Global Capital and National Governments Layna Mosley Frontmatter More Information

Cambridge University Press 978-0-521-52162-8 - Global Capital and National Governments Layna Mosley Frontmatter More information

Global Capital and National Governments

To what extent do international financial market pressures influence or con- strain government policy choices? Global Capital and National Governments suggests that international financial integration does not mean the end of social democratic welfare policies. Capital market openness allows investors to react swiftly and severely to government policy, but in the developed world, capital market participants consider only a few government policies when making decisions. Governments that conform to capital market pressures in macroeconomic areas remain relatively unconstrained in supply-side and microeconomic policy areas. Therefore, despite financial globalization, cross-national policy di- vergence among advanced democracies remains likely. Still, in the developing world, the influence of financial markets on government policy autonomy is more pronounced. The risk of default renders market participants willing to consider a range of government policies. This conclusion, however, must be tempered with an awareness that governments retain choices. As evidence for its conclusions, Global Capital and National Governments draws on interviews with fund managers, quantitative analyses, and archival investment banking materials.

Layna Mosley is the Thomas J. and Robert T. Rolfs Assistant Professor in the Department of Political Science at the University of Notre Dame. Her research interests include the impact of global capital markets on policy choices, the governance of international financial flows, and the politics of European financial integration. Mosley received her Ph.D. in Political Science from Duke University in 1999.

Cambridge Studies in Comparative Politics

General Editor Margaret Levi University of Washington, Seattle

Assistant General Editor Stephen Hanson University of Washington, Seattle

Associate Editors Robert H. Bates Harvard University Peter Hall Harvard University Peter Lange Duke University Helen Milner Columbia University Frances Rosenbluth Yale University Susan Stokes University of Chicago Sidney Tarrow Cornell University

Other Books in the Series Stefano Bartolini, The Political Mobilization of the European Left, 1860–1980: The Class Cleavage Mark Beissinger, Nationalist Mobilization and the Collapse of the Soviet State Nancy Bermeo, ed., Unemployment in the New Europe Carles Boix, Political Parties, Growth and Equality: Conservative and Social Democratic Economic Strategies in the World Economy Catherine Boone, Merchant Capital and the Roots of State Power in Senegal, 1930–1985 Michael Bratton and Nicolas van de Walle, Democratic Experiments in Africa: Regime Transitions in Comparative Perspective Valerie Bunce, Leaving Socialism and Leaving the State: The End of Yugoslavia, the Soviet Union and Czechoslovakia Ruth Berins Collier, Paths Toward Democracy: The Working Class and Elites in Western Europe and South America Donatella della Porta, Social Movements, Political Violence, and the State Robert F. Franzese, Macroeconomic Policies of Developed Democracies Gerald Easter, Reconstructing the State: Personal Networks and Elite Identity

List continues on page following the Index.

Global Capital and National Governments

LAYNA MOSLEY University of Notre Dame

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Library of Congress Cataloguing in Publication Data

Mosley, Layna. Global capital and national governments. Layna Mosley. p. cm. – (Cambridge studies in comparative politics) Includes bibliographical references and index. isbn-13: 978-0-521-81521-5 – isbn-10: 0-521-52162-9 (pb.) 1. Capital market – Government policy. 2. Finance – Government policy. 3. International fi nance – Government policy. I. Title. II. Series. hg4523 .m67 2002 332 – dc21 2002023442

isbn 978-0-521-81521-5 Hardback isbn 978-0-521-52162-8 Paperback

Cambridge University Press has no responsibility for the persistence or accuracy of URLs for external or third-party internet websites referred to in this publication, and does not guarantee that any content on such websites is, or will remain, accurate or appropriate. Information regarding prices, travel timetables, and other factual information given in this work is correct at the time of fi rst printing but Cambridge University Press does not guarantee the accuracy of such information thereafter.

