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Article

Research on the domestic politics of trade typically begins with a theory about who benefits from trade and who is harmed by it. The actors—for instance, firms, workers, or industries—who benefit from trade are expected to support liberalization while those who are harmed are expected to oppose liberalization. For individuals, exposure to globalization through the labor market—including the type of job, firm, or industry—is likely to be an important determinant of individuals’ preferences over policies governing the global economy. To understand the domestic politics of trade with respect to labor, therefore, it is important to ask two key questions. First, what explains the preferences of workers? Broadly, scholars can be divided between those that argue different economic factors (i.e., labor market consequences) explain attitudes toward free trade and those who argue that noneconomic factors (e.g., values, information) are the main drivers of attitudes. Empirical tests of these theories rely on survey data. Second, how do trade pressures influence elections and when do workers’ interests influence policy outcomes? Research on mass politics shows that workers’ interests with respect to trade shape not only support for incumbents in elections but also whether elected officials support free trade. Domestic institutions also play an important role in this process, with research suggesting that democracies and left-leaning governments implement trade policies that are more favorable to workers. Yet trade in the 21st century looks very different from trade 30 years ago. It no longer involves only (or even primarily) the exchange of final goods but also trade in intermediate goods and services. Trade is also closely linked to the production strategies of multinational firms, including offshoring. These fundamental changes in the nature of global economic activity have important implications for the how the interests of workers relate to those of their employers, and by extension the politics of trade. As a result, scholars are increasingly incorporating new models of trade into analysis of politics at the individual and aggregate levels.

Article

Mark Hallerberg

The topic of fiscal politics includes taxation and spending, budget balances and debt levels, and crises and the politics of austerity. The discussion often focuses on how some variable—such as the international environment, or political institutions—constrains “politics” in this realm. Almost omnipresent concerns about endogeneity run through this research. While this is a “big” policy area that deserves study, tracing causation is difficult.

Article

Federico Maria Ferrara and Thomas Sattler

The relationship between politics and financial markets is central for many, if not most, political economy arguments. The existing literature focuses on the effect of domestic and international political interests, institutions, and policy decisions on returns and volatility in stock, bond, and foreign exchange markets. This research bears implications for three major debates in political science: the distributive effects of politics, globalization and state autonomy, and the political roots of economic credibility and its tensions with democratic accountability. While the study of politics and financial markets is complicated by several theoretical and empirical challenges, recent methodological innovations in political research provide a window of opportunity for the development of the field.

Article

International trade and state efforts to liberalize or restrict trade generate very contentious politics. Trade creates winners and losers at the individual level, firm level, industry level, national level, and even regional level. It also generates conflict among transnational social groups, such as environmental advocacy organizations, human rights organizations, and transnational business alliances. Because of this complexity of the politics of international trade, scholars of international political economy (IPE) can focus on different levels of analysis and a variety of stages of the political decision-making process. Scholars agree that not only societal preferences but collective action problems, domestic institutions, and international factors all affect trade politics and policy outcomes. These aspects of trade politics together form the key influences on trade policy and whether it is liberal or protectionist in nature. Societal preferences constitute the initial inputs into the trade policy-making process. Understanding how different groups of economic actors within society win or lose from trade liberalization or protection is the first step toward understanding trade politics and trade policy outcomes. Once societal trade preferences are formed, they must be aggregated into cohesive pressure groups or grass-roots movements whose purpose is to influence trade policy. This is easier for some groups of actors to achieve than others. In lobbying government actors on policy, interest groups find that domestic institutions play an important role translating societal inputs into policy outputs. Policy-making institutions vary in the degree to which they are susceptible to special-interest lobbying versus the preferences of broader societal coalitions, and electoral rules and party structures also affect policy outcomes, with certain configurations creating a bias toward more protectionism or liberalization. In addition to these domestic-level influences on trade policy, IPE scholars have extensively studied the ways that international factors also affect trade policy outcomes such as the extent of liberalization and the content of what is liberalized (e.g., manufactures versus agricultural goods versus services). International factors such as the distribution of power, the character of international institutions and trade agreements (e.g., multilateral versus bilateral), transnational civil society and diffusion processes may be thought of as inputs into the policy-making process as well. Systemic conditions may constrain the types of policies that governments can adopt, or they may open the door to a range of possible policy outcomes that are nevertheless limited by the preferences of domestic societal actors.

