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Capital mobility, state autonomy and political legitimacy.

Language - not money or force - provides legitimacy. So long as military, political, religious or financial systems do not control language, the public's imagination can move about freely with its own ideas. Uncontrolled words are consistently more dangerous to established authority than armed forces.(2)

The invitation to reflect on the impact of global financial markets on the autonomy of the nation-state came while I was attending a conference entitled, "The Politics of Anti-Politics." Under this rubric, participants examined the dramatic rise in recent years of neo-populist, opposition and anti-establishment political movements in many countries around the world. It occurred to me that these issues were intrinsically connected. This essay is about that connection and the language often used to obscure it.

The "globalization of finance" is the latest jargon used to connote a number of interrelated developments in the contemporary world economy. Among the most important changes are the reduction of direct controls and taxes on capital movements, the liberalization of long-standing regulatory restrictions within national financial markets, the expansion of lightly regulated off-shore financial markets and the introduction of new technologies in the process of financial intermediation. These developments render capital more mobile, both within and across national borders.

This essay focuses on the decontrol of short-term capital flows and draws from relevant research in international economics and international political economy.(3) Much of the latter work treats capital mobility as a dependent variable, and the most persuasive arguments underline the deliberate policy choices of states under conditions of tightening economic interdependence and rapid technological change.(4) Some studies have begun to probe the internal political contest behind those choices within particular states. Still others are now reversing the causal chain altogetber and inquiring into the internal and external political implications of international capital mobility.(5) That research tends to support the view that the scale and durability of international capital flows now reflect a new regime in world politics, a normative framework increasingly evident in relations among advanced industrial countries and spreading rapidly to others.(6) That regime, this essay contends, is unstable.

The social and political implications of expanding international capital mobility are not fully understood. The associated obligations of both states and citizens have not been clearly debated and affirmation of relevant governing rules by established political authorities has been limited. In short, if a regime of international capital mobility is now commonly depicted as inevitably governing the lives of citizens in an increasingly global economy, the consent of the governed has not adequately been sought. The fact that such consent is routinely sought on analogous trade matters makes its absence in the financial field all the more glaring.

This is the source of mis-identified fears concerning nation-states' "losing their sovereignty" in the international arena. At issue is the legitimacy of an emergent regime, not the sovereignty of the states participating in it. This essay concludes that the language of international capital mobility - the truly anti-political language of global market enthusiasts - obfuscates, but cannot solve, that legitimacy problem.(7) The solution, like the problem, is intrinsically political.


Conditions approximating what is now commonly, if hyperbolically, referred to as "global finance" existed before 1914 between the most advanced economies and their dependencies. The extremities of war and economic depression succeeded in disrupting a system of economic adjustment that had accommodated, even necessitated, international capital flows. That system, which dates back to the 1870s, rested on a rough consensus among the principal trading nations, at the center of which lay a version of the gold standard, backed by the wealth and power of Great Britain. In theory, if not always in practice, the behavioral norms embedded in that system prescribed relatively passive domestic policy responses to external economic changes.(8)

The tumultuous era that began in 1914 witnessed the rise of the modern democratic nation-state, whose citizens expected it to ensure their military security and, increasingly, their economic security. These national expectations determined the terrain upon which a new intergovernmental consensus on monetary issues was defined at Bretton Woods in 1944 and, more fundamentally, upon which the Bretton Woods consensus evolved in subsequent years.(9) The policy mix expressing that consensus privileged exchange rate stability and limited capital mobility.

The contemporary reconstruction of global capital markets, or more precisely the dramatic expansion of international capital mobility, is closely linked to the disruption of the Bretton Woods consensus in the 1970s and the dawn of the era of flexible exchange rates. The expectations of citizens concerning the responsibilities of democratic nation-states, however, have not substantively changed.(10) The resulting policy mix - international capital mobility and flexible exchange rates, together with continued national responsibility for the broadly defined security of citizens - is beginning to look historically unprecedented.

Popular economic commentators, prominent bankers and Marxists underscore the discipline on autonomous state action imposed by international capital mobility. Whether they embrace such discipline or loathe it, they envisage the consolidation of a new global order: the borderless order of advanced capitalism. Their vision draws from a materialist world-view, and the language used to invoke it is the language of inevitability. But the ultimate stakes are far from linguistic in nature. Enjoining governments to yield to signals emanating from the global market, this language implies that a profound shift in policy-making authority is taking place, a shift away from the national level towards the supranational. Its more sanguine proponents typically extol a necessary surrender of sovereignty to the rational economic logic of markets beyond national control.

If sovereignty is defined as policy autonomy, then increased international capital mobility seems necessarily to imply a loss of sovereignty. This old chestnut ignores, however, both an extensive literature on the evolution of the legal concept of sovereignty and a generation of research on the political trade-offs entailed by international economic interdependence.(11) Furthermore, it downplays the stark historical lesson of 1914: Under conditions of crisis, the locus of ultimate political authority in the modem age - the state - is laid bare. Especially through its effects on domestic politics, capital mobility constrains states, but not in an absolute sense. If a crisis increases their willingness to bear the consequences, states can still defy markets. More broadly, the abrogation of the emergent regime of international capital mobility by the collectivity of states may be unlikely and undesirable, but it is certainly not inconceivable. As long as that remains the case, states retain their sovereignty. Nevertheless, in practical terms, it is undeniable that most states today do confront heightened pressures on their economic policies as a result of more freely flowing capital. The phenomenon itself, however, is not new. What is new is the widespread perception that all states and societies are now similarly affected.

