Capital mobility, state autonomy and political legitimacy.

• Author: Pauly, Louis W.
• Position: Transcending National Boundaries

Language - not money or force - provides legitimacy. So long as military, political, religious or financial systems do not control language, the public's imagination can move about freely with its own ideas. Uncontrolled words are consistently more dangerous to established authority than armed forces.(2)

The invitation to reflect on the impact of global financial markets on the autonomy of the nation-state came while I was attending a conference entitled, "The Politics of Anti-Politics." Under this rubric, participants examined the dramatic rise in recent years of neo-populist, opposition and anti-establishment political movements in many countries around the world. It occurred to me that these issues were intrinsically connected. This essay is about that connection and the language often used to obscure it.

The "globalization of finance" is the latest jargon used to connote a number of interrelated developments in the contemporary world economy. Among the most important changes are the reduction of direct controls and taxes on capital movements, the liberalization of long-standing regulatory restrictions within national financial markets, the expansion of lightly regulated off-shore financial markets and the introduction of new technologies in the process of financial intermediation. These developments render capital more mobile, both within and across national borders.

This essay focuses on the decontrol of short-term capital flows and draws from relevant research in international economics and international political economy.(3) Much of the latter work treats capital mobility as a dependent variable, and the most persuasive arguments underline the deliberate policy choices of states under conditions of tightening economic interdependence and rapid technological change.(4) Some studies have begun to probe the internal political contest behind those choices within particular states. Still others are now reversing the causal chain altogetber and inquiring into the internal and external political implications of international capital mobility.(5) That research tends to support the view that the scale and durability of international capital flows now reflect a new regime in world politics, a normative framework increasingly evident in relations among advanced industrial countries and spreading rapidly to others.(6) That regime, this essay contends, is unstable.

The social and political implications of expanding international capital mobility are not fully understood. The associated obligations of both states and citizens have not been clearly debated and affirmation of relevant governing rules by established political authorities has been limited. In short, if a regime of international capital mobility is now commonly depicted as inevitably governing the lives of citizens in an increasingly global economy, the consent of the governed has not adequately been sought. The fact that such consent is routinely sought on analogous trade matters makes its absence in the financial field all the more glaring.

This is the source of mis-identified fears concerning nation-states' "losing their sovereignty" in the international arena. At issue is the legitimacy of an emergent regime, not the sovereignty of the states participating in it. This essay concludes that the language of international capital mobility - the truly anti-political language of global market enthusiasts - obfuscates, but cannot solve, that legitimacy problem.(7) The solution, like the problem, is intrinsically political.

GLOBAL FINANCE AND THE QUESTION OF SOVEREIGNTY

Conditions approximating what is now commonly, if hyperbolically, referred to as "global finance" existed before 1914 between the most advanced economies and their dependencies. The extremities of war and economic depression succeeded in disrupting a system of economic adjustment that had accommodated, even necessitated, international capital flows. That system, which dates back to the 1870s, rested on a rough consensus among the principal trading nations, at the center of which lay a version of the gold standard, backed by the wealth and power of Great Britain. In theory, if not always in practice, the behavioral norms embedded in that system prescribed relatively passive domestic policy responses to external economic changes.(8)

The tumultuous era that began in 1914 witnessed the rise of the modern democratic nation-state, whose citizens expected it to ensure their military security and, increasingly, their economic security. These national expectations determined the terrain upon which a new intergovernmental consensus on monetary issues was defined at Bretton Woods in 1944 and, more fundamentally, upon which the Bretton Woods consensus evolved in subsequent years.(9) The policy mix expressing that consensus privileged exchange rate stability and limited capital mobility.

The contemporary reconstruction of global capital markets, or more precisely the dramatic expansion of international capital mobility, is closely linked to the disruption of the Bretton Woods consensus in the 1970s and the dawn of the era of flexible exchange rates. The expectations of citizens concerning the responsibilities of democratic nation-states, however, have not substantively changed.(10) The resulting policy mix - international capital mobility and flexible exchange rates, together with continued national responsibility for the broadly defined security of citizens - is beginning to look historically unprecedented.

Popular economic commentators, prominent bankers and Marxists underscore the discipline on autonomous state action imposed by international capital mobility. Whether they embrace such discipline or loathe it, they envisage the consolidation of a new global order: the borderless order of advanced capitalism. Their vision draws from a materialist world-view, and the language used to invoke it is the language of inevitability. But the ultimate stakes are far from linguistic in nature. Enjoining governments to yield to signals emanating from the global market, this language implies that a profound shift in policy-making authority is taking place, a shift away from the national level towards the supranational. Its more sanguine proponents typically extol a necessary surrender of sovereignty to the rational economic logic of markets beyond national control.

If sovereignty is defined as policy autonomy, then increased international capital mobility seems necessarily to imply a loss of sovereignty. This old chestnut ignores, however, both an extensive literature on the evolution of the legal concept of sovereignty and a generation of research on the political trade-offs entailed by international economic interdependence.(11) Furthermore, it downplays the stark historical lesson of 1914: Under conditions of crisis, the locus of ultimate political authority in the modem age - the state - is laid bare. Especially through its effects on domestic politics, capital mobility constrains states, but not in an absolute sense. If a crisis increases their willingness to bear the consequences, states can still defy markets. More broadly, the abrogation of the emergent regime of international capital mobility by the collectivity of states may be unlikely and undesirable, but it is certainly not inconceivable. As long as that remains the case, states retain their sovereignty. Nevertheless, in practical terms, it is undeniable that most states today do confront heightened pressures on their economic policies as a result of more freely flowing capital. The phenomenon itself, however, is not new. What is new is the widespread perception that all states and societies are now similarly affected.

In light of the historical record, such a perception is ironic. More importantly, it blurs crucial distinctions between states, and between social groups within those states. Could it be that beneath the overt discourse on sovereignty and inexorable policy constraints lies a covert discourse on power and legitimacy? If effective governing authority has been usurped by global capital markets, or if such authority has been devolved to those markets by states themselves, surely questions should be raised about the process by which such a shift has taken place and about the obligation of citizens to comply with the consequences.(12)

INTERNATIONAL CAPITAL MOBILITY IN RETROSPECT

The increasingly widespread belief that the holders of capital, especially short-term or portfolio capital, have the right to move it freely across national borders represents a distinct change in the normative consensus originally achieved by states in the aftermath of the Second World War.(13) During the discussions leading up to the 1944 Bretton Woods Conference, one of the sticking points between the United States and Great Britain, the principal negotiators, involved the issue of official controls on short-term capital movements in a pegged exchange rate system. Although the chief British spokesman, John Maynard Keynes, had moved away from his earlier view that finance was not one of those "things which should by their nature be international," he continued to defend the right of the state to impose capital controls as and when it perceived the need to arise.(14) The U.S. position, articulated most forcefully by Harry Dexter White, approached the matter differently. Although willing to concede that disequilibrating capital flows were both conceivable and undesirable, White envisaged a monetary order that would actively discourage all types of financial restrictions that impede trade and the international flow of "productive" capital."(15) The word "productive" here was carefully chosen; it was generally understood to distinguish such flows from "speculative" flows.

The U.S. position reflected the expectation that, as the major creditor in the post-war order, the United States stood to benefit from as liberal an environment for international...