For my parents, Janie and Steve Mosley

Contents

List of Figures and Tables page xi Acknowledgments xv

1 NATIONAL GOVERNMENTS AND GLOBAL CAPITAL: A RECASTING 1 2 FINANCIAL MARKET INFLUENCE ON GOVERNMENT POLICY: THEORY AND HYPOTHESES 25 3 FINANCIAL MARKET INFLUENCE IN DEVELOPED NATIONS: AN EMPIRICAL ASSESSMENT 50 4 FINANCIAL MARKET–GOVERNMENT RELATIONS IN EMERGING MARKETS 102 5 POLITICS MEETS MARKETS: DOMESTIC RESPONSES TO FINANCIAL MARKET PRESSURES 157 6 ALTERNATIVE DOMESTIC RESPONSES: CHANGES TO FINANCIAL MARKET–GOVERNMENT RELATIONS 199 7 HISTORY REPEATING ITSELF? FINANCIAL MARKETS AND NATIONAL GOVERNMENT POLICIES BEFORE THE FIRST WORLD WAR 249 8 FINANCIAL MARKET–GOVERNMENT RELATIONS IN THE TWENTY-FIRST CENTURY 304

Contents

APPENDIX 2.1: FINANCIAL MARKET INTERVIEWS 321 APPENDIX 3.1: DATA DEFINITIONS AND SOURCES 323 APPENDIX 3.2: FULL RESULTS FOR MACROINDICATORS MODEL 326 APPENDIX 4.1: THE COMPONENTS OF THE SDDS 327 APPENDIX 4.2: RATING AGENCY METHODOLOGIES 330 APPENDIX 4.3: RATING AGENCY OUTCOMES, 1997 333 APPENDIX 6.1: NATIONS IN CAPITAL CONTROLS DATA SET 337

References 339 Index 373

Figures and Tables

Figures 1.1 A Causal Model of Financial Market–Government Relations page 15 2.1 Institutional Investors’ Assets as a Percentage of GDP 27 2.2 Institutional Investors’ Assets, by Instrument, 1998 28 3.1 Inﬂation Trends, Select OECD Nations 75 3.2 Government Budget Balance, Select OECD Nations 77 3.3 Government Partisanship, Interest Rates, and Policy Indicators, 1981–1995 81 3.4 Government Debt Levels, Select OECD Nations 88 3.5 General Government Outlays, Select OECD Nations 93 3.6 Government Tax Revenue, Select OECD Nations 93 3.7 General Government Consumption, Select OECD Nations 95 3.8 Public Health Care Expenditure, Select OECD Nations 95 4.1 Emerging Market Bond Issues 108 4.2 Secondary Market Transactions in Emerging Market Debt Instruments 109 4.3 Regional Asset Allocation, Bond Funds 118 4.4 Asset Allocation for 25 Largest Emerging Market Debt Funds, September 1999 120 4.5 Bond Fund Asset Quality, 1999 121 4.6 Geographic Allocation of Respondents’ Mutual Funds 134 4.7 Correlations between Institutional Investor and Euromoney Ratings 145 4.8 Emerging Market Bond Indexes, 1994–2001 155 5.1 Swedish Government Bond Rates, 1994–1997 181

Figures and Tables

6.1 A Causal Model of Financial Market–Government Relations 202 6.2 A Causal Model with Government Strategies 202 6.3 Budget Institutions and Fiscal Performance in Europe 211 6.4 Foreign Currency Denomination in Europe 220 6.5 Term Structure Trade-offs 233 6.6 Resident Investment in European Nations 242

Tables 2.1 Possibilities for Financial Market Influences on Government Policy 46 3.1 Indicators Employed by Financial Market Participants 56 3.2 Model Results 82 3.3 Correlations between Macro- and Microindicators 91 3.4 Estimated Effects of Microindicators 96 4.1 IFC Country Classifications 104 4.2 Distribution of Capital Flows among Developing Nations, 1997 107 4.3 Variance in Policy Outcomes, 1990–1998 121 4.4 Annual Comparisons of Economic Policy Variance 122 4.5 Fund Manager Allocation, by Asset Type 133 4.6 The Importance of Policies and Political Factors to Asset Allocation 135 4.7 Factors in Institutional Investor Country Risk Ratings 142 4.8 Standard Deviations of 1997 Ratings 144 4.9 Interest Rate Spread and Macroeconomic Indicators, All Countries 147 4.10 Macroeconomic Indicators and Country Dummy Variables 148 4.11 Global Market Environments and the Nature of Financial Market Influence 151 5.1 A Schematic of Financial Market–Government Preferences Regarding the Size of the Public Sector 161 5.2 Expectations Regarding Determinants of Government Response 174 5.3 Domestic Politics, Vulnerability, and Predicted Responses in 1994 178 6.1 Government Policies and International Financial Markets 201 6.2 Increases in Central Bank Independence, Developed Democracies 206

