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Phoenix Risen: The Resurrection of Global Finance

  • Benjamin J. Cohen (a1)

Of all the many changes of the world economy since World War II, few have been nearly so dramatic as the resurrection of global finance. A review of five recent books suggests considerable diversity of opinion concerning both the causes and the consequences of financial globalization, leaving much room for further research. Competing historical interpretations, stressing the contrasting roles of market forces and government policies, need to be reexamined for dynamic linkages among the variables they identify. Likewise, impacts on state policy at both the macro and micro levels should be explored more systematically to understand not just whether constraints may be imposed on governments but also how and under what conditions, and what policymakers can do about them. Finally, questions are also raised about implications for the underlying paradigm conventionally used for the study of international political economy and international relations more generally.

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1 See, e.g., Wachtel, Howard M., The Money Mandarins: The Making of a New Supranational Economic Order (Armonk, N.Y.: M. E. Sharpe, 1990); McKenzie, Richard B. and Lee, Dwight R., Quicksilver Capital: How the Rapid Movement of Wealth Has Changed the World (New York: Free Press, 1991); Kurtzman, Joel, The Death of Money: How the Electronic Economy Has Destabilized the World's Markets and Created Financial Chaos (New York: Simon and Schuster, 1993); Millman, Gregory J., The Vandals’ Crown: How Rebel Currency Traders Overthrew the World's Central Banks (New York: Free Press, 1995); and Solomon, Steven, The Confidence Game: How Unelected Central Bankers Are Governing the Changed Global Economy (New York: Simon and Schuster, 1995).

2 Strange, Susan, Casino Capitalism (New York: Basil Blackwell, 1986).

3 Other recent contributions of note include Gill, Stephen R. and Law, David, “Global Hegemony and the Structural Power of Capital,” International Studies Quarterly 33 (December 1989); Underhill, Geoffrey R. D., “Markets beyond Politics? The State and the Intemationalisation of Financial Markets,” European Journal of Political Research 19 (March-April 1991); Banuri, Tariq and Schor, Juliet B., eds., Financial Openness and National Autonomy: Opportunities and Constraints (Oxford: Clarendon Press, 1992); Goodman, John B. and Pauly, Louis W., “The Obsolescence of Capital Controls? Economic Management in an Age of Global Markets,” World Politics 46 (October 1993); Cerny, Philip G., ed., Finance and World Politics (Aldershot, England: Edward Elgar, 1993); Andrews, David M., “Capital Mobility and State Autonomy: Toward a Structural Theory of International Monetary Relations,” International Studies Quarterly 38 (June 1994); Corbridge, Stuart, Thrift, Nigel, and Martin, Ron, eds., Money, Power and Space (Cambridge: Basil Blackwell, 1994); and Eric Helleiner, ed., “The World of Money: The Political Economy of International Capital Mobility,” Policy Sciences 27, no. 4 (1994).

4 Frieden, Jeffry A., “Invested Interests: The Politics of National Economic Policies in a World of Global Finance,” International Organization 45 (Autumn 1991), 429.

5 See, e.g., Frankel, Jeffrey A., On Exchange Rates (Cambridge: MIT Press, 1993), chap. 2; Bosworth, Barry P., Saving and Investment in a Global Economy (Washington, D.C.: Brookings Institution, 1993), chap. 1; Shepherd, William F., International Financial Integration: History, Theory and Applications in OECD Countries (Brookfield, Vt.: Ashgate Publishing, 1994), chap. 4; Herring, Richard J. and Litan, Robert E., Financial Regulation in the Global Economy (Washington, D.C.: Brookings Institution, 1995), chap. 2; and Ghosh, Atish R., “International Capital Mobility amongst the Major Industrialised Countries: Too Little or Too Much?” Economic Journal 105 (January 1995). Country (or political) risk refers to the possibility that assets may be treated differently by different sovereign governments; currency (or foreign-exchange) risk, to the possibility of exchange-rate movements that may alter the rate of return on investments. For some useful discussion, see Herring, Richard J., ed., Managing International Risk (Cambridge: Cambridge University Press, 1983).

6 Though unacknowledged by Sobel, use of the terms “outside-in” and “inside-out” to describe alternative approaches to the study of international relations was pioneered by Waltz, Kenneth. Waltz, See, Theory of World Politics (Reading, Mass.: Addison-Wesley, 1979), 63.

