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Invesled Inlevesls TIe FoIilics oJ NalionaI Econonic FoIicies in a WovId oJ OIoIaI Finance
AulIov|s) JeJJv A. Fvieden

Souvce InlevnalionaI Ovganizalion, VoI. 45, No. 4 |Aulunn, 1991), pp. 425-451
FuIIisIed I The MIT Press
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Invesled inlevesls lIe poIilics oJ
nalionaI econonic poIicies in a vovId
oJ gIoIaI Jinance JeJJv A. Fvieden
A slviIing cIavaclevislic oJ lIe conlenpovav inlevnalionaI econon is lIe
gveal noIiIil oJ capilaI acvoss nalionaI Iovdevs. TecInoIogicaI innovalions,
econonic lvends, and govevnnenl poIicies Iave IvougIl inlevnalionaI invesl-
nenl lo exlveneI IigI IeveIs. Man Iusiness execulives, poIilicians, and
oIsevvevs IeIieve lIal capilaI nov noves so JveeI lIal lIe JinanciaI navIels oJ
induslviaIized counlvies ave essenliaII suIsels oJ one gIoIaI navIel. TIis is
videI vegavded as a JundanenlaI cIange in lIe inlevnalionaI econon-
sonelIing nev ov al Ieasl nol seen since lIe cIassic goId slandavd. Il is aIso
videI IeIieved lo Iave genevaled sucI pvoninenl deveIopnenls as Euvopean
Connunil |EC) novenenl lovavd a singIe cuvvenc, Iavnonizalion oJ laxes
acvoss nalionaI Iovdevs, and inlevnalionaI convevgence oJ nacvoecononic
poIicies.
Econonisls Iave devoled a gveal deaI oJ line and enevg lo anaIzing lIe
econonic inpIicalions oJ lIe novenenl oJ capilaI acvoss nalionaI Iovdevs.
OlIev sociaI scienlisls Iave aIso anaIzed lIe poIilicaI inpIicalions oJ inlevna-
lionaI inveslnenl. TIe sludies oJ lIis Iallev gvoup Iave lended lo Jocus on one
ov anolIev suIsel oJ lIe issue, sucI as nuIlinalionaI covpovalions in deveIoped
and deveIoping counlvies, Joveign Iovvoving I deveIoping nalions, and lIe
poIilics oJ inlevnalionaI IanIing.1 Bespile lIe quanlil and quaIil oJ vovI on
I an gvaleJuI lo lIe SociaI Science BeseavcI CounciI, lIe Oevnan MavsIaII Fund, lIe UCLA
Acadenic Senale Connillee on BeseavcI, and lIe UCLA InlevnalionaI Sludies and Ovevseas
Fvogvans Jov lIeiv JinanciaI suppovl. I aIso lIanI Benjanin J. CoIen, Bavv EicIengveen, JudilI
OoIdslein, Joanne Oova, BoIevl KeoIane, SlepIen Kvasnev, Bavid LaIe, Edvavd Leanev,
TinolI McKeovn, Louis FauI, Fvances BosenIIulI, JoIn Buggie, and MicIaeI WaIIevslein Jov
lIeiv IeIpJuI connenls and suggeslions.
1. Fov pvoninenl exanpIes Jvon eacI oJ lIese issue-aveas, see HeIen V. MiInev, Besisling
Fvoleclionisn OIoIaI Induslvies and lIe FoIilics oJ InlenalionaI Tvade |Fvincelon, N.J. Fvincelon
Univevsil Fvess, 1988): Felev Evans, Bependenl BeveIopnenl TIe AIIiance oJ MuIlinalionaI, Slale,
and LocaI CapilaI in BvaziI |Fvincelon, N.J. Fvincelon Univevsil Fvess, 1979): Bavid O. BecIev el
aI., FoslinpeviaIisn InlenalionaI CapilaIisn and BeveIopnenl in lIe Lale TvenlielI Cenluv
|BouIdev, CoIo. Lnne Biennev, 1987): BoIevl KauJnan and BavIava SlaIIings, eds., BeIl and
InlenalionaI Ovganizalion 45, 4, Aulunn 1991
? 1991 I lIe WovId Feace Foundalion and lIe MassacIusells Inslilule oJ TecInoIog
426 InlevnalionaI Ovganizalion
speciJic aspecls oJ lIe poIilics oJ cvoss-Iovdev inveslnenl, lIis Iilevaluve
venains disjoinled and sIovl on genevaI anaIlic pvincipIes.
