Still Afraid of Footloose Finance? Exit and Voice in Contemporary Globalization

Abstract

To what extent and in what ways does mobile capital affect the policy decisions of national governments, and under what conditions are governments willing to privilege (or to ignore) the preferences of asset holders who can credibly threaten exit? There is a long tradition of analyses based on the state’s “structural dependence” on capital (both foreign and domestic), and on the “golden straightjacket” view of government-financial market relations. I discuss how we might understand the contemporary relationship between sovereign bond investors and governments, in terms of what “market pressures” are, when such pressures operate to affect government decisions, and when governments are willing to ignore investors’ demands (assuming they exist). I suggest that “the market” may not have a unified sense of what it wants in terms of fiscal and regulatory policy; that low interest rate/high global liquidity environments offer governments greater policymaking flexibility; and that governments may use “market pressures” and “market rewards” as a veil for other drivers of policy. I also note that the investors/capital owners in question may not be foreign actors – as we often assume them to be – but rather domestic actors who, by virtue of their embeddedness in the national political system, have greater stakes regarding a given government’s policy choices.

Keywords: Financial Globalization, Capital Market Openness, Sovereign Debt, Sovereign Finance

JEL Classification: H63, F34, F65, G15