7 For parallel arguments concerning the critical role of domestic politics in shaping distinctive national patterns of financial liberalization, see Pauly, Louis W., Opening Financial Markets: Banking Politics on the Pacific Rim (Ithaca, N.Y.: Cornell University Press, 1988); Rosenbluth, Frances McCall, Financial Politics in Contemporary Japan (Ithaca, N.Y.: Cornell University Press, 1989); and Maxfield, Sylvia, Governing Capital: International Finance and Mexican Politics (Ithaca, N.Y.: Cornell University Press, 1990).

8 Philip G. Cerny, “The Deregulation and Re-regulation of Financial Markets in a More Open World,” in Cerny (fn. 3), chap. 3.

9 Each of these levels of analysis has its analogue in one of Kenneth Waltz's three “images” of international relations—respectively, the third, second, and first image. Waltz, See, Man, the State and War (New York: Columbia University Press, 1959).

10 Bryant, Ralph C., International Financial Intermediation (Washington, D.C.: Brookings Institution, 1987), 69.

11 Andrews (fn. 3). See also Cerny, Philip G., “The Dynamics of Financial Globalization: Technology, Market Structure, and Policy Response,” Policy Sciences 27, no. 4 (1994).

12 Eric Helleiner, “Post-Globalization: Is the Financial Liberalization Trend Irreversible?” in Daniel Drache and R. Boyer, eds., The Future of Nations and the Limits of Markets (forthcoming).

13 Andrews (fn. 3), 197. See also idem, “Capital Mobility and Monetary Adjustment in Western Europe, 1973–1991,” Policy Sciences 27, no. 4 (1994); Philip G. Cerny, “The Political Economy of International Finance,” in Cerny (fn. 3), chap. 1; and idem (fn. 11).

14 Pauly, Louis W., “Capital Mobility, State Autonomy and Political Legitimacy,” Journal of InternationalAffairs 48 (Winter 1995), 373, 385. Andrews himself (fn. 3) admits that “this is not to say that the current degree of capital mobility cannot be reduced, but instead that reduction is likely to be both difficult and costly” (p. 198).

15 James, Scott C. and Lake, David A., “The Second Face of Hegemony: Britain's Repeal of the Corn Laws and the American Walker Tariff of 1846,” International Organization 43 (Winter 1989).

16 Uniquely, Japan was the object of considerable and quite direct pressure from the United States to liberalize its financial markets, particularly during the 1980s. For detail, see Rosenbluth (fn. 7), chap. 3. Overt exercise of influence by the U.S. as well as Britain has been much more evident in the negotiation of regulatory responses to financial globalization, as Kapstein emphasizes (chap. 5).

17 Ron Martin, “Stateless Monies, Global Financial Integration and National Economic Autonomy: The End of Geography?” in Corbridge, Thrift, and Martin (fn. 3), 271.

18 Cerny (fn. 8), 51. Andrews (fn. 3), similarly speaks of the critical role of “widely shared ideological commitments” and “mindsets” (pp. 200–201).

19 Gill and Law (fn. 3), 483–84.

20 Cerny (fn. 8), 79.

21 Goodman and Pauly (fn. 3), 79. Andrews (fn. 3) criticizes Goodman and Pauly for this suggestion, charging that, by stressing both market forces and preexisting levels of financial integration, they in effect “treat capital mobility as both an independent and dependent variable” (p. 197). In fact, this is a bit unfair, since Goodman and Pauly clearly have in mind a kind of dynamic sequencing model or step-function in which today's dependent variable is tomorrow's independent variable (and vice versa).

22 Goodman and Pauly (fn. 3), 79.

23 McKenzie and Lee (fn. 1), xi.

24 Millman (fn. 1), 24.

25 Cohen, Benjamin J., “The Triad and the Unholy Trinity: Lessons for the Pacific Region,” in Higgott, Richard, Leaver, Richard, and Ravenhill, John, eds., Pacific Economic Relations in the 1990s: Cooperation or Conflict? (Boulder, Colo.: Lynne Reinner, 1993). Adding free trade to the equation produces what Tommaso Padoa-Sehioppa calls the “inconsistent quartet.” See Padoa-Schioppa, “The European Monetary System: A Long-term View,” in Giavazzi, Francesco, Micossi, Stefano, and Miller, Marcus, eds., The European Monetary System (Cambridge: Cambridge University Press, 1988).

