Invested Interests: The Politics of National Economic Policies in a World of Global Finance Author(s): Jeffry A.

Frieden Reviewed work(s): Source: International Organization, Vol. 45, No. 4 (Autumn, 1991), pp. 425-451 Published by: The MIT Press Stable URL: http://www.jstor.org/stable/2706944 . Accessed: 03/02/2012 09:10
Your use of the JSTOR archive indicates your acceptance of the Terms & Conditions of Use, available at . http://www.jstor.org/page/info/about/policies/terms.jsp JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship. For more information about JSTOR, please contact support@jstor.org.

The MIT Press is collaborating with JSTOR to digitize, preserve and extend access to International Organization.

http://www.jstor.org

Investedinterests: politicsof the nationaleconomicpoliciesin a world A. ofglobal finance JeffryFrieden

A striking of international economyis the characteristic the contemporary great mobility capital across national borders.Technologicalinnovations, of international investeconomictrends, and government policies have brought ment to extremely high levels. Many business executives,politicians,and thatthefinancial markets of observers believethatcapitalnowmovesso freely industrialized countriesare essentially subsets of one global market.This is economywidelyregarded as a fundamental change in the international new or at least not seen since the classic gold standard.It is also something as developments European widely believedto have generatedsuch prominent towarda singlecurrency, harmonization taxes of Community (EC) movement convergenceof macroeconomic across national borders, and international policies. to the Economistshave devoted a greatdeal of timeand energy analyzing of economic implications the movementof capital across national borders. of Othersocial scientists have also analyzedthe politicalimplications internationalinvestment. studiesof thislattergrouphave tendedto focuson one The in or anothersubsetof theissue,such as multinational corporations developed and developingcountries, borrowing developingnations,and the by foreign and qualityof workon politicsof international banking.1 Despite the quantity
I am grateful the Social Science Research Council,the GermanMarshallFund, the UCLA to Academic Senate Committeeon Research, and the UCLA International Studies and Overseas Programs theirfinancial for support.I also thankBenjaminJ. Cohen, BarryEichengreen, Judith Goldstein,Joanne Gowa, Robert Keohane, Stephen Krasner, David Lake, Edward Leamer, Timothy McKeown,Louis Pauly,Frances Rosenbluth, JohnRuggie,and Michael Wallerstein for their and suggestions. helpful comments 1. For prominent examples fromeach of these issue-areas, see Helen V. Milner,Resisting Protectionism: Global Industries thePoliticsofIntemational and Trade (Princeton, N.J.: Princeton The University Press,1988); PeterEvans,Dependent Development: AllianceofMultinational, State, and Local CapitalinBrazil(Princeton, N.J.:Princeton University Press,1979); David G. Beckeret al., Postimperialism: IntemationalCapitalismand Developmentin the Late Twentieth Century (Boulder, Colo.: Lynne Rienner,1987); Robert Kaufman and Barbara Stallings, eds., Debt and Intemational Organization 4, Autumn1991 45, ? 1991 bytheWorldPeace Foundationand the Massachusetts Institute Technology of

426 International Organization this literature specific aspects of the politics of cross-borderinvestment, on principles. remainsdisjointed and short generalanalytic the for This articleproposesa framework analyzing politicsof international It of implications cross-border capital mobility. focuseson the distributional and on the distributional of implications variouseconomic capital movements capitalmobility. policiesin light the highdegreeof international of sectiondescribes just how mobilecapitalis todayand discussesthe The first for of levels of financialintegration national economic implications existing mobile policy autonomy.It argues that while financialcapital is extremely (especially in equities and sectoracross borders,other typesof investment specificcapital) are far less mobile. In this context,foreseeable levels of for international restrict do not eliminatethe possibility but capital mobility national economic policies. Sectoral policies remain feasible,as do policies involve exchangerate. the whosegoals directly indirectly or of The second sectionof the articleexaminesthe policypreferences various It integration. emphasizesthe differensocioeconomic groupstowardfinancial tial effectsof the increase in capital mobilityand focuses on questions which actors are better(or worse) offafterfinancialintegration concerning to thanbeforeand howthevariousactorscan be expectedto respondpolitically The hereis twofold. Over thischangein theeconomicenvironment. conclusion tends to favorcapital over financialintegration the long run, international But in the shorter run,whichis more labor,especiallyin developed countries. and policies,the issue is more complex:in the developed relevantto politics withmobile or diversified favorscapitalists assets world,financial integration thosewithassets tied to specific locationsand activities such as and disfavors or manufacturing farming. The third section of the article explores what high levels of financial groups in of integration implyfor the policy preferences economic interest policyand the exchangerate. regardto such otherissues as macroeconomic as The sectiontakes a highlevel of capital mobility given,to see how various It interestgroups are expected to behave in this environment. argues that tendsto remakepoliticalcoalitionsbywayof its international capitalmobility impact on the effectsof national policies. The political divisionbetween goods and services producersof tradablegoods and producersof nontradable to betweeninternationally is likely become moreimportant, are distinctions as All of these factorshave significant diversified and undiversified investors. for implications the analysisof politicsand economicpolicyin the advanced industrialized nations.

Development Latin America (Boulder, Colo.: WestviewPress, 1989); Benjamin J. Cohen, In in Bankingand AmericanForeignPolicy (New Haven, Conn.: Yale WhoseInterest? Intemational ForeignCapital in the University Press, 1987); and Charles Lipson, StandingGuard: Protecting of (Berkeley:University CaliforniaPress,1985). The bodies of Nineteenth Twentieth and Centuries literature, course,are fartoo largeto citeor discusshere. of

Globalfinance 427 policies Therelationship between international capital mobility national and conditions on is a prominent example themuch-discussed of impact external of domestic this thus the politics.2 Elucidating specific relationship also serves broader of the effects international of trends. The purpose clarifying domestic of article, then, bothdevelops integrated an approach thepolitics internato issuesabout tional capital movements addresses and more general conceptual the interaction the domestic international of and economies. so In political of doing, presents summary empirical it a and illustrations only thedirect not of impactof international capital mobility the effectiveness national on effects capital of on economic but mobility the policy also ofthedistributional themselves policy. socialgroups whose demands affect national economic Capital mobility nationaleconomicpolicies and international It wouldbe foolish inquire to aboutthe effects integrated of on over economic policy if capital markets interest group competition national in integrated world if or suchpolicy couldnotbe implemented a financially international markets werenotinfact highly integrated. contemporary capital The initial concerns degree which the to national economic question therefore is levelsof international capital policy autonomy compromised existing by mobility. to that The events the1970s the1980s of and haveledmany conclude capital limits contravenes national Between 1978and1982, or mobility severely policy. forexample, financial inflows Chile'sconservative policies private swamped In Mexico's evenas private outflows thwarted policies. financial free-spending the new FrenchSocialist the economic mid-1981, expansion attempted by confronted a largecapital outflow a runon thefranc, and government rapidly to soonafter their Parallel stories of leading a reversal thepolicies adoption.3 andcurrency movements aboutgovernment efforts could hampered capital by in other anddeveloped countries thepasttwo be toldaboutmany developing decades.Some observers havedrawn direconclusions, as thatof John such of that of "the who Freeman, observed inthecontext theglobalization finance and obsolete."4 nation state become bestimmobilized atworst has at
Politicsin Hard Times: 2. The two quintessential workson thissubjectare Peter Gourevitch's Press, Comparative Responsesto Intemational Economic Crises(Ithaca, N.Y.: Cornell University DomesticPolitical 1986) and Ronald Rogowski's Commerce and Coalitions:How TradeAffects Alignments (Princeton, N.J.:Princeton University Press,1989). Mitterand," 3. Jeffrey Sachs and CharlesWyplosz, "The EconomicConsequences of President EconomicPolicy2 (April 1986),pp. 262-322. for 4. See JohnFreeman,"Bankingon Democracy?International Finance and the Possibilities of different Popular Sovereignty," mimeograph, University Minnesota, 1990. From a politically WalterWriston has said similarthings about the quarter,former Citibankchiefexecutiveofficer "It's a new world and the concept of impactof financialinternationalization-but approvingly: law international is gone. It hasn't sovereignty goingto change.... The idea of fifteenth-century is Ballistic laid downyet,but it's dead. It's like the three-mile limitin a worldof Inter-Continental