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Figures and Tables

6.3 Increases in Central Bank Independence, Emerging Market Economies 207 6.4 Strong Finance Ministers, Fiscal Targets, and Economic Outcomes 212 6.5 Indexation as a Dependent Variable, 1981–1996 217 6.6 Indexation and Inﬂation 218 6.7 Regression Results for Foreign Currency Denomination 222 6.8 Capital Controls and Macroeconomic Indicators in Emerging Markets 227 6.9 Capital Controls and Macroeconomic Indicators in Developed Democracies, 1981–1986 227 6.10 Regression Results for Capital Controls in Developed Democracies, 1981–1996 228 6.11 Maturity Structures and Government Debt, 1996 235 6.12 Maturity Structures and Macroeconomic Indicators in Emerging Markets 236 6.13 Maturity Structures and Macroeconomic Indicators in Developed Democracies 238 6.14 Resident Investment and Macroeconomic Indicators in Advanced Economies 243 6.15 The Inﬂuence of Resident Investment on Macroeconomic Outcomes 244 6.16 Interest Rate Volatility and Resident Investment in Advanced Economies 245 6.17 Government Policies, Bivariate Correlations 247 7.1 Trade Openness, 1890–1990 252 7.2 Extent of Capital Flows, Measured by Current Account/GDP 254 7.3 Destinations of European Foreign Investment, 1913–1914 255 7.4 The Pre–World War I and Contemporary Eras: Similarities and Differences 284 7.5 Summary Statistics, Database of Sovereign Lending Episodes 290 7.6 Argentina, Cuba, Japan, and Russia 301

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Acknowledgments

I first became interested in the interactions between the global economy and national governments while an undergraduate at Rollins College. Tom Lairson’s general enthusiasm for international relations, and his specific encouragement of my senior research project, motivated me to pursue a career in political science. At Duke University, I encountered a variety of individuals who encouraged, mentored, and challenged me. Duke was an ideal place for graduate education – a department that was in broad agree- ment about its intellectual mission, filled with collegial faculty, and always prepared to engage its students. I first tackled the question of investors’ preferences over government policies in Peter Lange and Beth Simmons’s graduate seminar on the international economy and domestic politics. Despite the many shortcomings in my initial efforts, Peter and Beth encouraged me to pursue this issue. In subsequent years, as cochairs of my dissertation committee, Robert Keohane and Peter Lange provided large doses of intellectual guidance, professional advice, and warm friendship. Peter’s enthusiasm for questions of comparative political economy sparked my interest in the subject during my first semester of graduate school. As work on my dissertation progressed, I benefited from Peter’s willingness to juggle academic and administrative burdens, as well as from his generosity with food and drink. Throughout the process, Boboffered extensive advice on research design and on the drawing of causal connections between governments and financial markets. He challenged me to consider my arguments more carefully, and my work was always better for it. Bob also joined me for runs in Berlin, Durham, South Bend, and Venice, and, when I could not be there in person, he always updated me with news of Duke’s latest men’s or women’s basketball triumph.

