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The first of three chapters on the implications of electoral politics and the design of political institutions for welfare state adjustment. Swank first provides an overview of two key domestic and international pressures on developed welfare states: domestic fiscal stress and international capital mobility. He then outlines the theoretical argument that democratic institutions fundamentally determine government responses to domestic and international structural change, focusing on formal and informal institutions and drawing on and fusing insights from ‘power resources’ theory, the new institutionalism, and new cultural arguments about the determinants of social policy in advanced capitalist democracies. The next two sections utilize new data on social welfare effort, national political institutions, and internationalization to provide an econometric assessment of the social policy impacts of domestic fiscal stress and capital mobility during the period 1965 to 1995, looking first at the direct impacts of rises in public sector debt and in international capital mobility on social welfare provision, and second at the welfare state effects of fiscal stress and global capital flows across nationally and temporally divergent democratic institutional contexts; the initial focus is on total social welfare effort and then the analysis is shifted to changes in cash income maintenance and social services. The conclusion assesses the implications of the arguments and findings for the future course of social policy in developed democracies, and potentially bolsters the evidence for the central assertion that domestic institutions systematically determine the direction of welfare state restructuring.

This chapter notes the special role of financial services in an economy and distinguishes policy reform from domestic deregulation and capital account deregulation. The impacts of policy reform and the benefits and risks of broader financial sector development, growth, income distribution, and poverty are discussed. The impacts of reform include: increased domestic competition; causing further reform and greater regulatory transparency; increased resiliency of the domestic financial system to shocks; encouragement of the diffusion of new skills, products and technologies; and facilitation of access to international capital. The elements of successful trade-policy reform are noted, based on the experiences of China, Thailand, and Latin America. Issues in need of additional research are identified, including the impact on domestic financial performance of foreign equity participation, improvement of available data on and transparency of barriers to cross-border transactions and foreign entry, measures used to moderate unanticipated impacts of liberalization, and further elucidation of the rationales for the WTO Financial Services Agreement (FSA) commitments. The role of international negotiations is addressed in terms of how they can help individual countries, what can be learned from international rules and commitments undertaken, whether there is scope for improvement, whether existing commitments promote desirable policies, possible reasons for refraining from commitments, and issues in need of further research. An addendum reviews the liberalization of financial services in the Western Hemisphere and in China.

This chapter discusses the general principles of direct taxation when the economy is open to capital flows. Two basic principles of direct taxation are the residence principle and the source principle. The resident principle states that the government taxes the income of its residents regardless of source. The source principle tells that the government taxes income generated within the country. Also, this chapter studies the effects of opening up the economy to international capital flows. Opening up the economy allows capital to be mobile but it does not necessarily mean consumption tax is preferred to income tax. Governments will most likely find it optimal to tax capital, to impose a tax on it, or to sign tax treaties enabling them to impose a tax on it.

This chapter surveys international capital movements in the 1920s. It investigates the initial role of these capital flows in helping to promote the measure of stability achieved in the mid-1920s, and then their contribution to the detrimental developments which culminated in the crisis of 1931. Starting with an overview of the scale, origins, and destination of foreign lending during this decade based on recently compiled-estimates, the chapter provides a more comprehensive picture than hitherto available. It then considers in more detail the special relevance of the inflow and withdrawal of these external funds to the position of Germany, including their relationship to reparations, and to the producers of food and other primary products in central and eastern Europe and the Americas.

This introductory chapter argues that the story of the Russian investment boom and bust of the late nineteenth and early twentieth centuries is based on, among other things, financial and economic data, as well as the correspondence, reports, and other documents in government and private banking archives in Moscow, Saint Petersburg, Paris, London, and New York. The 1918 Bolshevik repudiation of debts contracted by the Tsarist and Provisional governments—the largest default in history—punctuated the end of an era during which Russia had become the leading net international debtor in the world. It is relevant to an extensive academic literature that stretches across the disciplines of history, economics, and political science. The secondary literature cited in these sources relates to the Russian Revolution, banking and business history, the historical sociology of revolutions, and international capital flows. Given the crucial importance of the last of these, the story is international, touching on aspects of the histories of nations such as Russia, France, Germany, Britain, the United States, China, and Japan.

In the advent of various developments in international financial markets, foreign portfolio investments have assumed an emerging role as a channel for international capital flows to a number of developing countries. While these countries experienced several challenges between 1979 to 1982 because of the recession, oil price increase, and the shift in US macroeconomic policy, the period between 1983 and 1989 entailed a decline in the net international capital flows received by developing countries because of the high levels of negative net transfers of resources from various countries in Latin America to banks. Since foreign direct investments were the only option of channeling in net capital flows for countries in the Western Hemisphere, such also became the case for developing countries in Asia. This chapter examines the implications of utilizing foreign portfolio investments in facilitating international capital flows specifically to developing countries.

Financial theory predicts that multinational corporations (MNCs) should have a lower cost of capital and a higher leverage level compared to domestic corporations (DCs) because of their enhanced access to global capital markets and risk diversification across countries. Empirical evidence, however, shows that the answer depends on the MNCs' home and host country factors, such as capital market development, institutional environment, and political stability. While the prediction holds for MNCs based in emerging markets, the opposite is observed for U.S. MNCs that expand into less stable economies. The increased globalization of the product and capital markets in the 1990s has also narrowed the gap in cost of capital between MNCs and DCs and this trend is likely to continue in the future.