In light of the historical record, such a perception is ironic. More importantly, it blurs crucial distinctions between states, and between social groups within those states. Could it be that beneath the overt discourse on sovereignty and inexorable policy constraints lies a covert discourse on power and legitimacy? If effective governing authority has been usurped by global capital markets, or if such authority has been devolved to those markets by states themselves, surely questions should be raised about the process by which such a shift has taken place and about the obligation of citizens to comply with the consequences.(12)


The increasingly widespread belief that the holders of capital, especially short-term or portfolio capital, have the right to move it freely across national borders represents a distinct change in the normative consensus originally achieved by states in the aftermath of the Second World War.(13) During the discussions leading up to the 1944 Bretton Woods Conference, one of the sticking points between the United States and Great Britain, the principal negotiators, involved the issue of official controls on short-term capital movements in a pegged exchange rate system. Although the chief British spokesman, John Maynard Keynes, had moved away from his earlier view that finance was not one of those "things which should by their nature be international," he continued to defend the right of the state to impose capital controls as and when it perceived the need to arise.(14) The U.S. position, articulated most forcefully by Harry Dexter White, approached the matter differently. Although willing to concede that disequilibrating capital flows were both conceivable and undesirable, White envisaged a monetary order that would actively discourage all types of financial restrictions that impede trade and the international flow of "productive" capital."(15) The word "productive" here was carefully chosen; it was generally understood to distinguish such flows from "speculative" flows.

The U.S. position reflected the expectation that, as the major creditor in the post-war order, the United States stood to benefit from as liberal an environment for international investment as could be created. By the same token, the United States was also intent on ensuring that access to the financial resources of the new international monetary institution it favored creating, the International Monetary Fund (IMF), would be limited to countries facing temporary balance of payments problems. In the face of undesired capital outflows, the United States preferred that a country undertake economic adjustment (in its exchange rate and/or domestic policies producing its payments problem) instead of seeking financing. The United States therefore contemplated a central regulatory role for the IMF.

In 1944, the final Bretton Woods compromise affirmed the priority of adjustment in the event of sustained capital outflows but left the option of controls to the discretion of individual states, provided only that such controls were not intended to restrict trade.(16) In the day-to-day experience of the IMF after its establishment, the difficulty of making clear distinctions between illegitimate exchange restrictions and legitimate capital controls soon became apparent.(17) Tensions related to such difficulties, however, gradually began to ebb after the restoration of currency convertibility among the major industrial countries in 1958.

The ascendancy of capital mobility as a policy objective received limited expression in 1961 in the founding documents of the industrial countries' Organization for Economic Cooperation and Development (OECD). In particular, on 12 December 1961, the Council of the OECD adopted the Code of Liberalization of Capital Movements in which member-states agreed to "progressively abolish between one another" restrictions on movements of capital "to the extent necessary for effective economic cooperation."(18) Although the Code represented the most explicit international statement of intent regarding the discouragement of capital controls, it left significant scope for member-states to make exceptions for certain types of capital transfers and to take any actions considered necessary for the "maintenance of public order or ... the protection of essential security interests."(19) In the event of severe balance-of-payments problems, a member-state was also permitted by the Code to suspend "temporarily" its liberalization obligations.(20) At the very least, a state could thereby attempt to manage the pace of its internal adjustment to changed international circumstances, perhaps even forcing other states to bear some of the burden of that adjustment. As long as states remained responsible for national security, the technical acceptability of such options remained crucial.

For the advanced industrialized states the OECD Code extended and clarified the fundamental normative consensus of Bretton Woods, but it did not change the essential rules governing international finance. Freer capital movements across borders were to be encouraged in the context of a liberal international economy, but states retained the right to impede that movement whenever they deemed it necessary. During the decade following the formation of the OECD, the importance states attached to that right became evident.

In the wake of persistent current account imbalances throughout the 1960s and early 1970s, most industrial states adopted controls on short-term capital movements. Even the United States embarked upon a series of experiments designed to control disequilibrating outflows and defend the pegged exchange rate system designed at Bretton Woods.(21) However, such measures did not ultimately save that system, for behind seemingly unstoppable speculative capital outflows lay an enduring disagreement between the leading states over the distribution of adjustment burdens under conditions of deepening economic interdependence.(22) As the system was collapsing, multilateral discussions on the future regulation of capital movements continued.

In 1972, an intergovernmental forum on international monetary reform was established. Labeled the Committee of Twenty of the IMF Board of Governors, its real work was undertaken by a staff drawn from the finance ministries and central banks of the leading monetary powers, who in turn assigned a group of technical experts to examine the problem of speculative capital flows. Despite difficulties encountered in specifying the extent of the problem, the group's final report conceded that disequilibrating flows could continue to disrupt even flexible exchange rate arrangements. However, it also concluded that although capital controls could not be forsworn, they should not become permanent features of any new system because of their potentially damaging effect on trade and beneficial investment flows. With this in mind, the group recommended that goverments seek to draft a new code of conduct for the use of capital controls, and that the code be monitored by an international agency such as the IMF. This recommendation was not followed.