Acknowledgments

Many other individuals provided insight and advice at various stages of this project. As members of my dissertation committee, Joseph Grieco, Robert Keohane, Peter Lange, and Beth Simmons offered feedback throughout the dissertation process. Bob’s and Peter’s interest continued long after I completed my dissertation. John Aldrich and Lori Leachman helped me to refine this project during its early stages. Michael Munger offered guidance on time series methodology, as well as on the overall project. At Duke and beyond, Sarah Brooks offered many suggestions on the domestic politics of financial market influence in developing nations and pushed me to develop further the logic of financial market–government relations. Sarah also has been the perfect roommate at academic conferences, and I am flattered to have been repeatedly mistaken for her. While conducting the interview research for this project, I benefited from the advice and generosity of Josef Esser (who provided me with an institutional home in Frankfurt), the late Michael Hodges (who welcomed me into his research seminar at the London School of Economics), William Wallace, and Martin Wolf. I also am indebted to those institutional investors, fund managers, research directors, and credit ratings agency staff who sacrificed their time in order to advance my research agenda. Those who participated in the London and Frankfurt interview studies remain anonymous but are identified by firm in Appendix 2.1. The archival research for Chapter 7 was possible only with the assistance of archivists at the Corporation of London’s Guildhall Library, ING Baring (London), the Morgan Library (New York), and N. M. Rothschild (London). For their assistance in identifying and accessing key archival materials, I am grate- ful particularly to Melanie Aspey, Moira Lovegrove, John Orbell, and Jane Waller. William Bernhard, Geoffrey Garrett, Mark Hallerberg, Alessandro Missale, Andy Sobel, and Duane Swank kindly provided some of the data used in Chapters 3, 4, 5, and 6. A variety of others offered comments and suggestions on this project; in every case, these served to improve its quality dramatically. These include Suzanne Berger, William Bernhard, James Caporaso, Phil Cerny, Jonas Pontusson, Michael Wallerstein, the editors of International Organization, participants in the 1999 Globalization and Western Europe workshop at the Harvard Center for European Studies, participants in the UNC/NC State Historical Political Economy of Europe group, members of the “Boat Race” seminar series, and participants in the University of Chicago’s PIPES Seminar. At Notre Dame, Andrew Reynolds read large portions of the manuscript, and Saika Uno offered insightful comments on the domestic

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Acknowledgments

politics sections. The book also benefited from detailed responses and specific suggestions of two anonymous reviewers. The editorial staff at Cambridge University Press shepherded this book through the review and publication process, improving it along the way. None of these individuals, of course, bears any responsibility for the remaining shortcomings of this book. Funding for the initial research contained in this book came from the Duke University Center for International Studies, the Duke University Department of Political Science, the Duke University Sawyer Seminar on Globalization and Equity, the National Science Foundation Dissertation Improvement Program, the Social Science Research Council, and the In- stitute for the Study of World Politics. The Institute for Scholarship in the Liberal Arts, the Kellogg Institute, and the Robert T. and Thomas J. Rolfs Professorship at the University of Notre Dame supported the archival research and the surveys of mutual fund managers. Ericka Benavides, Rosanna Castiglioni, Mark Higgins, and Michelle Petersen provided research assistance. Michelle Petersen deserves special praise; she undertook a variety of duties, including compiling databases of fund managers, surveying fund managers in the United States and United Kingdom, and editing large portions of the manuscript. Each of these things she did efficiently, accurately, and with good humor. Friends, family, and colleagues provided a wealth of support while I worked on the dissertation and then on the book. At Duke, Sarah Brooks, Damon Coletta, Michael Ensley, Claire Kramer, Denali Mosley, and Lyle Scruggs offered advice, abundant camaraderie, and occasional distraction. At the University of Notre Dame, members of the Political Science De- partment and the Fellows of the Kellogg Institute facilitated the com- pletion of my research. In particular, Frances Hagopian happily served as my official mentor; no matter how busy she was with other respon- sibilities, she always found time to provide professional and intellectual advice. Christina Wolbrecht helped me to understand the workings of the university as well as the profession; her continual willingness to answer the smallest – and largest – of queries eased my transition immensely. I also owe a debt of gratitude to the former members of ABBA, whose mu- sic provided me with the motivation to keep working when I wanted to give up and go home. And, as my colleague at Notre Dame and my dear friend after, Andrew Reynolds showed me the value of a friend who not only reads your work carefully and critically, but also makes you laugh hysterically.

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Acknowledgments

Finally, the Mosley family was unwavering as a source of support. Al- though my siblings and my parents have little idea about what it is I actually do, they were steadfast in their love and encouragement. Since childhood, my parents placed a high priority on academic achievement; their enthusiasm was constant and their praise unlimited. In addition to instilling in me the value of learning, my parents taught me the value of money. And, perhaps without realizing it, they demonstrated to me the importance of politics. As a small display of my gratitude for these lessons, this book – about politics and money – is dedicated to them.

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