Article

Kurt Hübner

Even the most critical observers of the creation of the euro found some nice words on the occasion of its 10th anniversary. And yet it needed only a marginal event like the announcement of the newly elected Greek government that the previously stated public debt ratio was gravely miscalculated to move the euro into a critical crisis zone. Swiftly the attention of private credit markets turned to more member states of the eurozone, only to eventually detect that financial stability of banks did not meet sustainability indicators. What is often labeled as “eurozone crisis” is better understood by a political-economic forensic analysis that rather speaks of eurozone crises. First, the causes for financial and then sovereign debt crises of Greece, Spain, Portugal, and Ireland (to name only the most prominent) differ fundamentally. They were triggered by the same events but caused by differing factors. Second, it is a crisis of economic governance, and thus an institutional crisis that needs fundamental institutional changes. Third, it is a crisis of political leadership. The overlapping character as well as the interplay of those three dimensions hampers a proper understanding of the dynamics of the processes that started in 2010. By differentiating between national crisis causes, triggering mechanisms, policy responses, and multi-level crises management, we suggest a comprehensive analytical framework that may guide current as well as future research in the operating of an incomplete currency union.

Article

Caner Bakir, Mehmet Kerem Coban, and Sinan Akgunay

The Global Financial Crisis, which originated in the United States, developed into a sovereign debt crisis in Europe, particularly the Eurozone. The Eurozone crisis was driven mainly by divergence in macroeconomic structures, fiscal indiscipline, and financial integration with fragmented regulatory and supervisory governance arrangements. The crisis also exposed flaws in the institutional design of the Economic and Monetary Union (EMU). The EMU lacked mechanisms of effective crisis prevention and management and fiscal coordination, had a centralized monetary policy despite divergence in the macroeconomic structure and institutional setting across member states, and adopted a “light touch” approach to financial regulation. In response, crisis-hit countries implemented structural reforms and public spending cuts. European Union (EU) leaders attempted to address these deficiencies with institutional reforms at the national and regional level. Policy responses and institutional reforms have led to populist backlash with declining trust in regional and domestic politics and organizations, with voters favoring more inward-looking, nationalist political parties. Within this context, the Eurozone and EU face further challenges to maintain macroeconomic and financial stability and to ensure intraregional policy coordination.

Article

The recent global economic crisis has renewed interest in the nature and history of monetary policy, the distributional effects of central bank policy, central bank governance, and the personalities at the helm of major central banks. In modern times, a country’s central bank formulates, or, to a minimum, implements, a country’s monetary policy, or the process of adjustment of a country’s money supply to achieve some combination of stable prices and sustainable economic growth. Monetary policy depends heavily on a country’s exchange rate system. Under fixed exchange rates, the country’s commitment to keep the level of the currency at a certain level dictates monetary policy to a great degree. As the gold standard was unraveling after World War I, many countries experienced high inflation or even hyperinflation. A similar situation faced monetary policy after the collapse of the Bretton Woods system of fixed exchange rates in the 1970s. By the 1980s, however, countries turned toward central bank independence as an institutional arrangement to control inflation. The current issues surrounding monetary policy have emerged from the historical increase in central bank independence and the 2007 economic and financial crisis. In particular, the opacity of central bank decisions, given their autonomy to pursue stable prices without political interference, has increased the demand for transparency and communication with the government, the public, and financial markets. Also, the 2007 crisis pushed central banks toward unconventional measures and macro-prudential regulation, and brought back into focus the monetary policy of the euro area.

Article

The role of the state in economic development is broad, old, and metamorphic. Drawing on historical political economy and a critical reading of new institutional scholarship, our understanding of the developmental state is contextual and complex. Successful developmental state formation is the result of stable political-economic environments, cultural legacies of earlier state-making functioning as mental maps for new statecraft, coherent institutional and policy entrepreneurship, and sustained growth that gives positive feedback in state-making. Latin American state developmentalism has always been diverse, before and after the debt crisis. In the era of state-led industrialization, the Latin American developmental state “failed” because, with domestic and regional markets small and dependence on foreign markets and financial capital high, macroeconomic policymaking did not learn to deal with crises and cyclical external conditions. Developmental state success in the 21st century depends on undertaking less volatile political-economic pathways to facilitate organizational learning by doing. In exclusionary Latin America more than in other corners of the world, developmental state success also means reconciling economic and social goals.

Article

All governments require revenue, and domestic taxes are the primary means for generating it. Yet both the size and shape of taxation vary significantly across countries and have been transformed over time. What explains variation in domestic taxation? To answer this question, recent scholarship on taxation has focused on the politics of taxation as a tool for redistribution. This has led to a wide body of research on the fiscal impact of taxation and on the introduction, evolution, and variation in direct and progressive tax regimes, particularly the income tax. Yet the focus on taxation as a redistributive tool yields a puzzle, as more progressive tax systems tend to be found where redistribution is in fact the lowest. Explanations of this paradox often center on the impossibility of high and progressive taxes on capital in the context of international economic integration. Not as well studied are taxes other than the taxation of income, and the deliberate politics of nonfiscal, regulatory, and incentive effects of different tax choices. Methodologically, problems of endogeneity are ubiquitous in the study of tax policy choices, but more sophisticated experimental work is well underway in research on individual preferences for taxation.