To the frustration of reformers, the final report of the Committee of Twenty did not succeed in laying the groundwork for a new monetary system.(23) In the end, all that proved politically feasible was an amendment to the Articles of Agreement of the IMF that essentially legalized floating exchange rates. The Committee gave up trying to achieve a new consensus on the definition of disequilibrating capital flows. Although the Agreement made explicit the idea that the exchange of capital between countries should be facilitated by the international monetary system, it nevertheless left intact the right of member-states to control capital movements not directly related to trade, and it once again restricted the IMF's oversight to trade-related flows only.

In terms of the leading theoretical approach to the dynamics of monetary interdependence, the disappointing conclusion of the reform exercise of the 1970s represented a collective and mainly infonnal decision by advanced industrialized states to abandon one set of policy trade-offs and to replace them with another. During the heyday of the original Bretton Woods system, participants had sought both exchange rate stability and autonomy in their macroeconomic policy making, and they had been willing to tolerate limits on capital mobility in order to achieve those objectives. As that system was breaking down, the participants gave priority to capital mobility and policy autonomy over exchange rate stability.(24) Only one priority remained constant: Still held responsible for national security, states retained their right to craft internal macroeconomic policies as they themselves saw fit. In short, the abandoning of exchange rate stability and the privileging of international capital mobility represented a means of managing the external effects of those internal policies under conditions of tightening interdependence.

Following the breakdown of the pegged exchange rate system, states collectively encouraged the further expansion of international capital movements. This occurred even as some states, mainly in Europe, sought to restore a degree of exchange rate stability for themselves by limiting their own policy autonomy through regional arrangements. Sometimes they encouraged capital flows through direct policy actions designed to liberate market forces, finance budget and trade deficits or respond to foreign competition.(25) At other times, they did so by not making decisions, effectively exempting so-called "off-shore" currency transactions from the sorts of requirements routinely imposed on "on-shore" transactions. Having set in motion a system that lacked a reliable mechanism for pegging currency values and that encouraged adaptive strategies on the part of business, individual states found that further capital liberalization, combined with enhanced market supervision, represented a politically viable alternative to the resurrection of the Bretton Woods system.(26) The outcome has been the widespread adoption of financial and investment policies aimed at greater capital decontrol and, as a result, the increased integration of national financial markets.

Capital flows continue to encounter frictions at national borders; international financial markets are not yet characterized by perfect capital mobility and structural homogeneity.(27) Still, it is clear that government policies formerly accommodating the possibility, or the necessity, of controls on short-tenn capital movements have lately converged in the direction of liberalization. This convergence and the consequent reorientation of the expectations of state and market actors suggest a fundamental break with the original Bretton Woods rules. In 1989, that convergence was recognized by the members of the OECD as they widened the scope of the Capital Movements Code. Although limited escape clauses were retained, the subsequent activism of the OECD in minimizing the reservations of member-states suggests an attempt by the organization's leading members to replace the formal legal right to control capital movements with a new norm. Among the members of the European Community, key planks of the Single European Act worked in a similar direction.


Walter Wriston, the former chairman of Citibank, described and defended the process of capital decontrol as follows:

The gold standard [of the 19th century], replaced by the gold exchange standard, which was replaced by the Bretton Woods arrangements, has now been replaced by the information standard. Unlike the other standards, the information standard is in place, operating, will never go away and has substantially changed the world. What it means, very simply, is that bad monetary and fiscal policies anywhere in the world are reflected within minutes on the Reuters screens in the trading rooms of the world. Money only goes where ifs wanted, and only stays where ifs well treated, and once you tie the world together with telecommunications and information, the ball game is over. It's a new world, and the fact is, the information standard is more draconian than any gold standard ... For the first time in history, the politicians of the world can't stop it. It's beyond the political control of the world, and that's the good news.(28)

Despite the exaggerated liberalism of his language, Wriston correctly noted that the norm of cross-national capital mobility gradually achieved a new priority by the 1970s. This ascendancy, however, generated significant strains in various domestic and international political arenas. Export-intensive economies with relatively rigid labor markets such as Germany found the consequent volatility of exchange rates increasingly disruptive. At the same time, the lack of effective coordination in the supervision of intermediaries operating across national borders contributed to a series of financial disasters, ranging from the near-collapse of the Franklin National Bank in 1974 to the developing-country debt crisis of the 1980s.(29) As a result, movements toward European financial and monetary integration and expanded international cooperation on financial market supervision accelerated. Neither movement, however, compromised the ascendancy of the capital mobility norm. Even the developing country debt crisis, which dominated the international financial policy agenda for over a decade, affected the distribution of international capital rather than its mobility in principle. Capital mobility was in turn greatly enhanced by the rapid development of new financial technologies. In Wriston's words, "technology has combined with finance in a new and unique way that makes obsolete some of the old ideas of compartmentalized national markets." Robert Slighton, a senior official from Chase Manhattan Bank put the mantra more simply: "There is a global capital market, period."(30)

Global financial integration and the fact that citizens continue to hold their governments responsible for national economic performance has heightened a widely perceived tension. On the one hand, in a more complex financial environment, governments seek the jobs, investment, new technology and prestige that mobile capital appears to promise, whether embodied in short-term financial flows or long-term fixed investments. On the other hand, governments must craft domestic economic ground rules that strike a balance between competitive efficiency, fairness, social justice and other such values. Moreover, democratic governments must strike that balance in societies that will not easily accept the notion that all choices related to a basic factor of production, namely capital, are unalterably constrained, often as a result of earlier decisions by those same governments.

