Globalization and the state: still room to move?

Layna Mosley

What is the authors main aim or motive in writing the work with respect to
what others have previously written on the subject?
The essay reviews the empirical and theoretical evidence in support of the claim in
the face of economic globalization, governments retain room to move, particularly
in the developed world but also in the developing nations, beginning with the
general issue of economic globalization and government policy making.

What modes of discourse does the author employ to analyze the subject
matter itself, and how is this carried out?
Economic globalization and national government policies
Discussions of economic globalization invoke the race to the bottom hypothesis,
grounded in the imperatives of cross-national competition and economic efficiency.
Nations benefit, in aggregate terms, from trade and financial openness, but
openness forces them into competition one another. Competition reduces
governments abilities to provide goods and services to their citizens. This
hypothesis implies not only a convergence of national policies, but also a
convergence toward the lowest common denominator. It has become a favorite
straw man of comparative and international political economists.
There are many reasons why nations will not converge to similar economic and
social policies;
First, domestic institutions play an important role in mediating pressures from the
global economy, and these institutions often are resilient in the face of global
economic pressures. There are different ways of organizing production in capitalist
economies, and still be able generate similar levels of overall economic
performance, and these sets of business practices, training systems organization
provide comparative advantages to particular countries and sectors. In the center of
the contested debate is the Tiebout-type model, in which specialization is possible
within globalization. Assuming that citizens and firms have different preferences
over public services, taxation and regulation, governments will offer different
combinations of these goods, and firms and citizens will locate in the jurisdiction
that best matches their preferences.
Second economic openness may increase citizens demands for public sector
intervention, as a means of compensating voters for externally-induced economic

volatility. Globalization increases economic insecurity, insists for government

intervention, while they may pay an economic price, higher interest rates, for
maintaining welfare state policies, the price is offset by internal political benefits of
compensatory policies.
The doubts of the RTB imply that national economic and social policies will continue
to display a good deal of diversity, reflecting citizens and firms preferences,
political institutions and traditional welfare state policies, despite the growing
financial and trade openness. Developed democracies substantial cross-national
diversity remains in areas such as government consumption spending, transfer
payments, public employment and taxation; however the growing similarities are
monetary and fiscal policies. Economic globalization appears related to substantial
convergence on overall fiscal (the size of public deficits) and monetary policy (the
inflation rate) outcomes. Despite this, domestic politics and institutions still are the
most important determinants of the overall size of government, the distribution of
gov spending across programmatic areas and the structure of taxation.
In the developing world, globalization creates greater pressure and incentives for
reform and cross-national policy convergence in the direction of neoliberal
economics. There is still some room for governments to move. The compensation
hypothesis confirms a positive association between trade openness and the size of
the public sector, more so true in democracies as it pushes public spending upward,
reflecting the incentives of governments to compensate citizens exposed to
volatility. Developing nations may be able to sustain a policy of high compensation if
the public goods generate future improvements in competitiveness and economic
growth.
Case studies: Latin America, reveals clearly the role of domestic politics. Marcus
Kurtzs study of social policies in Chile and Mexico demonstrates that despite
espousal of neoliberal reforms and the presence of external constraints in the
1980/90s, there were important differences in their welfare social regimes. With the
pressure from the global economy and the neoliberal ideology, the policy space
narrowed but there remained substantial room for variation which flowed from
political alliances, the degree of poor in the society and the competitiveness of the
political party system.
Sarah Brooks reports that pressures from international financial markets have an
effect on social security reforms in wide sample of countries. But the type of
political regime as well as the distribution of political power and the structure of
previous social insecurity arrangements also influences the reform process. For
developing a more mixed picture emerges, political institutions and domestic
interests play role in determining social and economic policies, but in some cases
the role domestic factors is rivaled by the pressure from economic globalization.
Global capital markets and governments room to move

