Capitalism, Not Globalism: Capital Mobility, Central Bank Independence, and the Political Control of the Economy.

By William Roberts Clark. Ann Arbor: University of Michigan Press, 2003. 192p. $60.00.

This is an important book that should enjoy a wide readership. It also has a catchy title. However, I did not figure out what “capitalism, not globalism” means, and since I have not yet seen it on bumper stickers or protestors' signs, I gave up the effort. This is a serious scholarly work, not a pop discussion of capitalism and globalization. The subtitle gives an accurate description. The book deals with major issues, such as the influence of globalization on domestic macroeconomic policymaking, and shows convincingly that we need to be wary of broad generalization about the effects of international capital mobility and central bank independence on domestic policymaking. In place of grand and typically false generalizations, we need to focus on more nuanced contingent hypotheses.

Standard open-economy macroeconomics shows that increasing capital mobility will have differential effects on the strengths of domestic monetary and fiscal policy, and that even the signs of these effects depend on whether fixed or flexible exchange rates are in place. Thus, contrary to the typical broad generalization that globalization undercuts the effects of domestic economic policies (and in the extreme will lead to a withering away of the state), increasing capital mobility will make national fiscal policy stronger under fixed exchange rates and monetary policy stronger under flexible exchange rates. Likewise, contrary to the frequently expressed belief that high capital mobility and pegged exchange rates will lead to greater discipline over domestic macroeconomic policies, by making it easier to finance deficits in the short run, this combination can actually reduce discipline over fiscal policy. Italy in the 1980s and Argentina in the 1990s provide powerful examples of this possibility.

A major strength of William Roberts Clark's analysis is that he brings to bear these more nuanced conclusions of modern open-economy macroeconomic analysis to the treatment of the politics of macroeconomic policies. In doing so, he contributes importantly to the growing integration of the fields of comparative and international political economy. Once we recognize the importance of international developments on domestic politics and economics and the impact of domestic politics and economics on international policies, the rationales for the traditional separation of these two fields disappear.

Clark's contributions go well beyond providing state-of-the-art applications of open-economy economics for political scientists. The author also makes major contributions to the ongoing debate over partisan versus political business-cycle approaches to the politics of macroeconomic policies. He cogently emphasizes that we need to analyze not only the political incentives to manipulate macroeconomic policies, but also the physical and institutional limitations on policies and their effects imposed by such factors as the degree of capital mobility and central bank independence and the nature of the exchange rate regimes in place. Again, we also need to differentiate between effects on monetary and fiscal policy and in some cases their interaction. Thus, for example, contrary to the conventional wisdom that fixed exchange rates, central bank independence, and high capital mobility discipline domestic macroeconomic policy, the presence of the first and third factors can undercut the ability of an independent central bank to offset a fiscally induced political business cycle. (The key here is that the fiscal expansion induces capital inflows that are too powerful to be offset by the central bank and, hence, force domestic monetary expansion to complement the fiscal expansion.)

Another important contribution of Clark's book is that he offers not just theory but empirical support for such explanation. His formal modeling and econometrics can make the full book heavy going for political scientists who do not already have a good deal of economics. Fortunately, however, Clark is a clear writer and presents extensive introductions and conclusions to each chapter, as well as nontechnical introductory and concluding chapters. Therefore, a good appreciation of the arguments should be accessible to any political scientists interested in comparative or international political economy. The sophistication and insights of the analysis will make it important reading for many economists as well.

Clark rightly argues that we cannot usefully analyze the effects of economic developments and constraints on policy in the absence of specific models of political economy. Here, however, we are somewhat at sea. The battle continues to rage not only between advocates of partisan versus political business cycle (PBC) approaches but also among adherents of different versions of PBC theory. Given the different spins by warring scholars, it is hard for the nonspecialist to gain a perspective on the current state of this literature. Clark's chapter gives the best midlength perspective currently available. He comes out squarely on the PBC side. He provocatively argues in the introduction: “Recent empirical studies have produced confusing results because they were looking for the effects of capital mobility on a phenomenon that does not exist—namely, partisan differences in policies and outcomes” (p. 2). I am much more comfortable with his later summary of the partisan literature: “A review of this literature reveals many contradictory findings and few authoritative empirical tests” (p. 81). Reading the evidence in Capitalism, Not Globalism has shifted down my priors of the empirical usefulness of partisan explanations of macroeconomics policies, but not all the way to zero.

Another important qualification of Clark's analysis is that, like much of the other recent literature, he does not distinguish between fixed and adjustably pegged exchange rates. For many purposes, however, such as evaluating effects on discipline or the likelihood of currency crises, this distinction can be crucial. In his specific application, this destination may well have not made a great deal of difference, but there is clearly fruitful work to be done extending Clark's theoretical and empirical analysis to a wider range of exchange rate regimes.