4 - Capital Mobility, Trade, and the Domestic Politics of Economic Policy

Summary

The increased international integration of goods, services, and capital markets among the advanced industrial countries in the past two decades is widely viewed to have exerted powerful pressures for convergence in economic policies toward those that promote the freer play of market forces (Andrews 1994; Goodman 1993; Kurzer 1991; Lee and McKenzie 1989; Notermans 1993; Scharpf 1991). The relative closure of the international economy from the end of World War II until the mid-1970s afforded governments the luxury of pursuing expansionary and interventionist economic policies – the “Keynesian welfare state” (KWS) – without undermining aggregate economic performance, and there were obvious reasons why such policies were particularly appealing to the left and organized labor. But the space to pursue such policies evaporated, so goes the conventional wisdom, in the ever more integrated and competitive international economy of the latter 1970s and 1980s.

In contrast, others claim that the association between left-labor power and the KWS increased with integration into the international economy – measured in terms of exposure to trade – at least through the late 1970s (Cameron 1978; Katzenstein 1985). Moreover, this contention has been buttressed by recent research in economics on the endogenous sources of economic growth and on the macroeconomic consequences of labor organization. “New growth” theory contends that active government involvement in the economy (for example, public spending on education, physical infrastructure and research and development) may actually increase productivity and hence competitiveness by providing collective goods that are undersupplied by the market (Aschauer 1990; Barro 1989; Lucas 1988; Romer 1990).