International forces affect government policy making, but not to the exclusion of
domestic factors, and developing nations are more constrained than developed
ones. Capital market may provide governments with greater access to capital but it
also subjects them to external discipline; investors capacity for exit provides them
with political leverage. Govs must sell their policies not only to domestic voters but
also to international investors. As financial openness increases, then, the capacity to
spend and tax, and the more general ability to pursue divergent policies, should
diminish markedly.
Some ross-national convergence has occurred, leading to lower average rates of
inflation and smaller fiscal deficits in advanced and developing nations. In the
developing world, there appear to be greater pressures for policy convergence, and
these pressures extend beyond macro-policies to more micro-policies such as tax
structure and the provision of education, health and social security policies.
Professional investors incentives and information needs mean financial market
pressure will across groups of countries. In advance capitalist democracies, market
participants consider key macroeconomic indicators, but not the supply side or
micro-policies. The result is a strong but narrow financial market constraint. For the
most important developed nations the constraint may not be very strong, i.e. the US
continuing to borrow at low interest rates despite its large and growing budget
deficits.
For developing nations, the scope of the financial market influence often extends to
both macro- and micro-policy areas. Market participants are concerned with default
risk, and consider many dimensions of government policy. Domestic policies will
tend towards the convergence view as the financial constraint is both strong broad.
Thus, financial markets are treated differently from developed ones and emerging
ones. The interest rates charged to geovernments are related directly to a wide
range of economic and social policies and institutional features, govs that want to
please international investors are highly constrained. This is because investors can
easily punish govs through exiting.
Financial market influences vary over time, as well groups and countries. Often the
global market environment is normal and country specific factors dominate; govs
costs of borrowing depend on their policies, as well as their country category. But in
other periods, external factors dominate the global market environment which may
characterized by a mania (risk acceptance) or a panic (risk aversion), where access
to capital can be easy or difficult.
The persistence of RTB
Pundits claim that the global economy has placed governments, particularly in the
developing world in a golden straight jacket; they must compete to survive, and the
only means of competing is reducing government intervention, lowering taxes and
steadfastly pruning environmental, health and safety and labour regulations.

Developed nations are not immune too, they have to worry about multinationals
moving production to the developing world where taxes and labor cost is cheaper.
The developing world shows us that, while a full scale RTB is not occurring, there are
stronger pressures on some governments than others.
Two additional elements are important. The first is ideological, for many the RTB,
and the possibility of constraints on government autonomy is favorable.
Researchers assume that the market is a more legitimate arbiter of value and of
values. If there are constraints on governments that result from financial
globalization, they are welcome, as they will keep governments from distorting
policies.
In contrast, others worry about the failures of markets to provide public goods and
improve overall welfare. For them constraints on government are unwelcome ones,
as they inhibit the ability of governments to protect their citizens from the vagaries
and volatilities of markets. This is old debate underscored by important normative
questions and reflected in debates regarding the value of pre-WWI laissez faire
capitalism vs. post-WWII embedded liberalism.
The RTB claim can be used to justify the deegation of decision making away from
govs to the private sector. If a policy makers claim is not only that governments
should not intervene in the domestic economy, but they also cannot do so, he may
be better able to convince voters of the necessity of making certain policy changes.
The global economy becomes a useful scapegoat for leaders who would like for
domestic reasons to reduce government spending, lower the rate of inflation or
enact tax and social security reform.
This is done not necessarily out ideological reasons, but sometimes the global
economy is a convenient cover for the negative consequences of past policy
mistakes. Reform is necessary, leaders might argue, not because of past
mismanagement, but because domestic firms are falling behind and threatening to
exit.
The second element is methodological. Its easy to find instances of government
cutting social programmes or lowering taxes, and where workers are treated poorly
in developing nations. Governments have enacted policy changes in an effort to
attract investment or promote export industries. i.e. the plight of a textile worker in
Vietnam, of a firm that has moved from the US to Mexico to Chian again, may make
for appealing journalism. However such anecdotal evidence may not be
representative of the broader empirical patterns. This element reveals a failing of
journalists and policy makers to take the findings of academic research, but also of
academic researchers to study systematically some of the key but empirically
difficult questions regarding the effects of economic openness on societies.
Varieties of constraints and varieties of capitalists?

Analysis of globalizations impact on policy making must draw specific causal

linkages. Economic globalization is multifaceted concept. Some nations have high
levels of trade openness, but lower levels of capital market openness; high trade
openness may present govs with one set of pressures, while high capital market
openness may expose them to a different set of demands. Increased trade
openness may enhance public demands for compensation, while increased reliance
on short term capital flows may reduce govs capacity to accumulate large debts and
run substantial budget deficits.
Therefore the manner in which a nation is plugged in has implications for the
constraints domestic policymakers will encounter. We must specify how varying
dimensions of globalization matter for government policy choices can we begin to
gauge the overall effects of economic openness on policymaking. The existing
evidence suggests that these overall effects are likely to be diverse, with some sorts
of openness associated with a growth in public sector intervention and other types
associated with a decline in public sector intervention. Finally, in order to
understand fully the linkages between economic globalisation and national
governments, we need to connect events in global markets with changes in
government policy, and we must consider how various domestic institutions and
ideologies mediate these changes.

What does the writer do to structure his/her analysis into a sequence of

coherent ideas? How are the parts fitted together in order to compose the
whole?
She begins with the general issue of economic globalization and government policy
making. I then turn to the relationship between global capital markets and
government autonomy. In con-clusion, I ask why the race to the bottom (RTB) logic
remains a feature of con-temporary public debates and explore variation across
countries and investors in the pressures emanating from global capital markets.