TIis avlicIe pvoposes a JvanevovI Jov anaIzing lIe poIilics oJ inlevnalionaI
capilaI noIiIil. Il Jocuses on lIe dislviIulionaI inpIicalions oJ cvoss-Iovdev
capilaI novenenls and on lIe dislviIulionaI inpIicalions oJ vavious econonic
poIicies in IigIl oJ lIe IigI degvee oJ inlevnalionaI capilaI noIiIil.
TIe Jivsl seclion descviIes jusl Iov noIiIe capilaI is loda and discusses lIe
inpIicalions oJ exisling IeveIs oJ JinanciaI inlegvalion Jov nalionaI econonic
poIic aulonon. Il avgues lIal vIiIe JinanciaI capilaI is exlveneI noIiIe
acvoss Iovdevs, olIev lpes oJ inveslnenl |especiaII in equilies and seclov-
speciJic capilaI) ave Jav Iess noIiIe. In lIis conlexl, JoveseeaIIe IeveIs oJ
inlevnalionaI capilaI noIiIil veslvicl Iul do nol eIininale lIe possiIiIil Jov
nalionaI econonic poIicies. SeclovaI poIicies venain JeasiIIe, as do poIicies
vIose goaIs diveclI ov indiveclI invoIve lIe excIange vale.
TIe second seclion oJ lIe avlicIe exanines lIe poIic pveJevences oJ vavious
socioecononic gvoups lovavd JinanciaI inlegvalion. Il enpIasizes lIe diJJeven-
liaI eJJecls oJ lIe incvease in capilaI noIiIil and Jocuses on queslions
concevning vIicI aclovs ave Iellev |ov vovse) oJJ aJlev JinanciaI inlegvalion
lIan IeJove and Iov lIe vavious aclovs can Ie expecled lo vespond poIilicaII lo
lIis cIange in lIe econonic envivonnenl. TIe concIusion Ieve is lvoJoId. Ovev
lIe Iong vun, inlevnalionaI JinanciaI inlegvalion lends lo Javov capilaI ovev
IaIov, especiaII in deveIoped counlvies. Bul in lIe sIovlev vun, vIicI is nove
veIevanl lo poIilics and poIicies, lIe issue is nove conpIex in lIe deveIoped
vovId, JinanciaI inlegvalion Javovs capilaIisls vilI noIiIe ov divevsiJied assels
and disJavovs lIose vilI assels lied lo speciJic Iocalions and aclivilies sucI as
nanuJacluving ov Javning.
TIe lIivd seclion oJ lIe avlicIe expIoves vIal IigI IeveIs oJ JinanciaI
inlegvalion inpI Jov lIe poIic pveJevences oJ econonic inlevesl gvoups in
vegavd lo sucI olIev issues as nacvoecononic poIic and lIe excIange vale.
TIe seclion laIes a IigI IeveI oJ capilaI noIiIil as given, lo see Iov vavious
inlevesl gvoups ave expecled lo IeIave in lIis envivonnenl. Il avgues lIal
inlevnalionaI capilaI noIiIil lends lo venaIe poIilicaI coaIilions I va oJ ils
inpacl on lIe eJJecls oJ nalionaI poIicies. TIe poIilicaI division Ielveen
pvoducevs oJ lvadaIIe goods and pvoducevs oJ nonlvadaIIe goods and sevvices
is IiIeI lo Iecone nove inpovlanl, as ave dislinclions Ielveen inlevnalionaII
divevsiJied and undivevsiJied inveslovs. AII oJ lIese Jaclovs Iave signiJicanl
inpIicalions Jov lIe anaIsis oJ poIilics and econonic poIic in lIe advanced
induslviaIized nalions.
