world of Inter-Continental Ballistic
428 International Organization The first step in evaluating the effects of contemporary levels of international capital mobility is to get a clear picture of where the levels stand in relation to the past.Long-term capital movements across borders were relatively limited for the first twenty-five years after World War II and took place primarily in the form of direct investment.Today,long-term international investment flows are extraordinarily large,and direct investment has been dwarfed by other,more arms-length,forms of cross-border capital movements. According to one source,net international bond and bank lending was $440 billion in 1989,up from $180 billion just five years earlier.Capital outflows from the thirteen leading industrialized countries averaged $444 billion in 1989,with almost two-thirds of the amount consisting of portfolio investment,in contrast to $52 billion in the late 1970s,with two-thirds consisting of foreign direct investment.Capital outflows were equivalent to 15 percent of world merchan- dise trade in 1989,in contrast to 7 percent in the late 1970s.3 According to another source,the outstanding stock of international bank and bond lending was $3.6 trillion in 1989,equivalent to 25 percent of the aggregate gross national product(GNP)of the industrialized countries,in contrast to under $200 billion and 5 percent of aggregate GNP in 1973. Recent changes in regulations and technology have made it possible for money to travel across borders almost instantly,giving rise to massive short-term international financial transactions.In April 1989,foreign exchange trading in the world's financial centers averaged about $650 billion a day, equivalent to nearly $500 million a minute and to forty times the amount of world trade a day.Markets for short-term international financial instruments are comparably large,although exact figures are not available.? Impressive as these numbers are,they do not amount to full international capital mobility.In fact,economic studies have consistently shown that borders and currencies are still substantial barriers to investment flows.3 Although Missiles."Wriston is cited in my Banking on the World:The Politics of American Interational Finance (New York:Harper Row,1987),p.115.See also Walter Wriston,Risk and Other Four-Letter Words (New York:Harper Row,1986). 5.Bank for International Settlements (BIS),Sixtieth Annual Report (BIS:Basle,1990),pp.63, 82,and125. 6.See Morris Goldstein,Donald Mathieson,and Timothy Lane,"Determinants and Systemic Consequences of International Capital Flows,"in Determinants and Systemic Consequences of International Capital Flows (Washington,D.C.:International Monetary Fund,1991),p.5.This assumes a low level of international bond lending in 1973,which is almost certainly the case.Exact figures are not available. 7.See BIS,Sixtieth Annual Report,pp.208-9.See also pp.146-52,which offer data regarding some short-term instruments and indicate that open positions in interest rate futures and options totaled about $1.6 trillion at the end of 1989. 8.The early classic work was M.Feldstein and C.Horioka's"Domestic Savings and Interna- tional Capital Flows,"Economic Joumal 90 (June 1980),pp.314-29.For more on the issue and debates over it,see Ralph Bryant,International Financial Intermediation (Washington,D.C.: Brookings Institution,1987),pp.82-86.For a recent test,see Tamim Bayoumi,"Saving-Investment Correlations:Immobile Capital,Government Policy,or Endogenous Behavior?"IMF Staff Papers 37(June1990),Pp.360-87
428 International Organization The first step in evaluating the effects of contemporary levels of international capital mobility is to get a clear picture of where the levels stand in relation to the past. Long-term capital movements across borders were relatively limited for the first twenty-five years after World War I1 and took place primarily in the form of direct investment. Today, long-term international investment flows are extraordinarily large, and direct investment has been dwarfed by other, more arms-length, forms of cross-border capital movements. According to one source, net international bond and bank lending was $440 billion in 1989, up from $180 billion just five years earlier. Capital outflows from the thirteen leading industrialized countries averaged $444 billion in 1989, with almost two-thirds of the amount consisting of portfolio investment, in contrast to $52 billion in the late 1970s, with two-thirds consisting of foreign direct investment. Capital outflows were equivalent to 15 percent of world merchandise trade in 1989, in contrast to 7 percent in the late 1970~.~ According to another source, the outstanding stock of international bank and bond lending was $3.6 trillion in 1989, equivalent to 25 percent of the aggregate gross national product (GNP) of the industrialized countries, in contrast to under $200 billion and 5 percent of aggregate GNP in 1973.6 Recent changes in regulations and technology have made it possible for money to travel across borders almost instantly, giving rise to massive short-term international financial transactions. In April 1989, foreign exchange trading in the world's financial centers averaged about $650 billion a day, equivalent to nearly $500 million a minute and to forty times the amount of world trade a day. Markets for short-term international financial instruments are comparably large, although exact figures are not available.' Impressive as these numbers are, they do not amount to full international capital mobility. In fact, economic studies have consistently shown that borders and currencies are still substantial barriers to investment flows.' Although Missiles." Wriston is cited in my Banking on the World: The Politics of American International Finance (New York: Harper & Row, 1987), p. 115. See also Walter Wriston, Risk and Other Four-Letter Words (New York: Harper & Row, 1986). 5. Bank for International Settlements (BIS), Sixtieth Annual Report (BIS: Basle, 1990), pp. 63, 82, and 125. 6. See Morris Goldstein, Donald Mathieson, and Timothy Lane, "Determinants and Systemic Consequences of International Capital Flows," in Determinants and Systemic Consequences of International Capital Flows (Washington, D.C.: International Monetary Fund, 1991), p. 5. This assumes a low level of international bond lending in 1973, which is almost certainly the case. Exact figures are not available. 7. See BIS, Sixtieth Annual Report, pp. 208-9. See also pp. 146-52, which offer data regarding some short-term instruments and indicate that open positions in interest rate futures and options A A totaled about $1.6 trillion at the end of 1989. 8. The early classic work was M. Feldstein and C. Horioka's "Domestic Savings and International Capital Flows," Economic Journal 90 (June 1980), pp. 314-29. For more on the issue and debates over it, see Ralph Bryant, International Financial Intermediation (Washington, D.C.: Brookings Institution, 1987), pp. 82-86. For a recent test, see Tamim Bayoumi, "Saving-Investment Correlations: Immobile Capital, Government Policy, or Endogenous Behavior?" IMF Staff Papers 37 (June 1990), pp. 360-87