There used to be a strand of thought that argued that the world economy constrained domestic economic policy in only one way: through fixed exchange rates. Let the exchange rate float, argued economists as far left as John Kenneth Galbraith and as far right as Milton Friedman, and then domestic policy will be free and unconstrained – and can be as stimulative (if the outside world should happen to be deflationary) or as committed to price stability (if the outside world should happen to be inflationary) as domestic politicians wish.

Yet for 25 years floating exchange rates have been the rule rather than the exception. And over these 25 years we have learned that this is not the case.

Let me try to give this point – Robert Pollin's point – some more empirical substance. Let me focus on Mexico in 1994–95, because it shows not only how brutal the limits placed on domestic policy by the integration of the world's financial market can be, but also how to at least mitigate the damage.

In the late 1980s, the authoritarian PRI party ruling Mexico shifted its economic policies in a “neo-liberal” direction. Instead of extremely tight restrictions on imports (even imports of the capital goods that serve as one of the major channels of technology transfer to the Third World), the party adopted policies of freer trade.