Organization 428 International the of levels Thefirst inevaluating effects contemporary ofinternational step in to of the stand relation capital mobility togeta clearpicture where levels is limited movements across borders wererelatively thepast.Long-term capital in WarII andtook placeprimarilythe years World for first the twenty-five after international investment are flows form direct of investment. Today, long-term investment beendwarfed other, has more by extraordinarily and direct large, forms cross-border of movements. capital arms-length, to net bond was According one source, international andbanklending $440 earlier. outflows from Capital in1989, from billion five $180 just years billion up in with averaged $444billion 1989, thethirteen industrialized countries leading in of investment,contrast almost of consisting portfolio two-thirdstheamount in withtwo-thirds of direct consisting foreign to $52 billion the late 1970s, to of outflows equivalent 15percent world were merchaninvestment. Capital to in to According dise tradein 1989,in contrast 7 percent thelate 1970s.5 the stock bank another source, outstanding ofinternational andbondlending of in to gross was $3.6 trillion 1989,equivalent 25 percent the aggregate in to countries, contrast under national product (GNP) oftheindustrialized and of GNP in1973.6 $200billion 5 percent aggregate in and have Recentchanges regulations technology made it possiblefor rise to massive giving moneyto travelacross bordersalmostinstantly, In international financial transactions.April exchange short-term 1989, foreign in financial centers averaged about$650 billiona day, trading the world's a and times amount the of to $500million minute to forty equivalent nearly international financial world for instruments tradea day.Markets short-term exact are arecomparably although figures notavailable.7 large, to as are, do Impressive thesenumbers they notamount fullinternational In shown borders economic studies haveconsistently that capital mobility. fact, are barriers investment to flows.8 and currencies stillsubstantial Although
Missiles." Wristonis cited in myBankingon the World:The Politicsof AmericanIntemational Risk and Other Finance (New York: Harper & Row, 1987), p. 115. See also Walter Wriston, Four-Letter Words (New York: Harper & Row, 1986). (BIS), Sixtieth Annual Report(BIS: Basle, 1990), pp. 63, 5. Bank forInternational Settlements 82, and 125. and Systemic Lane, "Determinants 6. See MorrisGoldstein,Donald Mathieson,and Timothy Consequencesof and Systemic Consequences of InternationalCapital Flows," in Determinants D.C.: International MonetaryFund, 1991), p. 5. This Intemational Capital Flows (Washington, the assumesa low levelof international bond lendingin 1973,whichis almostcertainly case. Exact figures notavailable. are data regarding 7. See BIS, Sixtieth Annual Report, 208-9. See also pp. 146-52,whichoffer pp. rate futures and and options some short-term instruments indicatethatopen positionsin interest at totaledabout $1.6 trillion theend of 1989. 8. The earlyclassic workwas M. Feldsteinand C. Horioka's "Domestic Savingsand International Capital Flows," EconomicJoumal90 (June 1980), pp. 314-29. For more on the issue and Financial Intermediation debates over it, see Ralph Bryant,Intemational (Washington,D.C.: see "Saving-Investment Brookings Institution, 1987),pp. 82-86. For a recenttest, TamimBayoumi, Papers ImmobileCapital,Government Policy,or Endogenous Behavior?"IMF Staff Correlations: 37 (June1990),pp. 360-87.

Global finance 429 these barriershave been and are stillbeing reduced, there are a numberof is investment byno means yeta seamlessweb. First, reasonswhyinternational and currency risks. movement capital across bordersstillinvolvescountry of may thatassets in one country Investors musttake intoaccountthe possibility in and be riskier thanthosein anothercountry thatmovements exchangerates on Of the mayaffect return theirinvestments. course,both of these problems are addressed by adjustmentsto asset prices and returnsand by forward countries amongindustrialized thatcapitalmovements imply markets, they but within them.9 are moredifficult capitalmovements than Second, while some formsof capital do move quite easily across borders, specific.Most assertionsof full internaothersremainmore geographically of tional capital mobilityrefer to internationaltransfers financialassets, especially bonds and bank claims. Equity marketsappear to be far less this of integrated,10 otherforms capitalstillless so. In mostinterpretations, and is because many formsof capital, such as technologicaland managerial are use and cannot skills,and networks, specificto theircurrent knowledge, from place to place."1Althoughdetailed analysesdo not easilybe transferred capitalis mostmobile wouldprobably agree thatfinancial exist, mostobservers or capital followed equitiesand thenbyfirm- sector-specific by acrossborders, mobility financialassets, the more modest of The greater international internationalmobilityof other assets, and the continued importanceof unexpected exchange rate movementsmust all be taken into account in international assessmentsof national policy autonomyin the contemporary The appraisal can be divided into policytargetedat well-defined economy. segmentsof the economy (industries,sectors, and regions) and policy of macroeconomic import.The baseline is the assertionthat asset marketsare
the late findings, updated through 9. The most carefulassessmentof the Feldstein-Horioka importance currency of and 1980s,emphasizesthegreatincreasein capital mobility the continued in Capital Mobility the 1980s," in International A. premiums. See Jeffrey Frankel,"Quantifying (Chicago: Douglas Bernheimand JohnShoven,eds., NationalSavingand EconomicPerformance University Chicago Press,1991),pp. 227-60. of see stockprice differentials, Barry and international 10. For roughevidence on intranational of University Californiaat Area?" mimeograph, "Is Eichengreen, Europe an OptimumCurrency advantages accruing may Berkeley, 1990,pp. 6-9. The differentials have to do withnontransferable and enforcement or to national owners,such as greater access to information to monitoring mechanisms. 11. The modern theory of foreign direct investmentis based on the proposition that multinationalfirmsexist precisely because they facilitate (but do not make costless) the by assets. The classic statement Caves is stillprobably transmission such specific of international Corporations:The Industrial the most appropriatehere. See Richard E. Caves, "International Economica 38 (February1971),pp. 1-27. EconomicsofForeignInvestment," in Capital Mobility the International 12. This is a conclusionmade byFrankelin "Quantifying is for assetsare integrated the of 1980s." One indication thehighdegreeto whichmarkets financial interest ratesin most spreadsbetweendomesticand offshore virtualdisappearanceof significant instruments membersof the OrganizationforEconomic Cooperation and Developof currency and ment(OECD). Regardingthissubject,see Goldstein,Mathieson,and Lane, "Determinants Capital Flows,"pp. 7-11. Consequencesof International Systemic assets.12

Organization 430 International linked, markets closely are financial degrees: linked internationally tovarying for and and are markets less connected, markets firm- sector-specific equity industrialized In words, among segmented. other capitalare quitenationally less assets flow relatively freely flows but freely other capital countries, financial orvery little. has integration financial increased is to as Inasmuch capital specific location, or Whether not at industries. on limited effects policies targeted particular only can firms enter on depends greatly howeasily policy a sector-specific iseffective to funds by the markets affect ease ofentry extending can thesector. Financial the quickly the the to it new The newfirms. easier isfor firms enter sector, more and thusthe less firms dissipate will of benefits the policyto preexisting feature sector-specific of policies will effective policy be. Thisis a general the it domestically;wouldbe true capitalis mobile and holdsas longas financial internationally. werenotmobile evenifcapital to barriers a favored sector, flows reduce entry cross-border financial Where International may mobility have capital sector-specific policy. contravene they by to to of producers respond tradeprotection the increased ability foreign of was inasmuch thepurpose protection to as in market; locating theprotected The this may owned firms, objective be frustrated. proliferation locally support to in factories theUnitedStatesin response automobile ofJapanese-owned of controls havebeenmadeeasierbytheintegration may automobile import to of someofthebenefits thecontrols and havereduced financial markets may automobile manufacturers.'3 of shareholders employees American-owned and has financial probably little All in all, however, increased capitalmobility of can Supporters suchpolicies generally policies. effect most on sector-specific or domestic internaflows, to frustration financial by them avoidtheir design to or is within across borders, notlikely affect tional. Financial mobility, capital incomes. Nor can financial on to theimpact cash transfers farmers their of standards. Financial health and safety government impede flows significantly to policies it to somesector-specific difficultdesign may integration make more to firms), benefits accruing untargeted side avoidundesirable effects (namely, makes them unsustainable. butitrarely effects on of markets significant has On theother integrationfinancial hand, macroof distributional impact national and theeffectiveness thedifferential with what it to on To economic policies. geta handle theissue, is useful start
are to 13. AlthoughI am unaware of any studies of thisphenomenon,arguments this effect of oftenin thecontext of heard amongAmericancompetitors theJapanesetransplants, frequently There are reasonsto doubt access to low-cost Japanesefunds. overtheJapanesefirms' complaints is directinvestment fundedin the host mostforeign First, however. the accuracyof the argument, have privilegedaccess to Japanese finance,then financial Second, if Japanese firms country. ties among Japanese The resultmightbe due to preferential marketsare not fullyintegrated. a whichwould constitute "natural" barrierto financialcapital firms, financialand nonfinancial of Furtherstudyin thisregardis required.A related issue is the effect foreign-owned mobility. For anecdotal evidence that Japanese branch plants on political lineups in the host country. freer interest groupsthatfavor domestic in investment theUnited Stateshas createdor reinforced trade,see "Influxof ForeignCapital Mutes Debate on Trade," TheNew YorkTimes,8 February 1987,p. 113.

Global finance 431 might be called the Mundell-Flemingconditions,taken from the most balance developedin theearly1960s.14These approachto payments influential that financialassets may be fullymobile conditionsinclude the possibility to I acrossborders.(In whatfollows, use "capital mobility" mean the mobility in capital,as does theliterature question.) offinancial can approachindicatesthata country have Simply put,theMundell-Fleming a threeconditions: fixedexchangerate,monetary at mosttwoof the following national policy autonomy,and capital mobility.Without capital mobility, fromthe authoritiescan adopt and sustain a monetarypolicy that differs policies of the rest of the world and can hold theirexchangerate constant; however,with mobile capital, the attemptwill be contravenedby financial policy.Without monetary wantan expansionary flows. Assume the authorities rateswill lead to a rise in demand,and the a capital mobility, fall in interest on effects the payments economywill be stimulated(we ignorelonger-term rateswilllead to an reduceddomesticinterest balance). Withcapitalmobility, rates abroad, and long before outflow capital in search of higherinterest of rates will be bid back up to world interest monetary policyhas a real effect, levels."5 mobile across if The reason forthe resultis straightforward:capital is fully borders,interestrates are constrainedto be the same in all countriesand national monetarypolicy can have no effecton national interestrates. is if However,to go back to the originalconditions, capital mobility given(or is if policy can be effective the value of the currency imposed), monetary allowed to vary.Monetarypolicyoperates,in otherwords,via exchangerates model.Withcapital closed-economy ratesas in a typical thanvia interest rather thanthatin therestoftheworldcauses a expansiongreater monetary mobility, the sell the currency; resultis currency financialoutflowin whichinvestors the Depreciationin mostcases stimulates economyas pricesof depreciation. produced goods, thereby foreign goods rise relativeto prices of domestically demandforlocallyproducedgoods.16 increasing local and foreign can policy.Ifcapitalis notmobileand the A parallelstory be toldaboutfiscal ratesas fiscal policyraisesnationalinterest expansionary exchangerateis fixed, financesincreased spendingby floatingmore bonds. The the government
worksof Robert A. Mundell: "The AppropriateUse of Monetaryand 14. See the following Papers9 (March 1962),pp. 70-77; "Capital Fiscal PolicyUnder Fixed ExchangeRates," IMF Staff PolicyUnder Fixed and FlexibleExchangeRates," CanadianJoumalof and Stabilization Mobility Economicsand PoliticalScience29 (November1963), pp. 475-85; and "A Reply: Capital Mobility and Size," Canadian JoumalofEconomicsand PoliticalScience30 (August1964), pp. 421-31. The a macroeconomics; discussionof open-economy basic model can be foundin anygood textbook 3d Economy, ed. (Chicago: Rates,and theWorld Exchange is usefulsurvey W. M. Corden'sInflation, of University Chicago Press,1986). autonomyis form.Variation in monetary presentedhere is in simplified 15. The argument between fullmonetary not dichotomous:the choice is not starkly actuallyalong a continuum, degreesof autonomy. independenceand none at all; itis insteadamongdifferent on of effects the depreciation nationalincome;that 16. This ignoresthe potentialcontravening or dominate income effects that expenditureswitching effects is, it assumes that substitution reduction. dominates expenditure

