Global Markets and National Politics: Collision Course or Virtuous Circle?

TLDR

In OECD countries, rising trade, FDI, and capital mobility have not triggered a universal shift toward neoliberalism because governments use political incentives to mitigate the risks of openness and the welfare state supplies essential collective goods that markets underprovide. Countries with sizable, revenue‑balanced public economies have avoided capital flight and higher interest rates, showing that fears of lost national autonomy in the global economy are overstated.

Abstract

Increasing exposure to trade, foreign direct investment, and liquid capital mobility have not prompted a pervasive policy race to the neoliberal bottom among the OECD countries. One reason is that there are strong political incentives for governments to cushion the dislocations and risk generated by openness. Moreover, countries with large and expanding public economies (when balanced with increased revenues, even from capital taxes) have not suffered from capital flight or higher interest rates. This is because the modern welfare state, comprising income transfer programs and publicly provided social services, generates economically important collective goods that are undersupplied by markets and that actors are interested in productivity value. These range from the accumulation of human and physical capital to social stability under conditions of high market uncertainty to popular support for the market economy itself. As a result, arguments about the demise of national autonomy in the global economy are considerably overdrawn.