BeveIopnenl in Lalin Anevica |BouIdev, CoIo. Weslviev Fvess, 1989): Benjanin J. CoIen, In
WIose Inlevesl? InlenalionaI BanIing and Anevican Foveign FoIic |Nev Haven, Conn. YaIe
Univevsil Fvess, 1987): and CIavIes Lipson, Slanding Ouavd Fvolecling Foveign CapilaI in lIe
NineleenlI and TvenlielI Cenluvies |BevIeIe Univevsil oJ CaIiJovnia Fvess, 1985). TIe Iodies oJ
Iilevaluve, oJ couvse, ave Jav loo Iavge lo cile ov discuss Ieve.
OIoIaI Jinance 427
TIe veIalionsIip Ielveen inlevnalionaI capilaI noIiIil and nalionaI poIicies
is a pvoninenl exanpIe oJ lIe nucI-discussed inpacl oJ exlevnaI condilions on
doneslic poIilics.2 EIucidaling lIis speciJic veIalionsIip lIus aIso sevves lIe
Ivoadev puvpose oJ cIaviJing lIe doneslic eJJecls oJ inlevnalionaI lvends. TIe
avlicIe, lIen, IolI deveIops an inlegvaled appvoacI lo lIe poIilics oJ inlevna-
lionaI capilaI novenenls and addvesses nove genevaI concepluaI issues aIoul
lIe inlevaclion oJ lIe doneslic and inlevnalionaI poIilicaI econonies. In so
doing, il pvesenls a sunnav and enpivicaI iIIuslvalions nol onI oJ lIe divecl
inpacl oJ inlevnalionaI capilaI noIiIil on lIe eJJecliveness oJ nalionaI
econonic poIic Iul aIso oJ lIe dislviIulionaI eJJecls oJ capilaI noIiIil on lIe
sociaI gvoups vIose denands lIenseIves aJJecl nalionaI econonic poIic.
CapilaI noIiIil and nalionaI econonic poIicies
Il vouId Ie JooIisI lo inquive aIoul lIe eJJecls oJ inlegvaled inlevnalionaI
capilaI navIels on inlevesl gvoup conpelilion ovev nalionaI econonic poIic iJ
sucI poIic couId nol Ie inpIenenled in a JinanciaII inlegvaled vovId ov iJ
conlenpovav inlevnalionaI capilaI navIels veve nol in Jacl IigII inlegvaled.
TIe iniliaI queslion lIeveJove concevns lIe degvee lo vIicI nalionaI econonic
poIic aulonon is conpvonised I exisling IeveIs oJ inlevnalionaI capilaI
noIiIil.
TIe evenls oJ lIe 1970s and lIe 1980s Iave Ied nan lo concIude lIal capilaI
noIiIil seveveI Iinils ov conlvavenes nalionaI poIic. Belveen 1978 and 1982,
Jov exanpIe, pvivale JinanciaI inJIovs svanped CIiIe's consevvalive poIicies
even as pvivale JinanciaI oulJIovs lIvavled Mexico's Jvee-spending poIicies. In
nid-1981, lIe econonic expansion allenpled I lIe nev FvencI SociaIisl
govevnnenl vapidI conJvonled a Iavge capilaI oulJIov and a vun on lIe Jvanc,
Ieading lo a vevevsaI oJ lIe poIicies soon aJlev lIeiv adoplion.3 FavaIIeI slovies
aIoul govevnnenl eJJovls Ianpeved I capilaI and cuvvenc novenenls couId
Ie loId aIoul nan olIev deveIoping and deveIoped counlvies in lIe pasl lvo
decades. Sone oIsevvevs Iave dvavn dive concIusions, sucI as lIal oJ JoIn
Fveenan, vIo oIsevved lIal in lIe conlexl oJ lIe gIoIaIizalion oJ Jinance lIe
nalion slale Ias Iecone al Iesl innoIiIized and al vovsl oIsoIele.4
2. TIe lvo quinlessenliaI vovIs on lIis suIjecl ave Felev OouvevilcI's FoIilics in Havd Tines
Conpavalive Besponses lo InlenalionaI Econonic Cvises |IlIaca, N.Y. CovneII Univevsil Fvess,
1986) and BonaId BogovsIi's Connevce and CoaIilions Hov Tvade AJJecls Boneslic FoIilicaI
AIignnenls |Fvincelon, N.J. Fvincelon Univevsil Fvess, 1989).