26 Cohen (fn. 25), 147.

27 See esp. Webb, Michael C., “International Economic Structures, Government Interests, and International Coordination of Macroeconomic Adjustment Policies,” International Organization 45 (Summer 1991); Goodman and Pauly (fn. 3); Cohen (fn. 25); Andrews (fn. 3).

28 Andrews (fn. 3).

29 Ibid., 203.

30 Thomas A. Friedman, “Don't Mess with Moody's,” New York Times, February 22, 1995, p. A15. For a more general analysis of the role that credit-rating agencies may play in constraining public policy, see Sinclair, Timothy J., “Between State and Market: Hegemony and Institutions of Collective Action under Conditions of International Capital Mobility,” Policy Sciences 27, no. 4 (1994). For more specific detail on the Mexican experience, see Nairn, Moises, “Mexico's Larger Story,” Foreign Policy 99 (Summer 1995).

31 Maxfield, Sylvia, “International Portfolio Flows to Developing/Transitional Economies: Impact on Government Policy Choice” (Manuscript, Yale University, 1995).

32 Eichengreen, Barry, International Monetary Arrangements for the 21st Century (Washington, D.C.: Brookings Institution, 1994), 56.

33 Ibid., 60.

34 Henning, C. Randall, Currencies and Politics in the United States, Germany, andjapan (Washington, D.C.: Institute for International Economics, 1994).

35 Goodman and Pauly (fn. 3), 51.

36 Andrews (fn. 3), 206–7.

37 For recent surveys of OCA theory, see Masson, Paul R. and Taylor, Mark P., “Currency Unions: A Survey of the Issues,” in Masson, and Taylor, , eds., Policy Issues in the Operation of Currency Unions (New York: Cambridge University Press, 1993); and Tavlas, George S., “The ‘New'theory of Optimum Currency Areas,” World Economy 16 (November 1993).

38 Frieden (fn. 4), 433.

40 Hirschman, Albert O., Exit, Voice and Loyalty: Responses to Decline in Firms, Organizations, and States (Cambridge: Harvard University Press, 1970).

41 Gill and Law (fn. 3), 486–88.

42 See, e.g., Thomas I. Palley, “Capital Mobility and the Threat to American Prosperity,” Challenge (November-December 1994).

43 Bates, Robert H. and Lien, Da-Hsiang Donald, “A Note on Taxation, Development, and Representative Government,” Politics and Society 14 (March 1985), 57. Bates and Lien note that their argument leads them to precisely the opposite conclusion from Hirschman, who reasoned that it was owners of immobile resources who would be more likely to take the political initiative. Hirschman's error, they suggest, was to focus on the motivations of private groups alone without regard to their strategic interaction with government. Political authorities anxious to preserve their tax base will always pay more attention to the owners of mobile resources. Ibid., 61.

44 Moses, Jonathan W., “Abdication from National Policy Autonomy: What's Left to Leave?” Politics and Society 12 (June 1994), 140–42.

45 Steinmo, Sven, “The End of Redistribution? International Pressures and Domestic Tax Policy Choices,” Challenge (November-December 1994), 17.

46 Thus Ton Notermans criticizes Jonathan Moses for his preoccupation with capital mobility in explaining the Swedish and Norwegian experiences, to the exclusion of what Notermans regards as even more important domestic factors. Notermans, , “Social Democracy in Open Economies: A Reply to Jonathan Moses,” Politics and Society 22 (June 1994).

47 Garrett, Geoffrey and Lange, Peter, “Political Responses to Interdependence: What's ‘Left’ for the Left?” International Organization 45 (Autumn 1991).

48 Ibid., 541.

49 Pauly, Louis W., “National Financial Structures, Capital Mobility, and International Economic Rules: The Normative Consequences of East Asian, European, and American Distinctiveness,” Policy Sciences 27, no. 4 (1994).

50 Frieden (fn. 4), 430.

51 Milner, Helen V., “Bargaining and Cooperation: Domestic Games and International Relations” (Manuscript, Columbia University, 1995).