Article

In the era following the decolonization of Africa, the economic performance of countries on the continent can be traced across three periods. The early postindependence years reflected moderate growth and policy variation, with occasional distress in some countries. From the 1980s through the late 1990s, the region was gripped by a sweeping crisis of growth and solvency shaped by a steep economic downturn and a slow, stuttering recovery. This was also a period of convergence and restrictions on policy space. By the early 2000s, accelerated growth buoyed most economies in Africa, although commodity price shocks and the global economic slump of 2008–2009 created episodic problems. Different approaches to policy and strategy once again marked the landscape. A number of influences help to explain variations in the occurrence of economic crisis across Africa, and the different responses to economic distress. In addition to structural factors, such as geography, resource wealth, and colonial legacies, middle-range political conditions contributed to these downturns. Key institutions, core constituencies, and fiscal pressures were domestic causes and external factors include donor convergence, access to finance, and policy learning. One framework of analysis centers on three factors: ruling coalitions, the fiscal imperative, and policy space. The ruling coalition refers to the nature of the political regime and core support groups. The fiscal imperative refers to the nature of state finance and access to external resources. And the policy space comprises the range of strategic alternatives and the latitude for governments to make choices among broad policy options. Applying the framework to Africa’s economic performance, the first period was marked by distributional imperatives, a flexible fiscal regime, and considerable space for policy experimentation. During the long crisis, regimes came under pressure from external and domestic influences, and shifted toward a focus on macroeconomic stabilization. This occurred under a tight fiscal imperative and a contraction of policy space under the supervision of multilateral financial institutions. In the 2000s, governments reflected a greater balance between distributional and developmental goals, fiscal constraints were somewhat relaxed, and policy variation reappeared across the region. While the early 21st century has displayed signs of intermittent distress, Africa is not mired in a crisis comparable to those of earlier periods. Developmental imperatives and electoral accountability are increasingly influential in shaping economic strategy across the continent.

Article

The sovereignty of postcolonial African states is largely derived from their recognition by other states and by the United Nations, irrespective of their actual effectiveness. Such international legal sovereignty has been a resource to weak African states, allowing them to endure against the odds, and to their rulers who have instrumentalized it to foster their domestic authority and domination. Yet, African sovereignty has also been a curse. Being exogenous to domestic social and political relations, it tends to isolate and shield rulers from the ruled and predisposes state institutions toward predation. It also standardizes and homogenizes the continent’s institutional landscape in disregard to the wealth and promise of effective institutional arrangements on the ground, to which it denies legitimacy. Despite the equilibrium properties of the African sovereignty regime, there might be opportunities to tweak the system in ways that could unleash more effective and accountable state and nonstate institutions.

Article

Finance is frequently, but incorrectly, judged a technical matter best left to experts. Equally mistaken is the exasperated conclusion encapsulated in the phrase “people, not profits,” which holds that capitalism, private investors, and markets are simply evil. Finance is necessary for economic development, but also has profound, and often unexamined, implications for social and political spheres. Channels for financial intermediation may be public or private, and national or foreign, implying tradeoffs among organizational forms. Public banks typically are superior in providing public goods and implementing national strategic plans, but private banks and capital markets normally are more efficient, assuming competitive markets. Savings may be sought within the national economy or from abroad, with domestic savings implying a smaller pool yet less subsequent international vulnerability, and foreign inflows offering potential abundance at the cost of external dependence. This framing yields four ideal-types of long-term finance (LTF): national public finance from state development banks; national private finance from domestic private banks and capital markets; foreign public finance via bilateral or multilateral aid or state investment (including from non-traditional lenders, such as China); and foreign private finance sourced from global investors seeking returns. Both national public and foreign public finance dominated long-term investment in Latin America in the early postwar decades of import-substituting industrialization. In the 1970s through the 1990s, they were succeeded by foreign private bank loans, followed by crisis and retrenchment. In the 21st century global political and market conditions brought a resurgence of foreign capital, including from both global private investors and non-Western public sources. Worries about problems arising from Chinese public finance to Latin America are likely overblown, as the quantity remains small, except in some Bolivarian Alliance countries. However, private foreign inflows, strongly promoted by Western-led multilateral actors, from the Organisation for Economic Co-operation and Development (OECD) to the World Bank, during the 2010s, may be more problematic. Excessive dependence on private securities markets funded by globally mobile capital often undercuts achievement of other valued societal goals such as reducing inequality and ensuring democratic accountability. Notwithstanding their predictable flaws, it may be time for a reemphasis on national, and possibly regional, public development banks.