The resulting dilemma for national policy makers is not entirely novel. In a time-honored tradition, obfuscation has been employed when economic interdependence becomes politically salient. The news media unintentionally provide cover with headlines like: "Governments Lose Clout in New Monetary Order." Financial commentators do the same by reiterating the bankers' message that "the privilege of government is being squeezed away" by global financial markets.(31)

That message will not bear scrutiny, for it ignores the fact that states are still the only actors capable of establishing and securing the property rights upon which financial markets are based. Only states can ensure the modicum of stability required for financial competition to deepen.(32) Directly or indirectly, states continue to meet that challenge, even as they seek to exploit the efficiency gains promised by increasing financial integration. Although they compete with one another for those gains, they also seek ways to cooperate more extensively on the supervisory front.(33) Measures to cope with what financiers call "systemic risk" - the risk that failure in one financial market will spread to others - ultimately entail an irreducible commitment on the part of states. In the end, only states are available to play the role of lenders of last resort.

Within individual states, the consequences of financial globalization also require deeper analysis. In theory, open capital markets and the expanding availability of direct and indirect investment options outside their home bases work to ensure that the most mobile, creditworthy and externally-oriented firms and individuals avoid the full impact of the costs of adjustment to changing economic circumstances. In the absence of countervailing action, therefore, the least mobile firms and individuals stand to bear most of that burden. While comparative work on distributional issues thereby raised is in its infancy, we nevertheless have some sense that the intensity of resulting social and political tensions, as well as the responses of particular states to such tensions, vary across regions and across business cycles.(33) No bold leap of imagination is needed to see that such differences leave the world with a challenge akin to those Inis Claude once termed problems of "collective legitimization."(35) For the international community as a whole, the character of rights, of compensatory obligations and of avenues for redress connected with the freedom of capital flows have not been clearly articulated.


Corporate financiers, as well as representatives of national governments, among the largest borrowers of international capital, use the language of inevitability to obscure the notion that other normative choices are conceivable. It is the language of what Karl Polanyi called "the self-regulating market."(36) In a profound sense, it is an anti-political language. How else are we to interpret phrases like "the privilege of government is being squeezed away?" As Polanyi pointed out, however, civil societies, even if re-shaped by new economic forces, have throughout modem history found ways to defend themselves from the vagaries of "self-regulating" markets.

Where can we find such defensive impulses today? Consider rising trade tensions in a number of countries and regions around the world. In this regard, the debate between Keynes and White is still alive as states find themselves hard-pressed to reconcile freer trade and freer capital movements. Consider also the agendas of proliferating populist and nationalist political movements. Although capital mobility is less visible and therefore often less politically salient than labor mobility, when demagogues in Europe ranging across a wide spectrum from Jean-marie Le Pen in France to Vladimir Zhirinovsky in Russia broach the idea of limiting the influence of "international" capital they strike a chord with deep historical resonance.(37) When U.S. presidential candidate Ross Perot alluded to the growing power of Japanese capital in the United States during the 1980s he struck a similar chord. The extreme caution evident in much of East Asia on the issue of western-style financial deregulation seems grounded in a similar sense of unease. To the extent that capital flows are perceived to create or sustain relationships of dominance and subservience, policies of financial liberalization are obvious targets for political leaders promising their followers security in a hostile world.

International capital mobility can disrupt long-standing patterns of life. It is unleashed by political forces, and its effects are intrinsically political. Its benefits are allocated differentially. For an increasing number of states today, international capital mobility appears to represent a key element in the least politically costly economic strategy. Few states, however, directly address its unintended social consequences. These include, most importantly, resentment among those not benefiting in the short term. This is the core of what was described above as a problem of legitimacy. As is especially obvious in countries attempting to make the transition to democracy, such resentment can clearly sow the seeds for a backlash if capital mobility does not reliably and expeditiously help bring widespread prosperity. Similar misgivings are not inconceivable in advanced countries, especially if capital mobility and exchange rate instability interact in a way that exacerbates concerns about future economic and social well-being.(38)

Within the advanced industrial world, however, it would likely take a serious crisis to shift dominant internal perceptions of the respective costs and benefits of capital decontrol. But crises do arise. Analysts should therefore be cautious when interpreting the current dimensions of international capital flows as constituting of an exogenous structure that irrevocably binds societies or their states. Again, a collective movement away from capital decontrol may be undesirable, but it remains entirely possible.(39) If it were not, then the world's central bankers and finance ministers would not fly into paroxysms of anxiety whenever a major financial institution gets into trouble, whenever the world's stock markets fall precipitously or whenever a major borrower threatens to default. To them, mismanagement of systemic risks and the consequent disintegration of international capital markets remains all too imaginable. It is from that realization that international political economists might usefully take their bearings for future research on the nonnative underpinnings of those markets.