Organization 432 International dampensthe expansion. out" of privateinvestment resultant "crowding to bondsfloated finance acrossborders, However, capitalmovesfreely if and investors, are by spending bought international increased government which setglobally.'7 the Relaxing fixed on are rates, there no effect interest is withfiscalpolicythanwith has effects rate constraint different exchange buy rate as If monetary policy. theexchange varies, foreigners moregovernthat causes a currency appreciation capitalinflow ment bondstheresultant andthus to produced goods for domestic demand domestically tends reduce to the expansion.'8 dampen fiscal in of mobile national policy is capital, The general point that a world fully the interest it can,however, affect exchange the rate;'9 cannot affect national is simply of macroeconomicsmeant rate.The abovediscussion open-economy tohighlight result. this one in which from that It mayseemunimportant theworldhas changed via ratesto one in national macroeconomic operated primarily interest policy to but via rates, several points defend which operates primarily exchange policy the effects can of observation be made.First, distributional thesignificancethis If rate from interest changes different thoseofexchange changes. rate are of in a stylized world before capital mobility (BCM) meant monetary expansion in world after capital then monetary expansion a stylized rates, lower interest example, To mobility (ACM) meansdepreciation. take one distributional construction while ratesare goodfortheresidential industry, lowerinterest demand it as to domestic away is depreciationbadfor inasmuch ittends switch might manufacturers By goodsandservices. thesametoken, from nontradable stancein thepast,whenthe to money havebeen moresympathetic a tight are rates, thanthey now, effect thisstancewas to raiseinterest of principal that whenthe principal effect a currency is appreciation tendsto increase This of interest preferences economic import penetration. meansthatpolicy to the between BCM coalitions, likely differ are and political groups, therefore it I to and andACM worlds. later return this point discuss indetail. to thereis an international component by Second,although definition an to there notnecessarily international is component rate exchange changes,
thatthe increased bondsbut,rather, buy 17. The pointis notthatforeigners all thegovernment domesticdemand forcreditis met by an increasedsupplyof creditas capital flowsin, withthe country is unchanged. This of courseassumesthatthe deficit resultthatthepriceof creditremains worldinterest rates,whichmaynot alwaysbe the case. It also assumes not largeenoughto affect policiesthataccommodatethe fiscalexpansion. thatthe government does notengage in monetary "Real 18. For a good survey and evaluation,see Michael M. Hutchisonand CharlesA. Pigott, and Financial Linkages in the Macroeconomic Response to Budget Deficits: An Empirical Open LinkagesAmong eds.,Real-Financial Investigation," Sven Arndtand J.David Richardson, in Mass.: MIT Press,1987),pp. 139-66. Economies(Cambridge, rateminus rate-that is, the interest the interest 19. More accurately, does not affect covered it if of movements. Obviously, investors expecta currency (or plus) themarket's expectation currency in rateforsecurities denominated it,and viceversa.Covered to fall,theydemanda higher interest interest parityappears to have held well fromthe mid-1970sonward among almost all major currencies.

Globalfinance 433 interest changes. monetary If rate expansion simply reduces national interest rates, chances that are most foreigners be indifferent.however, leads will If, it tocurrency depreciation theexpansionary in country, foreigners likely be are to concerned abouttheir resultant ofcompetitiveness.20 loss Third, focuson how macroeconomic the policytakeseffect through the exchange helpsclarify rate someobserved of If anomalies theACM world. an American administration BCM world pursued inthe had fiscal expansion and monetary the stringency, result might havebeenthat policies well the canceled eachother out:tight money wouldhavereinforced "crowding effects the out" of thefiscal expansion. itwas,however, theACM world, ReaganAs in the Volcker fiscal and of expansion monetary stringency the early1980shad a different markedly financed foreign impact.Fiscal policywas largely by borrowing, whichreducedor eliminated effects crowding and the of out contributed appreciation the dollar.At the same time,tight to of money reinforced riseofthedollar strengthening international the by the investment attractiveness ofdollar-denominated The both securities. result striking on was macroeconomic as States becamea soaredandtheUnited grounds, thedollar major debtor therest theworld, on distributional net to of and grounds, the as dollar devastated producers tradable of appreciation U.S. goods(manufacturingand agriculture) favored and producers nontradable of goodsandservices (realestate, health care,leisure andeducation). activities, To summarize section, this financial of capitalmovesacrosstheborders withgreatease, while otherasset markets less developedcountries are In and whileglobal integrated somecapitalremains quitefixed. thiscontext, financial the it integration reduce efficacy somesector-specific may of policies, does notimpede Andwhileinternational mostofthem. financial integration it doesnotmakenational the macroeconomic policy obsolete, doesshift effect of macroeconomic from interest to theexchange the rate rate.These policy features theACM world expected havea significant of are to on impact the interests variousdomestic I of interest to economic groups. return ACM interest groupcompetition economic over at policyafter first looking the from BCM toACM itself. effects theshift of expected The distributional effects capital mobility of I draw The distinction hereis nuanced important. theone hand, am On I but interested howeconomic in are to agents expected actina world characterized Whatsorts policieswillbe pursued whatsorts of of bycapitalmobility: by and I groups coalitions? theother On in from hand, aminterested howtheshift
20. For an illuminating discussion cross-border of effects, Michael Mussa, "Macroeconomic see Interdependenceand the Exchange Rate Regime," in Rudiger Dornbusch and Jacob Frenkel, eds., IntemationalEconomic Policy: Theoryand Evidence (Baltimore, Md.: Johns Hopkins University Press,1979),pp. 160-204.

434 International Organization to a pre-1970worldof limitedcapital mobility a post-1980worldof relatively affected interests the and influence economicagents: of highcapital mobility Who gained and who lost as we went fromcapital immobility capital to And whatare the politicalimplications thesegains and losses? In of mobility? other words,in one contextI analyze the dynamicsof the ACM world; in I anothercontext, compare conditionsin the BCM world withthose in the ACM world. The first of questions addressed in this sectionpertainsto the overall set impactofinternational financial integration majoreconomicinterest on groups in advanced industrialized societies.Once again,I have recourseto rudimentarytools of economic analysis.There are, however,several different (albeit potentiallycomplementary) approaches that contend for attention.Many on or choice approachor on an analysesfocusimplicitly explicitly theportfolio model of international applicationof the Heckscher-Ohlin trade.While these I give interesting insights, believe that theyare not directly relevantto our politicaland policyquestions.Afterreviewing them,then,I summarizeand discussthe "specific-factors" model,whichI believe is best suitedto assessing the distributional of and to determining the effects increasedcapital mobility on effects lobbying policy. for impactofthesedistributional Perhaps the mostcommonand simplest possible cut into the problemis to look at increased capital mobility fromthe standpointof investorsfacing be to portfolio decisions,whomit musthelp. It can hardly bad forcapitalists have moreinvestment optionsthanbefore, whichis whatcapitalmobility gives them.By the same token,increasing optionsof capitalpresumably the reduces thoseoflabor bymaking less costly capitalto moverather it for thanaccede to labordemands. This surmisecapturesimportant effects increasedfinancialintegration. of The widermenuof investments increasestheirinfluence open to asset-holders on governments, labor,and others.The 1980smayhave indeed seen a secular shift responseto increasedcapital mobility, whichgovernments over in in all the world were forcedto provide more attractive conditionsfor capitalists. Such conditions includeeverything lowerwealthand capitalgainstaxesto from relaxedregulation financial of In activities laborrelations. a worldinwhich and financial across borders,it is difficult one country for capital moves freely to on insist stiff whenothercountries removing reducing are it. or capitaltaxation Inasmuch as this effectholds, increased financial integrationimplies an across-the-board, lastingincreasein the social and politicalpowerof capital.21
21. Americantax reform 1986,forexample,was followedbywidespreadOECD movement in towardthe new Americancorporatetax rates.By 1989,directcorporatetaxratesin the principal were all in the 35 to 42 percentrange.See Price Waterhouse,Tax: Strategic EC membercountries Corporate Planning(London: Mercury Tax Books, 1989). Across industries, thereis evidencethat such footloosesectorsas financeface lowereffective rates. In the United States in 1983, for tax nonfinancial example,while twenty-four industries paid an average effective federalincome tax rate of 17.5 percent,the three financialsectors (insurance,investment, and financialservices companies) paid an averageof 8.5 percent.See "New Threat to Smokestack America,"TheNew YorkTimes, May 1985,p. 3:1. 26

