Globalization of Capital and National Policymaking

Abstract

Through a combination of economic, political, and technological changes, capital has become increasingly mobile across borders. This globalization of capital markets has created constraints on national policymaking. Fearing the loss capital inflows and the destabilizing effects of capital outflows, governments have incentives to avoid enacting policies that investors dislike. Applied across countries, this creates pressure for governments to compete for capital inflows by progressively reducing regulatory and tax burdens. Ultimately, this could lead to a race to the bottom that ends in complete deregulation. Yet, scholarship shows that while this pressure on governments exists, there has not been complete convergence of policy across countries. Instead, there remains persistent divergence as states do maintain some autonomy across a number of policy choices. This essay explores how recent research explains this interaction between the globalization of capital and national policymaking autonomies. Financial crises in the United States and Europe have challenged our understanding of how systemic risk can and should be managed in a world of mobile capital. Moving forward, scholars must build on the lessons from these crises.