In thinking about policy trade-offs under conditions of capital mobility, it is helpful to recall the economists' framework: If governments take seriously the concerns about exchange rate instability frequently expressed even in mainstream policy circles, and if they want to preserve whatever efficiency gains international capital mobility promises, then they must reconsider the priority they assign to autonomy in their macroeconomic policy making.(40) Some smaller economies have already moved in such a direction by voluntarily - but rarely irrevocably - giving up exchange rate flexibility.(41) For the major economic powers whose autonomy will arguably never really erode as a result of some automatic economic process, it might one day be timely to consider a similar compromise.

In recent years the Group of Seven has paid obeisance to this logic. When difficult choices need to be made, however, its three largest members - the United States, Germany and Japan - revert to the choices of 1973, and the language of international capital mobility provides comforting justification. For these three states, the essential trade-off remains capital mobility and exchange rate flexibility in return for the maximum feasible degree of freedom in macroeconomic policy making. For France, the choice was made in 1983 to limit the autonomy of its monetary policies by retaining a tight linkage between the franc and the mark in the European Monetary System. Britain and Italy favored autonomy by eventually severing such a connection, at least for a time. For its part, Canada, achieved a less desirable outcome - capital mobility, exchange rate instability and the illusion of policy autonomy.(42)

Under what conditions do powerful and potentially dominant states voluntarily relinquish policy autonomy? This remains a key question for future research in this area. As Paul Volcker's "Bretton Woods Commission" recently put it, domestic macroeconomic policy can no longer be formnulated in isolation.(43) But it can still be formnulated in relative isolation, at least in the United States, Japan and Germany.(44) In fact, international capital mobility helps those countries to shift consequent adjustment burdens. If a current account deficit, for example, is the consequence of autonomously crafted internal policies, open capital markets can finance it. If a surplus results, those same markets provide the necessary financial outlet. Through those markets, the rest of the world helps bear resulting economic and political costs.(45) As it does for financiers, the language of international capital mobility, with its pre-emptive overtones, appears to give certain governments a useful tool for dissimulation.

The internal policies of a leading state are typically only disciplined by its own willingness to embrace the goal of exchange rate stability. Combined with international capital mobility, such a goal implies a real commitment to coordinated macroeconomic policy making with other leading states. This, in turn, implies the establishment of a mechanism for overseeing the fair distribution of adjustment burdens if that commitment is to endure. Institutionalizing such a mechanism through a treaty and providing scope for reasonably objective external judgment would constitute substantial steps toward the legitimation of international capital mobility.(46) But these steps alone would not address the more difficult internal dimensions of the problem.

Despite the language of the proponents of capital mobility, the root of the internal difficulty is clear. If Oliver Wendell Holmes, Jr. was correct in noting that taxes are indeed "what we pay for a civilized society," international capital mobility makes it urgent that we address in a new way two enduring questions: Who should now pay, and how should they pay?(47) As the rise of rejectionist political movements reminds us, deferring answers will not likely solve the problem. In the long run, it is more likely to lead to one of two outcomes: the erosion of civilized societies or the limitation of international capital mobility.(48) If the fundamental assertion of proponents is truly sound - that is, if international capital mobility really does promise large economic and political gains for the whole world - it would seem worth seeking legitimation at both the broadest and the deepest levels possible. (2) John Ralston Saul, Voltaire's Bastards: The Diciatorship of Reason in the West (New York: Free Press, 1992) p. 8.

Journal of International Affairs, Winter 1995, 48, no. 2. [C] The Trustees of Columbia University in the City of New York.

(3) For example, in addition to references cited below, see Susan Strange, Casino Capitalism (Oxford: Basil Blackwell, 1986); Benjamin J. Cohen, In Whose Interest? International Banking and American Foreign Policy (New Haven: Yale University Press, 1986); James Hawley, Dollars and Borders (New York: M.E. Sharpe, 1987); Ralph Bryant, International Financial Intermediation (Washington, DC: Brookings Institution, 1987); Andrew Walter, World Power and World Money (London: Harvester Wheatsheaf, 1991); Geoffrey Underhill, "Markets Beyond Politics? The State and the Internationalization of Financial Markets," European Journal of Political Research, 19, nos. 2 and 3 (March/April 1991) pp. 197-255; Tony Porter, States, Markets and Regimes in Global Finance (New York: St. Martin's Press, 1993); and Philip Cerny, ed., Finance and World Politics (Aldershot, UK: Edward Elgar, 1993).

(4) An outstanding example, upon which I have relied in this essay, is Eric Helleiner, States and the Reemergence of Global Finance (Ithaca, NY: Cornell University Press, 1994).

(5) See Sylvia Maxfield, Governing Capital (Ithaca, NY: Cornell University Press, 1990); Michael C. Webb, The Political Economy of Policy Coordination: International Adjustment Since 1945 (Ithaca, NY: Cornell University Press, forthcoming); Michael Loriaux, France After Hegemony (Ithaca, NY: Cornell University Press, 1991); Brian Barry and Robert E. Goodin, Free Movement: Ethical Issues in the Transnational Migration of People and Money (London: Harvester Wheatsheaf, 1992); Paulette Kurzer, Business and Banking (Ithaca, NY: Cornell University Press, 1993); Susan Strange, States and Markets, 2nd edition (New York: Basil Blackwell, 1994); David M. Andrews, Capital Mobility and State Autonomy: Toward a Structural Theory of International Monetary Relations," International Studies Quarterly, 38, no. 2 June 1994) pp. 193-218; and Louis W. Pauly, "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).