Global finance 435 of effects aggregate for But thispictureis incomplete, it ignoresthedynamic across The ability capital to move freely of choices on asset-holders. portfolio or in borderscan in factbe bad forcapitalists a givencountry good forlabor in of endowment capital and underlying it. The resultdepends on the country's other resources,and this leads some to believe that the Heckscher-Ohlin analytic tool. approachis the appropriate According to the Heckscher-Ohlintrade model, the effectsof goods are the to to will on movements returns factors varyaccording whether factors extensionis the Stolperlocallyscarce or abundant.Perhaps the best-known whichposits that protection(that is, decreased trade) Samuelson theorem, is the benefits locallyscarce factor:protection good forlabor in a labor-poor is The intuition countryand is good for capital in a capital-poorcountry. has With straightforward. trade,demandfortheproductinwhichthecountry a advantageis a function advantagewill rise,and thiscomparative comparative A country is of how well endowed the country withvariousfactors. labor-rich trades, the thatuse laborintensively; morethecountry tendsto export products movements the morelabor is used, and the morewages rise.Trade and factor productshave the same labor and labor-intensive are substitutes: exporting products. as capital and capital-intensive effect, do exporting (like increased view,then,increasedcapitalmobility In theHeckscher-Ohlin capitalwhereit is capitalwhereit is abundantand hurts worldtrade) benefits raisingthe returnto local countries, scarce. Capital flowsout of capital-rich to the lowering return local capital,and flowstowardcapital-poorcountries, is capital. The effect analogous to that examinedby Ronald Rogowski,who assessed periodsinwhichtherewas an exogenousincreaseor decrease inworld effects nationalpolitics.22 on tradeto exploretheHeckscher-Ohlin withopposite the To illustrate above points,we can comparetwocountries is country richin capital and In sets of endowments. the BCM world,the first low rates are relatively and its local wages poor in labor, so its local interest in high.In theACM world,capitalis freeto moveto countries which relatively ratesrise to theworldlevel,and the is the rate of return higher; local interest labor,but local wages fall.In thiscase, the resultfavorscapital and disfavors are endowments-which characterisof thisis purelya function thebeginning tic of most developed countries.Now take the opposite case. In the BCM is the world, secondcountry poor in capitaland richinlabor,so itslocal interest low. In the ACM world, highand its local wages relatively ratesare relatively to ratesand tending raisewages. the capitalwillflowin,reducing local interest to on In thiscase, sincethelocal rateof return capitalis constrained fallto the benefit. are (lower)worldlevel,local capitalists harmedwhilelocal workers mobilityhas This may capture some of what has happened as capital rich in advanced. Capitalistsin the developed world (in countriesrelatively It might frominternational capital mobility. benefited capital) have probably financial be argued that the developingcountries' access to international
and Commerce Coalitions. 22. Rogowski,

Organization 436 International in labor (perhaps by increasinginvestment marketstended to strengthen clear-cut. activities), thisseemsfarfrom but labor-intensive approach may be useful in predicting In fact,while the Heckscher-Ohlin it long-term economictrends, is probablynot a verygood way to analyze the for of factormovements, several reasons. effects international distributional First, it is extremelysensitive to the number of factors involved. The at with but become ambiguous are predictions straightforward twofactors, they best with more than two. Second, it assumes that capital, labor, and other within country, a evenif from activity another one to can factors movecostlessly This is certainly untrue, sincean automobile are immobile. they internationally be nor can a seamstress cannot costlessly convertedinto a brewery, factory factors production of may Although costlessly become an aerospace engineer. cannotdo so in the short one use to anotheroverthelongrun,they movefrom and mediumrun,whichis the timeframemore relevantto politicalanalysis. thatpoliticalbehavior, with especially empiricalevidencesuggests And, third, regard to economic policy,is less commonlyfactoral(laborers as a class, the dairy farming capitalistsas a class) than sectoral (the steel industry, industry).23 economic As usefulas the Heckscher-Ohlin approachmaybe forlong-term analysis, it is more appropriate to investigatethe political economy of withan approach whichassumes trade and capital movements international to use forat are of thatat least some factors production specific a particular model, changes in the relative least the shortrun. In this "specific-factors" on producersof pricesof goods have theirprincipaleffect the sector-specific Thus, an increasein the goods,ratherthanon a whole class of factor-owners. ratherthan landownersas a whole; a milkprices is good for dairyfarmers in industry declinein clothing pricesis bad forownersand workers thegarment as or rather thanforcapitalists workers a class.24
is 23. The classic statement Stephen Magee's "Three Simple Tests of the Stolper-Samuelson Economics(London: Oriel,1980),pp. ed., Theorem,"in PeterOppenheimer, IssuesinIntemational pp. 138-53. In Commerce and Coalitions, 16-20, Rogowskiaddresses these objectionsand more; by BenjaminJ.Cohen has pointedout to me that needlessto say,I am unconvinced his treatment. ignores the of tradeto capitalmovements approachfrom thissimpletransfer the Heckscher-Ohlin inherentdifferences between the two realms and especiallythe importanceof expectationsin This maybe anotherreasonto avoida capitalmovements). determining assetprices(and therefore straightforward applicationofthe approachto capitalmovements. is 24. The seminalmodernstatement Ronald W. Jones's"A Three-FactorModel in Theory, and Growth Trade, and History,"in JagdishBhagwatiet al., eds., Trade,Balance of Payments, articles,which essentially (Amsterdam:North-Holland,1971), pp. 3-21. Two other important in run approachin thelong factors theshort withtheHeckscher-Ohlin argueforcombining specific for run,are Wolfgang Mayer's"Short-Runand Long-RunEquilibrium a Small Open Economy," and JoumalofPoliticalEconomy82 (September1974), pp. 955-68, and Michael Mussa's "Tariffs in of and Substitutability, Intensity theDistribution Income:The Importance FactorSpecificity, of Economy82 (November1974),pp. 1191-1204.Based theShortand Long Run,"JoumalofPolitical For on these two articles,the approach is sometimesknownas the Mayer-Mussaframework. a and long-termadjustment of useful summaryand geometricrepresentation the short-term capital processes, along with a critique of the Heckscher-Ohlinassumptionof intersectoral and mobility, J.PeterNeary,"Short-RunCapital Specificity the Pure Theoryof International see Trade," TheEconomicJoumal88 (September1978),pp. 488-510.

Globalfinance 437 In thespecific-factors I as approach, which regard most useful thetaskat to hand, economy organized activities sectors) which the is into (or to factors are specific, alongwith factors can movefreely that from activity activity. to The in is classic is either theproduction to setup an economy which capital specific of clothing to theproduction housing, for or of whilelaboris an input both sectors and can movefreely from garment the to industry the construction industry. result, mentioned The as above, that is changes theprices goods in of havetheir principal effects thespecific on with factors, collateral generally (and in effects themobile on factor. theaboveexample, increase In an ambiguous) therelative priceofclothing, perhaps to a tariff,goodfor due is in capital the in garment industry bad for and capital thehousing its on industry; effect labor on of and depends themix clothing housing workers that consume. however, If, thesupply (thus, price)ofthemobile the factor of changes, interests the the are of specific factors opposed those themobile to factor. theaboveexample, In ifthesupply laborshrinks wagesrise,thisis unambiguously for of and good workers bad for and and capitalin thegarment construction since industries, of theprice their laborinput rises.25 The application thespecific-factors of to is approach ourproblem straightI forward. clarify I of again thatwithcapitalmobility mean the mobility financial capitalrather than sector-specific capital.A secularincreasein international capital mobility impliesmovement financial of assets from to countries low to highinterest capital-rich capital-poor (from rates)and in therefore increase thesupply finance countries incapital a an of to poor and in reduction thesupply finance countries incapital. of to rich Specific factors in countries well,sincethey nowborrow lowerinterest do can at capital-poor in countries badly, do sincethey must now rates;specific factors capital-rich of interest assetsin capital-rich payhigher rates;and owners liquidfinancial in countries well, do while those capital-poor countries badly. do I shouldnote thatthe distinction made here between and capital-rich or countries be somewhat capital-poor may misleading, at leastincomplete. in in flows response differencesrates return, interest can to of and rates Capital of for endowments capital.The United vary reasonsotherthanunderlying in Stateswas a net capitalimporter the 1980snotbecauseit had suddenly become wereinsufficient to becausenational capital-poor rather, but, savings finance domestic investment; foreign wereespecially neededto help savings fundthe government budgetdeficit. the same token, By manydeveloping countries becamenetcapital the as lost exporters during 1980s, they accessto overseas finance had to service their and debts. Countries import can existing
25. In a slight variation theusual specific-factors Ricardo-Viner on or model,theone presented here impliesthatthereare bothmobileand specific of forms bothlabor and capital.The effect of relativeprice movementsand changes in endowments thus depends in part on the potential of of or of themselves-forexample,substitutability substitutability the forms factors the factors mobileforspecific labor or of mobilelabor formobilecapital. For our purposes,it is sufficient to to version. stopwiththe simpler Addingcomplexity the model does notfundamentally changethe analytic points;itonlychangesthedetailsof their empirical application.