From the end of the war until the beginning of the 1970s, Western Europe had not itself met all its own requirement for private capital. European concerns had been borrowing relatively heavily in New York because of the plentiful supply of funds and lower interest rates, and because of lower issuing costs relative to European markets which were narrow and strictly controlled. However, since the end of 1958, when the principal European currencies reverted to external convertibility on current account, a number of steps had been taken both in the United Kingdom and on the continent to remove restrictions on international capital movement and to restore a truly international security market. Indeed, the Eurodollar market eased the linkages between different European money markets, and contributed to a reduction of the spreads between short-term interest rates. The Eurobond market furthermore permitted some progress in the mobility of long-term capital within Europe, but in the early 1960s it remained rather small. Despite the progress made in the integration of economies and trade, Western Europe, lacking a common currency and with inadequate political will to integrate tax policy, budgets and regulatory frameworks was prevented from meeting the expectations that had been formed for a large integrated financial market.

Paris, considered until 1914 as the second international financial centre after London, declined more than the other ones after WW1. This study revaluates the different factors which could have led to the dramatic situation of the Paris Bourse after its past heyday. Beyond the macro economic effects due to the War, it gives prior to the role of the market organisation, without neglecting the weight of regulation. After the World War I which first created serious financial and monetary issues, Paris underwent three periods: during the 1918–1926 decade, the erratic exchange rate of the currency led to an important capital evasion; then the bright period of 1926–1931 made Paris dreaming of a return to the “good all days”; but the entrance in the Great Depression in 1931, followed by an erratic monetary and financial policy increased the Paris Bourse fall down, until the Second World War.

This chapter surveys the development of international capital mobility since the mid-nineteenth century. It documents the long U traced out by the creation of a well-integrated global capital market by 1914, its collapse during the interwar years, and its resurrection since 1970. This description is enhanced by reference to the open-economy “trilemma” faced by policymakers when choosing between capital markets, domestic monetary targets, and exchange rate regimes. The chapter examines a wide array of new evidence, including data on gross asset stocks, interest rate arbitrage, real interest differentials, and equity-return differentials. On all measures examined, the degree of international capital mobility appears to follow this U pattern, being high before World War I, low in the Great Depression, and high today. A commentary is also included at the end of the chapter.

This chapter investigates the patterns of international capital flows using data for 1970–2000. The data reveals that the quality of institutions plays an important role in explaining the direction and magnitude of capital flows in the 1970–2000 period. It also indicates that the quality of institutions and economic policy have contributed in the determination of the (relatively) high degree of capital flow volatility to the emerging markets in the 1970–2000 period. In addition, it shows that, despite the dramatic increase in capital flows, most capital flows to rich countries. A country that enhances institutions, decreases capital controls, and increases its growth is going to receive more capital inflows. Historical legal origins have a direct effect on capital inflows during the period 1970–2000.

This chapter describes the way in which South Korea has managed the capital account during the last twenty years. South Korean reluctance to deregulate reflected a mixture of motivations. South Korean authorities appeared to be proceeding more rapidly with liberalization on outbound flows than on inbound flows, and the country experienced an investment boom between 1994 and 1996 that was increasingly financed by mismatched foreign borrowing. On the whole, South Korean corporations have decreased their leverage, and access to capital is increasingly a function of profitability. Given the specifics of the South Korean situation, freer international capital flows, a less regulated domestic financial system, and an increased role for foreign financial service providers were probably not greatly separable components of financial-sector reform.

This chapter considers capital flows and a growing controversy among economists. In the past, the author was a strong proponent of international capital mobility—the free flow of investment financing from one country to another. He and others like him believed in freeing up capital flows to encourage large-scale lending from the world's rich countries to the world's poor countries. Such lending, they hoped, might cut a generation off the time it otherwise would have taken developing countries' economies to catch up to the industrial structures and living standards of wealthier nations. Today, however, it is much harder for him to support untrammeled international capital mobility. He is no longer as sure that capital flows are efficient. Worse yet, even if capital flows are efficient, it seems increasingly likely that these flows could benefit rich people from poor countries at the expense of the countries themselves—including their poor.

This chapter explains the impact of international capital liberalization that is consistent with the deterioration of economic performance in the post-Bretton Woods era. It comprises of hypotheses on the operation and interaction between financial markets and the real economy, which implies that liberal financial markets with a very high turnover would impose deflationary pressures on the economy. The chapter concludes with a discussion of the growth in international capital flows, as the product of the systemic transformation of the world economy since the end of World War II.

This introductory chapter discusses the contents of this volume which is about the impact of globalization on the international capital markets. The papers in this volume were presented at the Third Conference on Public Policy. The topics covered include the impact of globalization on financial markets, capital flows, dollarization debate in Argentina and Latin America and experiences with a floating exchange rate regime. This volume also features a roundtable discussion of the report of the International Financial Institutions Advisory Commission.