(6) The concept of "regimes" as scholars of international relations now conventionally use the term, is elaborated in Stephen Krasner, ed., International Regimes (Ithaca, NY: Cornell University Press, 1983). For present purposes, the term is used simply to mean a framework of norms expected to govern behavior. On the capital mobility issue, a strong regime would encompass formal commitments to market openness, restraints on controls, regulatory transparency and currency convertibility. A weaker regime might be said to develop when exchange and capital controls (both direct and indirect) are deliberately abolished and explicit acknowledgement of the propriety of such policies takes place across various states. For a review of relevant conceptual literature, see Volker Rittberger, ed., Regime Theory in International Relations (Oxford: Clarendon Press, 1993).

(7) I am using the term "anti-political" in a manner consistent with the polarity described by Charles Lindblom in Politics and Markets (New York: Basic Books, 1977). Populist or anti-establishment movements are in this sense necessarily "political." "Anti-politics," conversely, would cover efforts to move effective decision making entirely out of political arenas and into the hands of technicians or market "players."

(8) See Barry Eichengreen, ed., The Gold Standard in Theory and History (London: Methuen, 1985).

(9) See John Gerard Ruggie, "International Regimes, Transactions, and Change: Embedded Liberalism in the Postwar Economic Order," International Organization, 36, no. 2 (Spring 1982) pp. 379-415; "Embedded Liberalism Revisited," in Progress in International Relations, ed. Emanuel Adler and Beverly Crawford (New York: Columbia University Press, 1991) pp. 201-34; and "Trade, Protectionism and the Future of Welfare Capitalism," Journal of International Affairs, 48, no. I (Summer 1994) pp. 1-11.

(10) Witness the resistance apparent across the industrialized world when governments attempt to make decisive adjustments in social safety nets. Even Margaret Thatcher's much-vaunted efforts to change those expectations in Britain did little to undermine the actual scale and scope of the British welfare state.

(11) On the former, work directly relevant to international systemic questions extends from the classic statement by F.H. Hinsley in Sovereignty (New York: Basic Books, 1966) to recent perspectives offered by Stephen D. Krasner, "Sovereignty: An Institutional Perspective," Comparative Political Studies, 21, no. 1 (April 1988) pp. 66-94; John Gerard Ruggie, "Territoriality and Beyond: Problematizing Modernity in International Relations," International Organization, 47, no. 1 (1993) pp. 139-74; Samuel Barkin and Bruce Cronin, "The State and the Nation: Changing Norms and the Rules of Sovereignty in International Relations," International Organization, 48, no. 1 (Winter 1994) pp. 107-30; and Alexander Wendt, "Collective Identity Formation and the Intemational State," American Political Science Review, 88, no. 2 (June 1994) pp. 384-96. On the latter, a clear line of relevant debate on the constraining effects of interdependencc links Robert 0. Keohane and Joseph S. Nye, Jr. eds., Transnational Relations and World Politics (Cambridge, MA: Harvard University Press, 1972) and Robert O. Keohane and Joseph S. Nye, Jr., Power and Interdependence (Boston: Little Brown, 1977) to such works as Peter J. Katzenstein, ed., Between Power and Plenty (Madison, WI: University of Wisconsin Press, 1978); Stephen D. Krasner, ed., International Regimes (Ithaca, NY: Cornell University Press, 1983); David Baldwin, ed., Neorealism and Neoliberalism: The Contemporary Debate (New York: Columbia University Press, 1993); and Robert Putnam et al., eds., Double-edged Diplomacy (Berkeley, CA: University of California Press, 1993).

(12) The commonplace test of political legitimacy in general is whether the right to exercise effective political authority is matched by the perception of an obligation to comply. Thomas Franck persuasively adapted this Weberian conception to the international sphere by defining legitimacy as the "quality of a rule which derives from a perception on the part of those to whom it is addressed that it has come into being in accordance with right process." As indicators for the rightness of a process and the legitimacy of resulting rules, Franck proposed tests of determinacy, symbolic validation, coherence and adherence to a normative hierarchy. The emergent capital mobility regime would appear to fall short on all counts. See Thomas Franck, "Legitimacy in the International System," American Journal of International Law, 82, no. 4 (October 1988) pp. 705-59.

(13) This section draws in part on my contribution to U.S. Congress, Office of Technology Assessment, Multinationals and the National Interest: Playing By Different Rules, OTA-ITE-569 (Washington, DC: U.S. Government Printing Office, September 1993) pp. 135-58. Relevant historical background is also recounted in John B. Goodman and Louis W. Pauly, "The Obsolescence of Capital Controls? Economic Management in an Age of Global Markets," World Politics, 46, no. 1 (October 1993) pp. 50-82. (14) John Maynard Keynes, "National self-sufficiency," Yale Review, 22, no. 4 (June 1933) pp. 755-69, quoted in Charles P. Kindleberger, International Capital Movements (Cambridge: Cambridge University Press, 1987) p. 86.

(15) The view that all capital controls should be discouraged later became even more prominent in the U.S. position, a development many students of the subject have attributed to the resurgent influence of the New York financial community after the war ended. See Marcello de Cecco, "Origins of the Postwar Payments System," Cambridge Journal of Economics, 3 (March 1979) pp. 49-61. That influence, however, was evidently not strong enough during the 1960s to prevent the U.S. government from experimenting with capital controls when the need arose.