438 International Organization or exportcapital for reasons that have littleto do with theirendowments, especially overtheshort and mediumrun.Nonethelessand overthelongerrun, developed countries tend to be net capital exporters,while developing The point is simplythat actual countriestend to be net capital importers. to applications requireattention specific nationalcircumstances. In any case, I believe that the specific-factors model has three important featureswhich make it useful for the analysisof the political economyof international finance. First,it emphasizesthepoliticalrelevanceof short-term in fluctuations the returns different to sortsof economicactivity, ratherthan longer-term changes in the conditionsof workersor capitalistsas a class. are Second, it assumes that most people and investments "caught" in their current to activity one degree or another.To be sure,some are more caught than others,but there is no recourse to the highlyunrealisticassumption commonin other models that,for example, automobileworkersfaced with importpenetrationwill have no trouble finding jobs at the same wage in anotherindustry. Third,it recognizesthatsome factors maybe mobile,while others are specific.For example, it is consonant with the specific-factors laboris quitemobileamongindustries, approachto assumethatunskilled while skilledlabor is industry-specific, to assume thatfinancial or capital is mobile This amongindustries, whilephysical capitalis industry-specific. feature allows forvariations the degreeto whichpeople or investments "stuck"in one in are place. These threeinterrelated emphases-on the politicalsignificance the of shortrun,on the relativespecificity most people and investments their of to current thatsome factors moremobilethan and are activity, on the possibility others-seem bothrealistic and analytically useful. For those unfamiliar withthe method,it maybe helpfulto identify as a it sectoralapproachto politicaleconomyas opposed to a class-basedapproach.26 In the class-based approach, differences among workersare less important thandifferences betweenworkers and capitalists; same is held to be trueof the capitalistsand landowners.Politics is competition among these classes, not withinthem.In the sectoralapproach,steelworkers have cross-cutting interests.On the one hand,theyare workers, theirinterests thelongrunare in and similarto those of otherworkers. the otherhand, theyproduce steel,and On their interestsin the short run are similar to those of managers and in shareholders thesteelindustry. in Politics, thisview,is primarily competition among various sectors of the economy,althoughlong-term class interests sometimes playa role. The specific-factors sectoralviewof the worldtellsus a greatdeal about or of the distributional As implications capital mobility. indicatedabove, as we
26. I referhere to those Marxist(and non-Marxist) viewsthatassume labor-capital contradictions to be the principal axis of political conflict.Many other Marxistsfocus on intraclass differences blocs; fora good exampleof relevanceto the issue at hand,see StephenR. Gill and or David Law, "Global Hegemony and the StructuralPower of Capital," International Studies 33 Quarterly (December 1989),pp. 475-99.

Global finance 439 capitalleaves areas whererates movefrom BCM to an ACM world,financial a Interest ratesgo up and entersareas wheretheyare higher. ofreturn lower are regions;interest regionsand down in capital-importing in capital-exporting for assetsbut also borrowers, affect onlyownersoffinancial not ratevariations In withtheBCM world,in the whomtheyare a costofproduction. comparison assetsin capital-exporting for are ACM worldthings better ownersoffinancial and forownersof sector-specific assets (capital, skills,and land) in countries and countries, viceversa. capital-importing set We can also introduce another important ofeconomicactors:internationview In corporations. the specific-factors of the (multinational) allydiversified or of is of world,a crucialdimension variation the mobility specificity an asset, be it an investment, skill,or plot of land. In manyways,the dimensionof An who holds an asset that diversification parallelsthatof specificity. investor whose can easilybe movedfrom to use is in a parallelpositionto an investor use The economic activities. asset portfolio includes a large numberof different to specific one mostvulnerablepositionis to hold an asset thatis completely thatincludes vulnerableto have an asset portfolio industry; is analogously it with operations that are In firmsin only one industry.27 this sense, firms diversified withrespectto activity locationcan be regardedas less specific and and and more mobilethanfirms whose operationsare "stuck" in one activity of withoperationsin one place. The preferences multinational corporations, of thus parallel the preferences conditions, manycountriesfacingdifferent investors withmore mobile assets and divergefromthose of nationallyand corporations.8 sectorally specific A simple "map" of sectoral interests can thus be drawn in line withthe is approach. On thismap, increasedcapital mobility generally specific-factors in asset-holders thedevelopedworldand bad forthosein the good forfinancial and it is bad for corporations; world; it is good formultinational developing in factors the developedworldand good forthose specific (nonmultinational) in thedeveloping world.29
but,rather, that is diversification the same as asset mobility 27. The pointis not thatportfolio morecontroversial version but are thepolicyimplications parallel.A moresophisticated somewhat assets of corporations combinations intangible as might focuson multinational of thisargument in by literature surveyed MartinPerry "Vertical is the integrated firm; relevant within vertically a and Effects," R. Schmalensee and R. D. Willig,eds., Handbook of in Determinants Integration: North-Holland, 1989), pp. 183-255. Inasmuchas such vol. Industrial Organization, 1 (Amsterdam: this corporations, does in factmaketheassets multinational assetscan moreeasilybe movedwithin in mobilethan those of otherfirms similarindustries. more geographically of these corporations See, for example, Daniel M. Shapiro, "Entry, Exit, and the Theory of the Multinational Corporation,"in Charles P. Kindlebergerand David B. Audretsch,eds., The Multinational Mass.: MIT Press,1983),pp. 103-22. Corporation the1980s (Cambridge, in ideas to thecases ofU.S. and Frenchtradepoliciesin the 1920s of 28. For an application similar Protectionism. Resisting and the 1970s,see Milner, from thatmay manyspecifics again thatthese conclusionsabstract 29. It is worthemphasizing indeed overridethem. For example, in the early 1980s, financialasset-holdersin manyLatin of In strongly from capital mobility. the context politicalinstability benefited Americancountries theywere able to get theirmoneyout of appreciations, and strongand unsustainablecurrency

Organization 440 International of A fewexamplesindicatetheplausibility thissectoralmap. The openingof to markets the less developed countries(LDCs) was good for global financial able to borrowat reduced in industries theThirdWorld,whichwere suddenly productionin the LDCs grewrapidlyas foreign Industrial rates of interest. ownersand managers(and usuallyworkers)in financeflowedin, benefiting By the same token, overseas lending from developed these industries.30 raised the cost of capital to industriesat home, countriesalmost certainly to the problemsof industrialsectors in Western Europe and contributing of the increased financialintegration the North America. More generally, competitivepressures on advanced industrializedcountries strengthened taking place restructuring to and contributed the industrial industries specific in them.31 In line with the approach, the interestsof two groups-the owners and corporations-are opposed assets and the multinational managersof financial in interests and multinational so factors, thatfinancial to those of the specific of the are the developed countries expectedto divergefrom interests specific sectors.This would appear a fairgeneralization nationallybased industrial of beneficiaries the the from experienceof the 1970s and 1980s.The principal broad economic trends of the last two decades have been internationally the and the financialservicesindustries; principallosers have orientedfirms firms.32 based industrial been nationally of effects increased financial These conclusions about the distributional can be turned around to predict expected patternsof political integration capital support and opposition to policies that will increase international Perhapsthe mostobviouspolicies in thisregardconcernthe removal mobility. to acrossborders, they but also includeefforts to ofbarriers capitalmovements financial especially markets, thatpolice international organizations strengthen Fund (IMF). theInternational Monetary integration In the developedworld,I expectsupportforincreasedfinancial firms with multinational assetsand from of from ownersand managers financial
Latin America and to overseas bank accounts. On the process,see Donald Lessard and John for D.C.: Institute InternaDebt (Washington, and ThirdWorld Williamson,eds., Capital Flight the of othercharacteristics thesepoliticaleconomiesoutweighed tionalEconomics,1987). Clearly, discussedhere. tendencies A. see to 30. For a more detailed argument thiseffect, Jeffry Frieden,"ThirdWorld Indebted Finance in Mexico,Brazil,Algeria,and South Industrialization: State Capitalismand International 35 Organization (Summer 1981), pp. 407-31. The degree to whichworkers Korea," Intermational their on woulddepend,in thisframework, howspecific from capitalinflow the and others benefited assetswere. see Frieden, Bankingon the World,especiallypp. 31. For an elaborationof this argument, 196-246. of policyepisodes, to 32. Much of thisdiscussionabstracts an extentfromthe effects specific to the such as those involving United States in the 1980s. I return thisproblemin the following national sectionof the article.My discussionhere also does not take intoaccountsuch significant based firms. on growth thepartof domestically ratesofproductivity as variations different

Global finance 441 I investments.33 expect opposition to increased diversified internationally financial integrationfrom specific industries,especially those tied to a albeit in the nationalmarket.It is myopinionthatthisaccurately, particular on describespatternsof politicalactivity these issues. In the broadestterms, includingderegulationof United States, supportfor financialderegulation, internationalfinancial relations, has come primarilyfrom the country's corporations; orientednonfinancial financialcenters and its internationally By or and groupshave been ambivalent hostile.34 manufacturing farm domestic in of for thesame token, support Americanbacking theIMF has been strongest to commitments the these sectors,while again opposition to government financialorder have been concentratedin the industrialand international heartlands.35 agricultural have been the stronghold firms and multinational Europe's leadingfinancial and monetary barriers EC financial to for downremaining of support breaking are evidenceis notavailable,indications that Although systematic integration.36 are backersof financial deregulation in theEC's leadingfinancial thestrongest financial deregulation of centers.37 chiefJapanesepromoters international The In firms. Japan, the issue is and multinational have been, again, financial community over the contours the withmajorbattleswithin financial complex,

