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.
Which risks are social and which are private? How much of their GDP do states spend on social welfare? Who exactly is entitled to which benefits? Is it still possible to finance an encompassing welfare state in times of deindustrialization, technological and demographic change, and globalization? And why do the answers to these questions differ so much across countries? These and similar questions—all central to social cohesion in capitalist democracies—ensure that the analysis of welfare politics is one of the theoretically as well as methodologically most dynamic and richest research areas within comparative political economy and political science more generally. Besides outlining the comparative development and the difficulty of measuring social policy, the focus of this contribution lies in a critical review of the most important past and current theoretical debates in the field of welfare state research, as a subfield of comparative political economy. These debates include party- and power-resource-centered approaches and their critiques, institutional explanations of welfare state retrenchment and restructuring, and the importance of multidimensional distributional effects for the analysis of social policy. The article concludes with a review of three more recent debates: the importance of public opinion and individual preferences for the development of the welfare state, the interaction of social policy and the changes of party systems, and the increasing relevance of social investment policies. The political and scientific need for innovative political science research will continue for the foreseeable future: Theory building and methodological possibilities are developing quickly, and the welfare states as research subject are constantly being challenged.
The term ownership society is commonly used to describe a suite of policies promoted during the second George W. Bush administration that sought, among other things, to increase popular ownership of housing and financial assets. The ownership society was always in large part an attempt at social engineering. That attempt rests on two premises: first, that asset ownership pushes individuals’ politics to the right; and second, that governments can engineer a more right-leaning populace by promoting asset ownership.
While the term was novel, the ideas were not. Bush’s ownership society bore more than a striking resemblance to Thatcher’s “enterprise society,” for example, and similar ideas percolated in some quarters of Latin American neoliberalism of the 1980s and 1990s. But foreign referents are in this case not necessary; the ownership society was in large part an expansion of a preexisting American tradition of promoting private ownership explicitly for its capacity to transform the owner’s politics.
Despite its consistent appeal to right-of-center governments, political science has not come to any tidy conclusions about whether the ownership society exists or, if it does exist, how it works and how it interacts with financial and housing markets. Turmoil in those markets over the past 10 years, and the accompanying political fallout, underline the need to consolidate what we know about the ownership society and to set a course for theoretical and empirical development.
Two themes in the literature are particularly noteworthy as it moves forward. First, there is a substantial contrast between “static” and “dynamic” theories of ownership society politics. Static theories argue that the fact of asset ownership per se affects the owner’s politics; dynamic theories look more toward movements in asset markets, arguing that asset ownership’s political effects vary according to the financial consequences of that ownership on the individual. While the latter appears to better fit the empirical evidence, the relevant scope conditions—when should we expect a dynamic theory to obtain, and where should we expect a static theory to obtain—remain unclear. Second, the empirical study of the ownership society is made difficult by the fact that asset ownership is virtually never randomly assigned, and the political antecedents of asset ownership are difficult to convincingly control for using observational data. In lieu of a perfect research design, better communication between observational and experimental studies can help move the literature forward.
The surge in the appointments of technocrats to the top economic portfolios of finance since the 2009 Great Recession, and even the formation of fully technocratic governments in Europe, raises questions regarding the role of technocrats and technocratic governments in economic policy in democracies. Who are the technocrats? Why are they appointed in the first place? What is their impact on economic policy, and finally what are their sources of policy influence?
Surprisingly, we know little about the role of technocrats in economic policy despite their prominent presence in Eastern Europe since the early 90s and in Latin America since the early 80s. Technocrats were behind major market-conforming reforms in Latin America with lasting economic and political effects in the region. Technocrats we also appointed in many former Eastern European countries to reform the system of production and the labor market. Yet, to this day, we have little systematic knowledge and even less cross-regional comparative work on the policy effects of technocratic appointments.