(16) See Article VI, sections 1 and 3 of the Articles of Agreement of the IMF. For his part, Keynes interpreted this compromise as follows: "Not merely as a feature of the transition, but as a permanent arrangement, the plan accords to every member Government the explicit right to control all capital movements. What used to be heresy is now endorsed as orthodox ... It follows that our right to control the domestic capital market is secured on firmer foundations than ever before, and is formally accepted as a proper part of agreed international arrangements." (Quoted in Joseph Gold, International Capital Movements Under the Law of the International Monetary Fund, Pamphlet Series, no. 21 [Washington, DC: IMF, 1977] p. 11).

(17) To take one example, note that leads and lags in current payments can effectively create "capital flows" which may or may not be equilibrating for a country's overall external balance. Controls on such flows have typically included a broad range of explicit restrictions, special taxes or tacit arrangements designed essentially to discourage certain kinds of financial transfers between residents and non-residents. See Organization for Economic Cooperation and Development, Controls on International Capital Movements (Paris: OECD, 1982).

(18) The signatories agreed further to "endeavor to extend the measures of liberalization to all members of the International Monetary Fund." OECD, Code of Liberalization of Capital Movements (Paris: OECD, October 1986) Article 1. See also OECD, Introduction to the OECD Codes of Liberalization (Paris: OECD, 1987).

(19) Code, Art. 3.

(20) ibid., Art. 7.

(21) See John Conybeare, U.S. Foreign Economic Policy and the International Capital Markets (New York: Garland, 1988).

(22) See Benjamin J. Cohen, Organizing the World's Money (New York: Basic Books, 1977); Fred L. Block, The Origins of International Economic Disorder (Berkeley: University of California Press, 1977); John S. Odell, U.S. International Monetary Policy (Princeton, NJ: Princeton University Press, 1982); and Joanne Gowa, Closing the Gold Window (Ithaca, NY: Cornell University Press, 1983).

(23) See John Williamson, The Failure of World Monetary Reform, 1971-1974 (New York: New York University Press, 1977).