of structure thevarious and on 33. This mustbe qualified thebasis oftheinstitutional industrial of or servicesindustry subsections it sectors.For example,in cases in whichthe domesticfinancial may serve to underminethe cartel. Such nuances are of are local cartels,financialintegration justice. but courseimportant, so broad a sweep as in thisarticlecannotdo them Frieden,"The PoliticalEconomyof FinancialDeregulationin 34. See David Dollar and Jeffry Financial Changein theAmerican theUnitedStatesand Japan,"in Giacomo Luciani,ed., Structural ignoresspecific 1990), pp. 72-102. Again,thisgeneralization System (Rome: Fondazione Olivetti, in Americancapital imports the 1980s.In myown nationalpolicyepisodes,such as thatinvolving defense, however,I can note that those involvedin political debates over the regulationof financialflows to and fromthe United States do appear to have longer-term international in considerations mind. on pp. 35. For detailson the 1983 IMF quota increasedebate, see Frieden,Banking theWorld, 179-90. 36. Again, as mentionedabove, this should be qualifiedwith careful attentionto national system tended In as differences. such countries Spain and Italy,the nationalbanking institutional regulations to function a protectedcartel,so thatthe removalof capital controlsand financial as The issue is not clear-cut;banks might mayhave harmedsegmentsof the financialcommunity. local of banks,and thestronger of but the support removal capitalcontrols oppose theentry foreign relations withbanks if banksmight welcomederegulation thiswould allow themto beginbuilding researchmustbe done. abroad. This is,ofcourse,a topicon whichfurther and 37. See BenjaminJ.Cohen, "European FinancialIntegration NationalBankingInterests," eds., The PoliticalEconomyof European Integration in Pier Carlo Padoan and Paolo Guerrieri, perspectiveon the (London: Harvester Wheatsheaf, 1989), pp. 145-70. For an interesting works of Vittorio Grilli: "Financial implicationsof financialderegulation,see the following no. Paperson EconomicActivity, 2, 1989,pp. 301-24; and "Europe Marketsand 1992,"Brookings 1992: Issues and Prospectsfor the Financial Markets,"Economic Policy9 (October 1989), pp. issue of the U.S. responseto European and Japanesepolicies, 388-421. Regardingthe important in Ann Elliot, "Reciprocity Financial Services:The Schumer see Thomas Bayard and Kimberly 1990. Amendment theSecond BankingDirective,"mimeograph, and

Organization 442 International appearconsonant the patterns Nonetheless, general changes. oftheregulatory set here.38 the with approach forth crossof effects increased the this To summarize section, distributional it and sense, may In can mobility be striking. a general long-term border capital by of the increases influence capital financial integration international be that abroadinresponse assets takethem to of owners financial it making easierfor in results the to nationalpoliciestheydo not like. The moreimmediate the twocamps, first worldhave been to drivea wedgebetween developed owners financial of assets,and integrated of sector, consisting thefinancial and integration, the with financial havegained firms, multinational allofwhich all and to industry location, of of specific a particular secondconsisting firms for competition scarce increased by havebeen harmed thegenerally which "integrationist" these between is conflict The predictionfor funds. clear loanable debatehas notbeen and forces. forces "anti-integrationist" Butpolitical and or with concerned increasing retarding to directly not will be restricted policies and and capitalmobility, it is to the distributional political international that now we debates itself theseother integration for of implications financial turn. of effects economicpoliciesin a The distributional world integrated financially to divisions likely emergeover the desireddegreeof Whilethe political the are financial integration important, generalincreasein international on activity a to interest group mobilityalsolikely change is capital international has integration Globalfinancial economic problems. of policy widerange other the toward exchange or directly indirectly shifted much activity political already It divisions. raises and new socioeconomic political ratein waysthatimply in that be of policy problems international cooperation may toonewtoanalyze on financial may integration havean impact the detail.And,in someways, these expected effects. This sectionsurveys of lobbying. strength sectoral itself; of integration the here the Again, problem isnottodowith level financial to in mobility order see how capital levelofinternational I takeas given high a in realms. and levelaffects behavior policy other this political
on Markets: BankingPolitics the studiesare Louis W. Pauly'sOpeningFinancial 38. Two excellent Press, 1988) and Frances McCall Rosenbluth's Pacific Rim (Ithaca, N.Y.: Cornell University Press,1989). In Japan,as Japan(Ithaca, N.Y.: CornellUniversity in FinancialPolitics Contemporary to werereluctant see international community of members thebanking in some European nations, markets appears of but cartel, therapidglobalization financial theirdomestic threaten competition as to have led themto regardderegulation the betterof twoevils.For a moredetailedelaboration see ofthisargument, Dollar and Frieden,"The PoliticalEconomyofFinancialDeregulationin the in United States and Japan." For an argumentthat is complementary manyways to the one Capital presentedhere,see JohnGoodman and Louis Pauly,"The New Politicsof International of BusinessSchool and University Toronto,1990. HarvardUniversity mimeograph, Mobility,"

Global finance 443 of observation to do withthepotentialeffects increased has One preliminary of of on capitalmobility the intensity sectoralinterests ownersof international the asset is to its current point is thatthe more specific capital. The starting the is use-that is, the moresubstantial thecost attachedto moving asset from the use-the moreincentive ownerof the use itscurrent to itsbest alternative Agentsin a sector government policies.39 assetwillhave to lobbyforsupportive to are to whichexitand entry costlesshave littleor no incentive spend time, support,since this supportwill be energy,and money to get government intothesector. dissipatedbynew entrants of To pick up fromthe previousdiscussionof the effects financialcapital makes it integration on mobility sectoralpolicies,inasmuchas global financial to easier for investors get into or out of a particularsector,it reduces the thereis littleevidencethatthiseffect Although for incentive sectorallobbying. financial worldwide has been large,it is theoretically plausible.An integrated marketof enormoussize, comparedwithmanysegmentednationalmarkets, and that of indeed allow forthe development instruments mechanisms might of the would facilitate redeployment capital fromone use to another.These could include broader and deeper futuresmarketsand insuranceschemes, to better information potential borrowersand lenders, and more readily availableventure finance.40 does reduce barriersto entry If indeed international financialintegration it to and exitof investors and fromspecificeconomicactivities, could reduce If makes integration thesectoralorientation lobbying investors.41financial of by to sectors, theirattachment a iteasier forfirms exitand entermanydifferent to particularsector may be reduced. Inasmuch as this takes place, we might

about this. In one, the resultobtains because 39. There are a numberof ways of thinking in thatinvestment a to to of a difficulty exitfrom sectorconstitutes barrier entry it: the knowledge of will irreversible component reducethelikelihood newinvestors thesectorcontainsan important In to in pricechangesthatmaynotbe permanent. thissense,barriers entering responseto relative of policiesin sinceentry barriers increasetheeffectiveness sector-specific exitare barriers entry; to they increasethereturns politicallobbying. to agentsin thesector, aidingexisting returnsand competition-increasing 40. Possibilitiessuch as these tend to implyimperfect the sector, whichis almostcertainly case. For a representative the learning-by-doing-in financial to "IncreasingReturns Scale in approachalongtheselines,see StephenD. Williamson, theoretical Policy,"Reviewof Economic of and the Non-Neutrality Government Financial Intermediation Studies (October 1986),pp. 863-75. 53 and 41. This isjust a restatement thegeneralnotionthatthecapitalmarkets politicallobbying of ones). This idea sounds absurd to mostpolitical (albeit imperfect are in some sense substitutes automobile scientists,but performthe followingthought experiment:if import-competing to could sell all oftheirequipment theJapaneseat a pricethatwouldallowthemto manufacturers lobbyingfor make a marketprofit, their incentiveto engage in costly and time-consuming skills could in somewaysell their if wouldbe muchlower.Or, alternatively,autoworkers protection have hoped to might for to and theirseniority Japaneseautoworkers an amountequal to whatthey theirincentive lobbywouldbe lower.The factthatmarkets to earn withtheseskillsand seniority, of or simply servesto pointout thatthe politicization forthese assets are incomplete nonexistent for for theissue is expected.Whilethereare notmarkets theseassets,thereare good markets other active. assets-and we expectownersofsuch assetsto be less politically

Organization 444 International expectmorepoliticalactionby ownersof capital as a class and less participain tionofcapitalists sectorallobbying. and its However,as argued above, even if thistrendexists,it is embryonic of capital has not been impact has yet to be felt: the sector specificity financial The integration. mostprominent reducedbyinternational measurably but, is not on the level of sectorallobbying effect increasedcapital mobility of arising of and on thecharacter sectorallobbying thepolicypreferences rather, in of support. together pursuit government whenthesectorsare thrown on the expected political lineup over The impact of capital mobility of dimensions policy Two interrelated macroeconomic policyis in factstriking. and the choice are especiallyimportant: degreeof exchangerateflexibility the level of the exchange rate itself.With regard to the firstdimension,the Recall that,with conditionsserve as a point of reference.42 Mundell-Fleming between exchange of a faces something a trade-off capital mobility, country exchange the policyautonomy: morethe country's and rate stability monetary thatof the the policycan deviatefrom rate is held constant, less its monetary restof the world.While some actorswill favora low degree of exchangerate rate such as the gold standard)despitethe loss of monetary flexibility fixed (a to willbe willing accepta highdegreeofexchangerate others policyautonomy, With autonomy. floating rates) in exchangeforpolicymaking flexibility (freely level of the exchange whichis the preferred regardto the second dimension, of some fixing exchangerates is assumed. While some actorswill rate itself, a a prefer high(more appreciated)exchangerate,otherswillprefer low (more depreciated) exchange rate. The two dimensionsand the expected policy of preferences socioeconomicactorsalong themare presentedin Figure1 and only provides discussedin detailbelow.We shouldkeep in mindthatthefigure ratherthan variationis, of course,along a continuum roughapproximations; dichotomous. involvesthe desireddegree of exchangerate flexibility, dimension The first as whichcan be presentedmost starkly whetherthe rate should be fixedor national flexible. Fixingthe rate in a worldof mobile capital impliesforgoing in about thevalue of the monetary policyautonomy favorof greatercertainty to in currency; otherwords,it gives priority a stable exchangerate over the to attractive of to domestic prices.This is especially ability nationalpolicy affect involveinternational directly two groupsof actorswhose economic activities trade and paymentsand who thereforeare highlysensitive to currency and the producersof exportInternational tradersand investors fluctuations. sinceit from volatility, exchangemarket orientedtradablegoods tendto suffer
and specificmay resultfromthis meldingof the Mundell-Fleming 42. Some complications model generallyassumes some unutilizedresourcesand factorsmodels. The Mundell-Fleming model does not.The contradiction be relevant may whilethe specific-factors somewage stickiness, but muchforthe shortof on forthe analysis effects nationalwelfare, it does not appear to matter see Corden, effects, whichare the focushere. For a discussion, distributional and medium-term pp. Economy, 22-34. Exchange Rates,and theWorld Inflation,