52 Pauly (fn. 14), 373.

53 Cohen (fn. 25), 134.

54 Goodman and Pauly (fn. 3), 52.

55 Grieco, Joseph M., “Anarchy and the Limits of Cooperation: A Realist Critique of the Newest Liberal Institutionalism,” International Organization 42 (August 1988).

56 Cerny (fn. 8); and idem, “The Infrastructure of the Infrastructure? Toward ‘Embedded Financial Orthodoxy’ in the International Political Economy,” in Palen, Ronen P. and Gills, Barry, eds., Transcending the State-Global Divide: A Neostructuralist Agenda in International Relations (Boulder, Colo.: Lynne Rienner, 1994).

57 For a useful recent survey, see Rittberger, Volker, ed., Regime Theory and International Relations (New York: Oxford University Press, 1993).

58 Stein, Arthur A., Why Nations Cooperate: Circumstance and Choice in International Relations (Ithaca, N.Y.: Cornell University Press, 1990), chap. 2.

59 Kenen, Peter B., Managing Exchange Rates (New York: Council on Foreign Relations, 1988), 7577.

60 Herring and Litan (fn. 5), chap. 5.

61 For evidence of developing cooperation in the regulation of securities markets, see Porter, Tony, States, Markets and Regimes in Global Finance (New York: St. Martin's Press, 1993); and Coleman, William D. and Porter, Tony, “Regulating International Banking and Securities: Emerging Co-operation among National Authorities,” in Stubbs, Richard and Underhill, Geoffrey R. D., eds., Political Economy and the Changing Global Order (New York: St. Martin's Press, 1994). For some observers, regulatory convergence amounts to a “re-regulation” of financial markets. See Underhill (fn. 3), Cerny (fn. 8).

62 Cohen (fn. 25); Kenen (fn. 59).

63 Webb(fn.27).

64 O'Brien, Richard, Global Financial Integration: The End of Geography (New York: Council on Foreign Relations, 1992), 5. See also Ohmae, Kenichi, The Borderless World: Power and Strategy in an Interdependent Economy (New York: Harper Business, 1990); Martin (fn. 17).

65 O'Brien (fn. 64), 2.

66 Ibid., 76.

67 Paul Krugman, Geography andTrade (Cambridge: MIT Press, 1991), 25.

68 Kindleberger, Charles P., American Business Abroad (New Haven: Yale University Press, 1969), 207.

69 Cecco, Marcello De, “Financial Relations: Between Internationalism and Transnationalism,” in Morgan, Roger et al., eds., New Diplomacy in the Post-Cold War World: Essays for Susan Strange (New York: St. Martin's, 1993).

70 Cerny, Philip G., “Money and Finance in the International Political Economy: Structural Change and Paradigmatic Muddle,” Review of International Political Economy 1 (Autumn 1994), 591.

71 Ruggie, John Gerard, “Territoriality and Beyond: Problematizing Modernity in International Relations,” International Organization 47 (Winter 1993); Krasner, Stephen D., “Westphalia and All That,” in Goldstein, Judith D. and Keohane, Robert O., eds., Ideas and Foreign Policy: Beliefs, Institutions, and Political Change (Ithaca, N.Y.: Cornell University Press, 1993); and Thomson, Janice E., “State Sovereignty in International Relations: Bridging the Gap between Theory and Empirical Research,” International Studies Quarterly 39 (June 1995).

72 Agnew, John A., “The Territorial Trap: The Geographical Assumptions of International Relations Theory,” Review of International Political Economy 1 (Spring 1994).

73 Agnew, John A., “Timeless Space and State-Centrism: The Geographical Assumptions of International Relations Theory,” in Rosow, Stephen J., Inayatullah, Naeem, and Rupert, Mark, eds., The Global Economy as Political Space (Boulder, Colo.: Lynne Reinner, 1994), 89.

74 Rosow, Stephen J., “On the Political Theory of Political Economy: Conceptual Ambiguity and the Global Economy,” Review of International Political Economy 1 (Autumn 1994), 473–75.

75 Ruggie (fn. 71), 172.

* I am indebted to David Andrews, Joe Grieco, Miles Kahler, Helen Milner, and Louis Pauly for helpful comments and suggestions. The able assistance of Kathleen Collihan is also gratefully acknowledged.

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