(24) For background, see Richard Cooper, The Economics of Interdependence (New York: McGraw-Hill, 1968); Benjamin J. Cohen, "The Triad and the Unholy Trinity: Lessons for the Pacific Region," in Pacific Economic Relations in the 1990s, ed. Richard Higgott et al. (London: Allen & Unwin, 1993); and Tommasso Padoa-Schioppa, "The European Monetary System: A Long-Term View," in The European Monetary System, ed. F. Giavazzi et al. (Cambridge: Cambridge University Press, 1987). This approach was deeply influenced by pioneering work on the assignment of policy instruments under conditions of capital mobility by Robert Mundell and Marcus Fleming. Note, however, that the original Mundell-Fleming analysis did not give sufficient weight to the link between exchange rates and domestic prices. In practice, that link assures that under normal circumstances only the largest economies least dependent on international trade and investment could use flexible exchange rates to obtain a high degree of monetary autonomy. (25) The "competitive deregulation" dynamic is examined in P.G. Cerny, ed., Finance and World Politics: Markets, Regimes and States in the Post-Hegemonic Era (Cheltenham, UK: Edward Elgar, 1993). (26) For an expansion of this point, see Goodman and Pauly, "The Obsolescence of Capital Controls?" (27) See Jeffrey A. Frankel, "Measuring International Capital Mobility: A Review," American Economic Review: Papers and Proceedings, 82, no. 2 (May 1992) pp. 197-202. (28) Quoted in Jeffry A. Frieden, Banking on the World: The Politics of International Finance (New York: Basil Blackwell, 1987) pp. 114-5. See also Walter Wriston, "Technology and Sovereignty," Foreign Affairs, 67, no. 2 (Winter 1988) pp. 63-75. (29) See Joan Edelman Spero, The Failure of the Franklin National Bank (New York: Columbia University Press, 1980). (30) Frieden, Banking on the World, p. 164. (31) "Governments Lose Clout in New Monetary Order," International Herald Tribune, 7 July 1994, p. 1. For analysis along this line, see Richard O'Brien, Global Financial Integration: The End of Geography (London: Pinter, 1992). (32) The point is made in Janice E. Thomson and Stephen D. Krasner, "Global Transactions and the Consolidation of Sovereignty," in Global Changes and Theoretical Challenges, ed. Ernst-Otto Czempiel and James N. Rosenau (Lexington, MA: D.C. Heath, 1989). Also see Robert Gilpin, The Political Economy of International Relations (Princeton, NJ: Princeton University Press, 1986) chapter 8. (33) See Ethan Kapstein, Governing Global Finance Cainbridge, MA: Harvard University Press, 1994); John Goodman, Monetary Sovereignty (Ithaca, NY: Cornell University Press, 1992); and Tony Porter, States, Markets and Regimes in Global Finance (New York: St. Martin's Press, 1993). This is an important part of the logic that appears currently to be driving policy planning on capital movements and monetary integration within the European Union. (34) For relevant research, much of which is grounded in the politics of trade, see Helen Milner, Resisting Protectionism (Princeton, NJ: Princeton University Press, 1989); Ronald Rogowski, Commerce and Coalitions (Princeton, NJ: Princeton University Press, 1989); Jeffry A. Frieden, "Invested Interests: The Politics of National Economic Policies in a World of Global Finance," International Organization, 45, no. 4 (Autumn 199 1) pp. 425-51; and Debt, Development and Democracy (Princeton, NJ: Princeton University Press, 1991); Cheryl Schonhardt-Bailey, "Specific Factors, Capital Markets, Portfolio Diversification and Free Trade: Domestic Determinants of the Repeal of the Corn Laws," World Politics, 43, no. 4 (July 1991) pp. 545-69; and Jeffrey A. Winters, "Power and the Control of Capital," World Politics, 46, no. 3 April 1994) pp. 419-52. (35) Inis L. Claude, Jr., "Collective Legitimization as a Political Function of the United Nations," International Organization, 20, no. 3 (Summer 1966) pp. 367-79. On the more general problem of legitimation in advanced capitalism, see Jurgen Habermas, Legitimation Crisis (Boston: Beacon Press, 1975); and Robert Cox, Production, Power and World Order (New York: Columbia University Press, 1987). (36) Karl Polanyi, The Great Transformation (Boston: Beacon Press, 1957). (37) In France, analogous "mainstream" views have in recent years been evident whenever the European Monetary System has come under strain. An "Anglo-saxon" conspiracy is frequently cited in popular commentary. (38) It is possible, for example, that such an interaction exacerbates rising separatist tendencies in places like Quebec. (39) On the feasibility of a reversion amidst the turmoil of the 1970s, see Helleiner, States and the Reemergence of Global Finance, p. 118. The theme continues to recur in official documents. It is rehearsed most recently in a study of international capital movements commissioned by the Ministers and Governors of the Group of Ten in the wake of the September 1992 crisis in the European Monetary System. See IMF Survey (17 May 1993) p. 148. (40) Since short-run volatility can be hedged against recurrent misalignment between key currencies is the major concern. See, for example, Paul Volcker and Toyoo Gyohten, Changing Fortunes (New York: Times Books, 1992); Bretton Woods Commission, Bretton Woods: Looking to the Future (Washington, DC: Bretton Woods Commission, 1994); and Peter B. Kenen, ed., Managing the World Economy: Fifty Years After Bretton Woods (Washington, DC: Institute for International Economics, 1994). (41) Such a choice is bringing to the fore a new set of international issues. One important challenge is how such countries should deal with the consequences of "capital surges," that is, the balance of payments effects of large and sudden outward as well as inward portfolio flows. See International Monetary Fund, Private Market Financing for Developing Countries (Washington, DC: IMF, 1994). (42) With a relatively small, open economy, the outcome for Canada reflected both feedback effects between exchange rates and domestic prices, and the consequences of a high level of dependence on external sources of financing its overall government indebtedness. (43) Bretton Woods Committee, Bretton Woods: Looking to the Future (Washington, DC: Bretton Woods Committee, 1994), cited in IMF Survey (8 August 1994) p. 249. (44) See C. Randall Henning, Currencies and Politics in the United States, Germany and Japan (Washington, DC: Institute for International Economics, 1994). (45) In the aftermath of reunification, for example, Germany's economic partners complained bitterly about just such a shifting of financial burdens through high German interest rates in the context of the European Monetary System. Despite a general recession, those rising rates generated inflationary pressures, made existing debts more costly and thus compounded deficits in governmental accounts. (46) The original mandate of the IMF, for example, could be revised and expanded to encompass all capital movements and the Fund's "surveillance" function could be strengthened. For related analysis, see Manuel Guitian, The Unique Nature and the Responsibilities of the International Monetary Fund (Washington, DC: International Monetary Fund, 1992) and Louis W. Pauly, "The Political Foundations of Multilateral Economic Surveillance," International Journal, 47, no. 2 (Spring 1992). Such ideas, however, raise a deeper question that international relations scholarship struggles to address. When power is diffuse in the international system, that is, when there is no single dominant economic power, is such a path toward enduring legitimation ultimately blocked? There remains room here for more fruitful debate between liberals and (47) The famous Holmes aphorism is emblazoned on the headquarters building of the Internal Revenue Service in Washington. It comes from his 1904 decision in Compania de Tabacos v. Collector, 275 U.S. 87, 100 (1904). (48) Highly relevant in this regard are recent studies on the correlation between efficiency-driven economic policies and rising income inequalities. For a survey, see "For Richer, For Poorer," The Economist (5 November 1994) pp. 19-21. Also see "The New Refugees," Forbes (21 November 1994) pp. 131-6. (47) The famous Holmes aphorism is emblazoned on the headquarters building of the Internal Revenue Service in Washington. It comes from his 1904 decision in Compania de Tabacos v. Collector, 275 U.S. 87, 100 (1904). (48) Highly relevant in this regard are recent studies on the correlation between efficiency-driven economic policies and rising income inequalities. For a survey, see "For Richer, For Poorer," The Economist (5 November 1994) pp. 19-21. Also see "The New Refugees," Forbes (21 November 1994) pp. 131-6.
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Title Annotation:Transcending National Boundaries
Author:Pauly, Louis W.
Publication:Journal of International Affairs
Date:Jan 1, 1995
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