Globalfinance 445
Preferred degreeof exchangerateflexibility and nationalmonetary policyautonomy High Low

oi

Import-competing of producers tradablegoods forthe domestic market

Export-oriented producers of tradablegoods

Producersof nontradable goods and services

International traders and investors

actors in socioeconomic of FIGURE 1. Synopsis the of policy preferences various a world mobilecapital of

theseactors relatively are makestheir business riskier.43 thesametoken, By sincethey can reaboutdomestic macroeconomic unconcerned conditions, to localdemand shifting business other their to countries. by spond depressed about In contrast, other of tendto be highly concerned two groups actors the conditions thusfavor national and domestic macroeconomic monetary of rate.The first these madepossible a flexible exchange policy autonomy by Sincetheir goodsand services. groups consists producers nontradable of of and sincecurrency the business does not involve use of foreign exchange tendto haveno clear has indirect effects beston them, at they volatility only The consists producers of for rates.44 second group preference stable exchange who ofimport-competing tradable market, tendto be goodsforthedomestic rate about indifferent exchange volatility (which mayevenreduce relatively as riskier)and primarily import pressureinasmuch it makes importing concerned aboutpolicymaking autonomy. to The preferences thevarious are mostprominently, of groups relevant, rates. Basedon theabovearguments, debates aboutstabilizing exchange policy
on is 43. There are exceptions: producersof tradablegoods in whichcompetition notprimarily to price(and is instead,forexample,on quality)willbe less sensitive exchangeratemovements. 44. Inasmuch as a devaluation changes the price of tradable goods relative to that of sector.However,such pricevolatility nontradable goods, it affects producersin the nontradables all far moreor less equallyand is therefore less significant affects nationalnontradables producers to themthanit is to tradablesproducers, who see theiroutputchange in price relativeto thatof their competitors.

446 International Organization international investors moregenerally, and we can expectmultinational firms, to internationally oriented producers tradablegoods to be moresympathetic of while we can expect producersin the nontradablessector currency stability, in tradable goods to be most interested and producersof import-competing nationalmonetary policyautonomy. In policydebates about the level of the exchangerate,whichis the second of dimension noted in Figure 1, we can expectthe interests variouseconomic sectors to track the relative price changes involved in depreciation or of From a differential distributional the appreciation thecurrency. standpoint, is lower(more depreciated)the exchangerate,thehigher thepriceoftradable of to goods relative nontradable goods.This,ofcourse,tendsto help producers tradable goods-whose output prices rise more than the prices of the nontradableinputstheyuse-and to hurtproducersof nontradablegoods. in favor weakercurrency makes a that Producers thetradablessectortherefore theirproductsmore competitive home and foreign in markets.In contrast, from in sectorgenerally benefit producers thenontradables currency appreciation,whichraises the domesticrelativeprice of theirproductsand lowersthe relative international traders and domestic priceof tradablegoods.45 Similarly, investors, who are interestedin purchasingassets overseas, favor a strong
currency.46

45. For those unfamiliar withthe approach, the real exchange rate can be expressedas the relationship betweenthepriceofnontradable goods and thatoftradablegoods. Byassumption, the price of tradablesis set on worldmarkets and cannotbe changed (in foreign currency terms)by nationalpolicy.In otherwords,the foreign currency priceof tradablesis an anchoraroundwhich domestic prices move. Depreciation makes tradables relativelymore expensive in domestic currency terms,while nontradablesbecome relatively cheaper. Appreciationhas the opposite In can be offset, example by characteristics product for effects. the real world,these effects of markets, thereis littledoubt thatthe generalpatternholds. When the dollarwas strong, but the dollar prices of televisionsets and clothing were low, while the price of housingsoared. As the dollar fell,the dollar price of hard goods rose, while the price of housingstagnatedor declined. its Despite some controversy about the approach,it is close enoughto consensualto warrant use. to to One important consideration keep in mindis the extent whichtherelative priceeffect (say of an appreciationon raising demand for nontradablegoods) may be counteractedby the demandmoregenerally); macroeconomic effect (say of reduced aggregate thisis, so to speak, the contest between the income and substitution effectsor between expenditurereductionand and applicationto the LDCs, see Sebastian Edwards, For expenditure switching. a usefulsurvey Real Exchange Rates,Devaluationand Adjustment (Cambridge, Mass.: MIT Press,1989). For more technicalessays,see JohnBilson and Richard Marston,eds., ExchangeRate Theory and Practice of (Chicago: University Chicago Press, 1984). Another point to keep in mind is that the nontradable barriersto goods and servicessectorincludesthose who operate behind prohibitive trade(especiallyquotas). 46. Of course,from standpoint an overseasinvestor, desirefora strong the of the homecurrency home currency to allowgreater purchasesof overseasassets is balanced bythe desireto maximize from these assets,whichdemandsa weak home currency. The best possible scenario,as earnings when the home currency is usual, is to buy cheap and sell dear-that is, to buyforeign currency and sell it when the home currency weak. There are a numberof defensibletheoretical is strong reasonswhyinternational investors might favorstrong home currencies; is probably it enoughto note here that empirically they tend to do so. On the relationshipbetween foreigndirect investmentand the exchange rate, see Steven W. Kohlhagen, "Exchange Rate Changes, Profitability, DirectForeignInvestment," and Southem EconomicJoumal44 (July 1977),pp. 43-52.

Globalfinance 447 Preliminary evidence seemsto bear out theseexpectations bothon the dimension exchange flexibility on that theleveloftheexchange of of rate and rateitself.47 Perhaps arenain which choicebetween the the monetary policy autonomy and currency stability been posed mostdirectly in the has is development the exchange of rate mechanism the EuropeanMonetary of movement toward single currency.48 a EC System (EMS) andthesubsequent The abovediscussion systematic has predictions aboutprivate-sector attitudes the I toward exchange mechanism rate (ERM) oftheEMS.49 expect the ERM tobe most favorable andtoevince most for, the enthusiasm firms from, in thefinancial sector, major and exporters, diversified multinational corporations with or investments customers theEC. Evidence scanty, some in major is but can be presented. One study potential of British and winners losersfrom Britain's affiliation theERM essentially with tracks expectations. my Internationally oriented and manufacturing finance related and services expected were to do well, while domestically the oriented and manufacturing services sectors wereexpected be weaker.5" Britain's to in Of twelve members the corporate Association Monetary for UnioninEurope, private-sector a lobbying organiza47. Practically onlysystematic the empirical study theseissuesin recent on yearsis I. M. Destler and C. Randall Henning's Dollar Politics: Exchange Rate Policymaking the United States in for D.C.: Institute International (Washington, Economics,1989),whichappears to bear out some of theseobservations. The issue is somewhat clouded bythe difficulty, whichDestler and Henning recognize, separating of debatesoverthe levelofthe exchangeratefrom debatesoveritsvolatility; in theearly1980sin theUnitedStates,theformer tendedto dominatethelatter. The authors note thatinternational financialinstitutions benefit fromexchangemarket volatility, whichcan make theirtrading desks extremely profitable. However,theyshould-and manydo-weigh thisbenefit againstthe cost of international businessforegone because of uncertainty about currency values. At least some portionof the international businessof Americanmoney-center banksis due to the of environment widespreadbeliefin the reliability the dollar and the Americanmacroeconomic moregenerally. 48. The literature the EMS is now enormous,and almost all of it is purelyeconomic in on For an excellent content. survey along theselines,see FrancescoGiavazzi and AlbertoGiovannini, Limiting Exchange Rate Flexibility: EuropeanMonetary The System (Cambridge,Mass.: MIT Press, thatdiscussesmanyof the domesticand international 1989). For a good study politicalaspectsof the EMS, see Peter Ludlow, TheMakingoftheEuropeanMonetary System (London: Butterworth, 1982); unfortunately, eventshave movedfarbeyondwhatLudlow describedin 1982. 49. I avoid three issues that are more closely associated with a single currency per se: the potentialwelfarecosts of reduced seignorageopportunities, welfaregains associated with the reduced transactions costs,and the potentially differential impactof these reduced transactions costson variouseconomicagents.I focusentirely the moreimmediate on issue of the differential effects fixedbut adjustableexchangerateswithin EMS. For a discussionof some of these of the otherissues,see BarryEichengreen, "One Money forEurope?" EconomicPolicy5 (April 1990), pp. 118-87. 50. See S. G. WarburgSecurities, Into theERM: The Outlook the UK Economyand Equity for tableis on p. 31,butmoreusefulsectoralsummaries are London,August1990.A summary Market, on pp. 32-52. The projections complicateda bit (forour purposes)bythe study's are conflation of greaterexchangerate stability witha firmer pound sterling, bothof whichit expectsto ensue but whichmayoperatein slightly directions as different also distributionally, I discussbelow.The study notes thatwhile 45 percentof profits from firms the Financial Timesstockexchangeindexare in from and profits foreign of come from EC the overseasactivities (exports affiliates), 13 percent only and 17 percentfrom NorthAmerica.This mayhelp explainsome of the British reluctanceto tie to at wereappreciating sterling theERM, especially a timewhentheEuropean currencies strongly againstthedollar.