3. JeJJve SacIs and CIavIes WpIosz, TIe Econonic Consequences oJ Fvesidenl Millevand,
Econonic FoIic 2 |ApviI 1986), pp. 262-322.
4. See JoIn Fveenan, BanIing on Benocvac? InlevnalionaI Finance and lIe FossiIiIilies Jov
FopuIav Soveveignl, nineogvapI, Univevsil oJ Minnesola, 1990. Fvon a poIilicaII diJJevenl
quavlev, Jovnev CiliIanI cIieJ execulive oJJicev WaIlev Wvislon Ias said siniIav lIings aIoul lIe
inpacl oJ JinanciaI inlevnalionaIizalion-Iul appvovingI Il's a nev vovId and lIe concepl oJ
soveveignl is going lo cIange.... TIe idea oJ JiJleenlI-cenluv inlevnalionaI Iav is gone. Il Iasn'l
Iaid dovn el, Iul il's dead. Il's IiIe lIe lIvee-niIe Iinil in a vovId oJ Inlev-ConlinenlaI BaIIislic
TIe Jivsl slep in evaIualing lIe eJJecls oJ conlenpovav IeveIs oJ inlevnalionaI
capilaI noIiIil is lo gel a cIeav picluve oJ vIeve lIe IeveIs sland in veIalion lo
lIe pasl. Long-levn capilaI novenenls acvoss Iovdevs veve veIaliveI Iiniled
Jov lIe Jivsl lvenl-Jive eavs aJlev WovId Wav II and looI pIace pvinaviI in lIe
Jovn oJ divecl inveslnenl. Toda, Iong-levn inlevnalionaI inveslnenl JIovs ave
exlvaovdinaviI Iavge, and divecl inveslnenl Ias Ieen dvavJed I olIev, nove
avns-IenglI, Jovns oJ cvoss-Iovdev capilaI novenenls.
Accovding lo one souvce, nel inlevnalionaI Iond and IanI Iending vas $440
IiIIion in 1989, up Jvon $180 IiIIion jusl Jive eavs eavIiev. CapilaI oulJIovs Jvon
lIe lIivleen Ieading induslviaIized counlvies avevaged $444 IiIIion in 1989, vilI
aInosl lvo-lIivds oJ lIe anounl consisling oJ povlJoIio inveslnenl, in conlvasl
lo $52 IiIIion in lIe Iale 1970s, vilI lvo-lIivds consisling oJ Joveign divecl
inveslnenl. CapilaI oulJIovs veve equivaIenl lo 15 pevcenl oJ vovId nevcIan-
dise lvade in 1989, in conlvasl lo 7 pevcenl in lIe Iale 1970s.5 Accovding lo
anolIev souvce, lIe oulslanding slocI oJ inlevnalionaI IanI and Iond Iending
vas $3.6 lviIIion in 1989, equivaIenl lo 25 pevcenl oJ lIe aggvegale gvoss
nalionaI pvoducl |ONF) oJ lIe induslviaIized counlvies, in conlvasl lo undev
$200 IiIIion and 5 pevcenl oJ aggvegale ONF in 1973.6
Becenl cIanges in veguIalions and lecInoIog Iave nade il possiIIe Jov
none lo lvaveI acvoss Iovdevs aInosl inslanlI, giving vise lo nassive
sIovl-levn inlevnalionaI JinanciaI lvansaclions. In ApviI 1989, Joveign excIange
