Capital mobility, trade, and the domestic politics of economic policy

Abstract

The conventional wisdom about the domestic political effects of economic internationalization in recent decades is overdrawn and too simple. Increasing exposure to trade and capital mobility has not led all countries to pursue the same types of economic policies. The political power of the left and the strength of organized labor still have a marked bearing on macroeconomic policy. Rather than being constrained by internationalization, the relationship between left-labor power and fiscal expansions has increased with greater trade and capital mobility. However, the political left and organized labor have had to pay a price for these expansions. With greater exposure to world market forces, left-labor power has been increasingly associated with lower levels of corporate taxation and with higher interest rates. Nonetheless, common assertions about the demise of partisan politics must be reconsidered.