Moreover, the term “technocrat” itself does have a shared meaning and is not uniformly used by scholars across the European and American continents, further inhibiting the study of technocrat policymakers. This article seeks to advance the study of technocratic government by providing a clear definition of a technocrat and of technocracy more generally; by reviewing the extant literature on the role of technocrats in economic policy with a special focus on the sources of their policy influence and finally by proposing a theoretical framework for understanding the role of technocrats as policymakers.
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.
Christina J. Schneider
How does domestic politics affect international cooperation? Even though classic work on international relations already acknowledges the central role of domestic politics in international relations, the first generation of scholarly work on international cooperation focused almost exclusively on the international sources of cooperation. Theories that explicitly link domestic politics and international cooperation did not take a more prominent place in the scholarly work on international cooperation until the late 1980s.
Recent research analyzes how interests and institutions at the domestic level affect the cooperation of governments at the international level. The analysis is structured along a political economy model, which emphasizes the decision making calculus of office-motivated political leaders who find themselves under pressure by different societal groups interested in promoting or hindering international cooperation. These pressures are conveyed, constrained, and calibrated by domestic institutions, which provide an important context for policy making, and in particular for the choice to cooperate at the international level. This standard political economy model of domestic politics is embedded within models of international cooperation, which entail decisions by governments about (a) whether to cooperate (and to comply with international agreements), (b) how to distribute the gains and costs from cooperation, (c) and how to design cooperation as to maximize the likelihood that the public good will be provided.
Domestic politics is significant to explain all aspects of international cooperation. The likelihood that governments engage in international cooperation does not only depend on international factors, but is also and sometimes predominantly driven by the demands of societal groups and variations in institutional structures across countries. Domestic factors can explain how governments behave in distributive negotiations, whether they can achieve advantageous deals, and if negotiations succeed to produce an international collective action. They also contribute to our understanding about whether and how governments comply with international agreements, and consequently, how the design of international institutions affects government compliance. More recently, scholars have become interested in the democratic responsiveness of governments when they cooperate at the international level. Whereas research is still sparse, emerging evidence points to responsive conduct of governments particularly when international cooperation is politicized at the national level.
Naeem Inayatullah and David L. Blaney
Heterodox work in Global Political Economy (GPE) finds its motive force in challenging the ontological atomism of International Political Economy (IPE) orthodoxy. Various strains of heterodoxy that have grown out of dependency theory and World-Systems Theory (WST), for example, emphasize the social whole: Individual parts are given form and meaning within social relations of domination produced by a history of violence and colonial conquest. An atomistic approach, they stress, seems designed to ignore this history of violence and relations of domination by making bargaining among independent units the key to explaining the current state of international institutions. For IPE, it is precisely this atomistic approach, largely inspired by the ostensible success of neoclassical economics, which justifies its claims to scientific rigor. International relations can be modeled as a market-like space, in which individual actors, with given preferences and endowments, bargain over the character of international institutional arrangements. Heterodox scholars’ treatment of social processes as indivisible wholes places them beyond the pale of acceptable scientific practice. Heterodoxy appears, then, as the constitutive outside of IPE orthodoxy.
Heterodox GPE perhaps reached its zenith in the 1980s. Just as heterodox work was being cast out from the temple of International Relations (IR), heterodox scholars, building on earlier work, produced magisterial studies that continue to merit our attention. We focus on three texts: K. N. Chaudhuri’s Asia Before Europe (1990), Eric Wolf’s Europe and the People Without History (1982), and L. S. Stavrianos’s Global Rift (1981). We select these texts for their temporal and geographical sweep and their intellectual acuity. While Chaudhuri limits his scope to the Indian Ocean over a millennium, Wolf and Stavrianos attempt an anthropology and a history, respectively, of European expansion, colonialism, and the rise of capitalism in the modern era. Though the authors combine different elements of material, political, and social life, all three illustrate the power of seeing the “social process” as an “indivisible whole,” as Schumpeter discusses in the epigram below. “Economic facts,” the region, or time period they extract for detailed scrutiny are never disconnected from the “great stream” or process of social relations. More specifically, Chaudhuri’s work shows notably that we cannot take for granted the distinct units that comprise a social whole, as does the IPE orthodoxy. Rather, such units must be carefully assembled by the scholar from historical evidence, just as the institutions, practices, and material infrastructure that comprise the unit were and are constructed by people over the longue durée. Wolf starts with a world of interaction, but shows that European expansion and the rise and spread of capitalism intensified cultural encounters, encompassing them all within a global division of labor that conditioned the developmental prospects of each in relation to the others. Stavrianos carries out a systematic and relational history of the First and Third Worlds, in which both appear as structural positions conditioned by a capitalist political economy. By way of conclusion, we suggest that these three works collectively inspire an effort to overcome the reification and dualism of agents and structures that inform IR theory and arrive instead at “flow.”