448 International Organization tionfor rapidcurrency in union, eight from are firms thefinancial related and services two sectors, are from diversified multinational corporations, two and In aremajor exporters.5"theabsence systematic of few empirical work, serious assessments be made, thepatterns suggestive.52 can but are The seconddimension, leveloftheexchange the rate, a familiar is topicof debateinmany those which for countries, especially international isvery trade important those and which havea history exchange volatility of rate (characteristicsthat applyprimarily developing to and small developedcountries). Political conflict theexchange hasbecome over rate important larger in nations as well.One striking is example theUnitedStates, where between 1981and of 1986much thepolitical that activity might otherwise taken form have the of pressure trade for protection instead focused trying gettheauthorities on to or other actors force dollarto depreciate to the to relative thecurrencies the of country's majortrading The partners.53 evidence, from United the especially States the1980s, in consonant theexpectations appears with above.54 presented Thesevarying rate in exchange preferences turn affect toward preferences different macroeconomic an policies.Withcapitalmobility, expansionary leadsto depreciation thecurrency, of monetary whilean expansionary policy fiscal leads to appreciation. of policy Producers tradable goodsshouldthus prefer and monetary of expansion, producers nontradable goodsand services shouldprefer fiscal This willespecially the case if the fiscal be expansion. takesthe form a director indirect of expansion increasein spending on which quitelikely nontradable is goods, where is government spending involved and (defense, infrastructure, socialspending generally are This nontradables). mayhelp explainthe peculiar of pattern U.S. economic policy during the Reagan years.Withthe administration's principal bases of support the in defense inrealestate related and community, and sectors, intheinternational investors wereforincreased group, pressures on spending nontradables. The resultant havebeen countered monetary appreciation might as by expansion, was in factdemanded the tradable hurt the import by goodsproducers by but constituencies it surge, thenontradables wanted reinforced tight by money, not dissipated. otherwords, mixof loose fiscaland tight In the monetary policiesmayhave been less a mistake, mosteconomists observers as and
51. The twelvecorporatemembers Barclays, are British Aerospace, British AmericanTobacco, BritishPetroleum,Citibank,Ernst and Young, Goldman Sachs, Imperial Chemical Industries, Midland Montagu,Salomon International, Shearson Brothers, and S. G. Warburg. The Associationof CorporateTreasurersis also a member. 52. For an evaluationof manyof these developments, Jeffrey see Frankel,"The Making of Exchange Rate Policy in the 1980s," mimeograph, of University Californiaat Berkeley,1990. Again, the political economycomponentof Frankel's discussionfocuses, as did most of the debates,on thelevelof theexchangeraterather thanon itsvolatility. 53. In Dollar Politics, 17-80,Destler and Henningprovidean excellent pp. interpretive survey of thecourseof dollarpoliticsand policiesoverthe 1980s. 54. For descriptions the interplay the variousinterest of of groups,see Destler and Henning, Dollar Politics;Frankel,"The Making of Exchange Rate Policy in the 1980s"; and C. Randall Henning,"InternationalMonetaryPolicymaking Withinthe Countriesof the Group of Five," mimeograph, 1990.

Global finance 449 of concluded at the time,than it was a reflection the dominanceof political of from goods producersand othersupporters a strong nontradable pressures whowanteda weakerdollar. dollarovertradablegoods producers Anotherissue that has gained in importancein a world of great capital can Because financial integration is policycoordination. mobility international policiesthat to for makeit difficult nationalauthorities pursuemacroeconomic differfrom those of their financial "neighbors," it may make sense to currency coordinatesuch policies.This would,forexample,avoid competitive monetary policy in pursuingan expansionary depreciations, whicha country foiledas finds itself partners againstitstrading and thuscurrency depreciation its partnersmatch the monetaryexpansion and depreciation,leaving the to countries trying prevent levelsunchanged. Alternatively, currencies' relative ratesin a bid might unnecessarily up interest depreciating from their currencies The obvious solutionto such to attempt avoid a capital outflow. competitive exchange to problemsis forthe relevantpolicymakers cooperate in targeting indicators.55 ratesand othermacroeconomic macroeconomic policy withinternational There are many problems potential is intervention less desirable coordination. Some believe thatsuchgovernment of take theircourse;othersbelievethatthedifficulties the thanletting markets is problems Amongthecoordination coordination nearly are insurmountable.56 may make that slight divergencesin views among national policymakers thatthe difficult.57 indeed likely It is cooperationextremely welfare-improving will governments of cooperating domestic politicalunderpinnings thepotential about the gainsfrom or preferences interpretations differ, leadingto different bestbe achieved. might cooperationand how they of effects domesticdistributional In this light,once again the differential I are relevant.Not surprisingly,expectthose whose such policycoordination financial and exchangemarket to economicactivities mostsensitive foreign are of conditionsto be mostfavorableto the sacrifice national policyautonomy traders, thelikeare and investors, International by implied policycoordination. apt to be well disposed, while those in the nontradables sector-whose businesses may be harmed by the sacrificeof autonomywith little or no benefit from coordination-are proneto be opposed. A related corresponding of set of issues has to do withthe coordination othernationalpolicies,such as
by proposal was offered JohnWilliamsonand Marcus and controversial 55. One influential of Coordination EconomicPolicy for and Indicators: Blueprint theIntemational A Miller in Targets Economics,1987). D.C.: Institute International for (Washington, see growing literature, MartinFeldstein,ed., surveys thisrapidly of 56. For some representative Frankel, of (Chicago: University ChicagoPress,1988); and Jeffrey Intemational PolicyCoordination PolicyCoordination, PrincetonStudies in International Macroeconomic Obstaclesto Intemational Finance Section,1988). of N.J.:Department Economics,International Finance no. 64 (Princeton, "International Frankeland KatharineRockett, of 57. For a demonstration thispoint,see Jeffrey Do MacroeconomicPolicy CoordinationWhen Policy-Makers Not Agree on the True Model," is among AmericanEconomic Review78 (June 1988), pp. 318-40. The argument controversial; ignoresthe potential try otherthings, assumesthatpolicymakers to maximizenationalwelfare, it to costs of not cooperating(or not appearing to cooperate), and makes it difficult explain been achieved. has in circumstances whichcoordination apparently

Organization 450 International workand indeed so little taxation.58 thissubject,thereis so littleanalytic On is speculation.However, experiencein the real worldthatcoordination mostly both the trendswithinthe EC and the discussionsamong other developed in be countries indicatethatitwilllikely a topicof greatimportance the 1990s. in with have to do withtheinterests play,notnecessarily These observations outcomeswill amongthem.Politicaland policy theoutcomeofpoliticalconflict of course depend on how intense preferencesare, how concentratedand organized the various interestsare, and how political and other social How successfulthe various interest influencetheir interaction. institutions will theirobjectives varyfrom case to case and from groupswillbe at obtaining of countryto country.Nonetheless, a clear understanding the economic pointforanalysis. involved a crucialstarting is interests has This section can be summarizedquite simply.Financial integration effects-and thereforethe politics-of implicationsfor the distributional national policies. Over the long run,access to broader and deeper financial of marketsmay tend to reduce the sectoral specificity capital and thereby ever to dampen some sectoraldemands-but thisgradual process is unlikely eliminatesuch demands. The more immediateimplicationis that political to policiesare likely changequite significantly. lineupsovermacroeconomic and A trade-off betweennationalmacroeconomic policyautonomy exchange investorsand tradersmore has developed, with international rate stability willingto give up autonomyfor stabilityand with the nontradablesand in thanin fluctuations orientedsectorsmoreinterested autonomy domestically has intensified onlyover the flexibility not but in the exchangerate. Conflict for expansion also overthelevelof theexchangerate.While support monetary and depreciationhas tended to come fromproducers of tradable goods, contraction and appreciationhas come frominternasupportfor monetary At of tionalinvestors producers nontradable and goods and services. the same time, the coordinationof national macroeconomicpolicies has become an and the domesticlevel. important politicalproblemat both the international Not surprisingly, those for whom overseas economic conditionsare more relevant (internationalinvestorsand traders and producers of tradable of goods) will favormore coordinatedpolicies-and thus a surrender more are nationalpolicyautonomy-thanwill those forwhomdomesticconditions determinant.

Conclusions
Withoutrepeatingthe points made in the article,I can emphasize a few conclusions. may Hampered as nationalgovernments be or appear to be in the
"National Tax Systems Versus the European Capital 58. See, forexample,AlbertoGiovannini, Market,"EconomicPolicy9 (October 1989),pp. 346-86.

Globalfinance 451 faceof an internationally integrated financial to system, continue have they weaponsin theirpolicyarsenal.These weaponsmaynot be as sharpor numerous before, they as but exist. Manysectoral policies be effective, can as canmacroeconomic if policies policymakers theexchange tovary. allow rate However, distributional the implications international of capital mobility are In striking. thelongrun,owners capitalhaveprobably of gainedrelative to other In groups. theshorter owners workers specific run, in and sectors the in world serious in developed face costs adjusting increased to capital mobility. International capitalmobility changesthe pattern lobbying also of over national policies. may, It overthelongrun,dampen somesectoral demands from owners capital. of More specifically, in theshorter it tendsto and run, shift debatetoward exchange the rateas an intermediate ultimate or policy a instrument, thereby driving wedgebetween thosemoresensitive those and less sensitive exchange to rate fluctuations betweenthosewho favor and whofavor currency and appreciation those depreciation. someextent, To this tracks division theeconomy a of between of producers tradable goodson the one handandinternational and investors producers nontradable of goodsand services theother. on Thisarticle forth series propositions canbe brought bearona sets a of that to widevariety problems of to having do withthepolitics the international of movement capital.Such problems, is safe to project, be of great of it will and policyimportance yearsto come. The possibility the in analytic for evaluation theapproach of empirical here further presented andfor theoretical and empirical is elaboration clear. As we approach1992 and as parallel in evolve elsewhere theworld, opportunity andnecessity the for developments ofsuchwork be enormous, a better will and is of understandingwhat at stake will ofgreat be importance.