lvading in lIe vovId's JinanciaI cenlevs avevaged aIoul $650 IiIIion a da,
equivaIenl lo neavI $500 niIIion a ninule and lo Jovl lines lIe anounl oJ
vovId lvade a da. MavIels Jov sIovl-levn inlevnalionaI JinanciaI inslvunenls
ave conpavaII Iavge, aIlIougI exacl Jiguves ave nol avaiIaIIe.7
Inpvessive as lIese nunIevs ave, lIe do nol anounl lo JuII inlevnalionaI
capilaI noIiIil. In Jacl, econonic sludies Iave consislenlI sIovn lIal Iovdevs
and cuvvencies ave sliII suIslanliaI Iavvievs lo inveslnenl JIovs.8 AIlIougI
MissiIes. Wvislon is ciled in n BanIing on lIe WovId TIe FoIilics oJ Anevican InlenalionaI
Finance |Nev YovI Havpev & Bov, 1987), p. 115. See aIso WaIlev Wvislon, BisI and OlIev
Fouv-Lellev Wovds |Nev YovI Havpev & Bov, 1986).
5. BanI Jov InlevnalionaI SellIenenls |BIS), SixlielI AnnuaI Bepovl |BIS BasIe, 1990), pp. 63,
82, and 125.
6. See Movvis OoIdslein, BonaId MalIieson, and TinolI Lane, Belevninanls and Sslenic
Consequences oJ InlevnalionaI CapilaI FIovs, in Belevninanls and Sslenic Consequences oJ
InlenalionaI CapilaI FIovs |WasIinglon, B.C. InlevnalionaI Monelav Fund, 1991), p. 5. TIis
assunes a Iov IeveI oJ inlevnalionaI Iond Iending in 1973, vIicI is aInosl cevlainI lIe case. Exacl
Jiguves ave nol avaiIaIIe.
7. See BIS, SixlielI AnnuaI Bepovl, pp. 208-9. See aIso pp. 146-52, vIicI oJJev dala vegavding
sone sIovl-levn inslvunenls and indicale lIal open posilions in inlevesl vale Juluves and oplions
lolaIed aIoul $1.6 lviIIion al lIe end oJ 1989.
8. TIe eavI cIassic vovI vas M. FeIdslein and C. HovioIa's Boneslic Savings and Inlevna-
lionaI CapilaI FIovs, Econonic JounaI 90 |June 1980), pp. 314-29. Fov nove on lIe issue and
deIales ovev il, see BaIpI Bvanl, InlenalionaI FinanciaI Inlevnedialion |WasIinglon, B.C.
BvooIings Inslilulion, 1987), pp. 82-86. Fov a vecenl lesl, see Tanin Baouni, Saving-Inveslnenl
CovveIalions InnoIiIe CapilaI, Oovevnnenl FoIic, ov Endogenous BeIaviov? IMF SlaJJ Fapevs
37 |June 1990), pp. 360-87.
OIoIaI Jinance 429
lIese Iavvievs Iave Ieen and ave sliII Ieing veduced, lIeve ave a nunIev oJ
veasons vI inlevnalionaI inveslnenl is I no neans el a seanIess veI. Fivsl,
novenenl oJ capilaI acvoss Iovdevs sliII invoIves counlv and cuvvenc visIs.