Regional integration theory seeks to explain the establishment and development of regional international organizations. Key questions are why and under which conditions states decide to transfer political authority to regional organizations; how regional organizations expand their tasks, competencies, and members; and what impact they have on states and societies in their regions. Whereas regional integration theory started with a broad comparative regional and organizational scope in the 1950s and 1960s, it has since focused on European integration and the European Union.
The main (families of) theories explaining the development of European integration—rather than decision making and policy making in the EU—are intergovernmentalism, neofunctionalism, and postfunctionalism. The key debates in regional integration theory have taken place between variants of intergovernmentalist and neofunctionalist integration theory. Intergovernmentalism assumes national governments to be the key actors in regional integration. Governments use regional integration to maximize their national security and economic interests in the context of regional interdependence. Integration outcomes result from intergovernmental bargaining and reflect the regional preference and power constellations. Governments delegate authority to regional organizations to secure their bargaining outcomes but remain in control of regional organizations and the integration process. By contrast, neofunctionalism disputes that governments are able to control the integration process. Transnational corporations and interest groups as well as supranational actors are empowered by the integration process and shape it in their own interest. In addition, integration creates a variety of “spillovers” and path-dependencies that push integration beyond the intergovernmental bargain. More recently, postfunctionalism has enriched and challenged the theoretical debate on regional integration. In contrast to neofunctionalism, postfunctionalism assumes a backlash mechanism of integration. As regional integration progresses and undermines national sovereignty and community, it creates economic and cultural losers who are mobilized by integration-skeptic parties. Identity-based and populist mass politicization constrains regional integration and may even cause disintegration.
Regional integration theories have closely followed and adapted themselves to the development of European integration. They cover the establishment and progress of supranational policies and institutions but also the recent crisis of the EU. An exemplary review of their explanations of major development in European integration shows that they are more complementary than competing.
Mary Anne Madeira
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.
Studies of Western development assistance conclude that aid is effective only when recipients have good governance, measured as pro-investment policies, democratic institutions, and political stability, or when recipients lack strategic importance to donors. Underlying the theoretical frameworks in these studies is a common mechanism: compliance with conditions on aid agreements, which, in turn, depends on recipient incentives to comply. With the exception of donors’ emphasis on the quality of governance in the early 2000s, donors generally overlook recipient incentives to comply with aid agreements and thus fail to capitalize on opportunities for aid effectiveness suggested by the academic studies. A paucity of data has limited direct analysis of compliance with conditions, but studies have relied on their own data collection or have leveraged data from the World Bank to assess determinants of compliance with conditions. Importantly, these studies of compliance support the findings from the aid-effectiveness literature, indicating that the initial incentives to comply with aid agreements are the driving force in agreement compliance and therefore aid effectiveness.
Based on these findings, future research on compliance with conditions on aid is encouraged, beginning with study of the direct influence of compliance on economic development. In addition, future research should analyze whether certain types of aid influence compliance with Western aid agreements, including tied aid and aid from non-Western donors. The implication for policy is that donors should enthusiastically support recipients who face incentives to comply because compliance drives aid effectiveness. When recipients lack such incentives, donors should try to change the underlying incentive structure of recipients rather than adding conditions on aid.