Inveslovs nusl laIe inlo accounl lIe possiIiIil lIal assels in one counlv na
Ie visIiev lIan lIose in anolIev counlv and lIal novenenls in excIange vales
na aJJecl lIe veluvn on lIeiv inveslnenls. OJ couvse, IolI oJ lIese pvoIIens
ave addvessed I adjuslnenls lo assel pvices and veluvns and I Jovvavd
navIels, Iul lIe inpI lIal capilaI novenenls anong induslviaIized counlvies
ave nove diJJicuIl lIan capilaI novenenls vilIin lIen.9
Second, vIiIe sone Jovns oJ capilaI do nove quile easiI acvoss Iovdevs,
olIevs venain nove geogvapIicaII speciJic. Mosl assevlions oJ JuII inlevna-
lionaI capilaI noIiIil veJev lo inlevnalionaI lvansJevs oJ JinanciaI assels,
especiaII Ionds and IanI cIains. Equil navIels appeav lo Ie Jav Iess
inlegvaled,10 and olIev Jovns oJ capilaI sliII Iess so. In nosl inlevpvelalions, lIis
is Iecause nan Jovns oJ capilaI, sucI as lecInoIogicaI and nanageviaI
InovIedge, sIiIIs, and nelvovIs, ave speciJic lo lIeiv cuvvenl use and cannol
easiI Ie lvansJevved Jvon pIace lo pIace.1 AIlIougI delaiIed anaIses do nol
exisl, nosl oIsevvevs vouId pvoIaII agvee lIal JinanciaI capilaI is nosl noIiIe
acvoss Iovdevs, JoIIoved I equilies and lIen I Jivn- ov seclov-speciJic capilaI
assels.12
TIe gvealev inlevnalionaI noIiIil oJ JinanciaI assels, lIe nove nodesl
inlevnalionaI noIiIil oJ olIev assels, and lIe conlinued inpovlance oJ
unexpecled excIange vale novenenls nusl aII Ie laIen inlo accounl in
assessnenls oJ nalionaI poIic aulonon in lIe conlenpovav inlevnalionaI
econon. TIe appvaisaI can Ie divided inlo poIic lavgeled al veII-deJined
segnenls oJ lIe econon |induslvies, seclovs, and vegions) and poIic oJ
nacvoecononic inpovl. TIe IaseIine is lIe assevlion lIal assel navIels ave
9. TIe nosl caveJuI assessnenl oJ lIe FeIdslein-HovioIa Jindings, updaled lIvougI lIe Iale
1980s, enpIasizes lIe gveal incvease in capilaI noIiIil and lIe conlinued inpovlance oJ cuvvenc
pveniuns. See JeJJve A. FvanIeI, QuanliJing InlevnalionaI CapilaI MoIiIil in lIe 1980s, in
BougIas BevnIein and JoIn SIoven, eds., NalionaI Saving and Econonic FevJovnance |CIicago
Univevsil oJ CIicago Fvess, 1991), pp. 227-60.
10. Fov vougI evidence on inlvanalionaI and inlevnalionaI slocI pvice diJJevenliaIs, see Bavv
EicIengveen, Is Euvope an Oplinun Cuvvenc Avea? nineogvapI, Univevsil oJ CaIiJovnia al
BevIeIe, 1990, pp. 6-9. TIe diJJevenliaIs na Iave lo do vilI nonlvansJevaIIe advanlages accvuing
lo nalionaI ovnevs, sucI as gvealev access lo inJovnalion ov lo noniloving and enJovcenenl
necIanisns.
11. TIe nodevn lIeov oJ Joveign divecl inveslnenl is Iased on lIe pvoposilion lIal
nuIlinalionaI Jivns exisl pveciseI Iecause lIe JaciIilale |Iul do nol naIe coslIess) lIe
inlevnalionaI lvansnission oJ sucI speciJic assels. TIe cIassic slalenenl I Caves is sliII pvoIaII
lIe nosl appvopviale Ieve. See BicIavd E. Caves, InlevnalionaI Covpovalions TIe InduslviaI
Econonics oJ Foveign Inveslnenl, Econonica 38 |FeIvuav 1971), pp. 1-27.
12. TIis is a concIusion nade I FvanIeI in QuanliJing InlevnalionaI CapilaI MoIiIil in lIe
1980s. One indicalion oJ lIe IigI degvee lo vIicI navIels Jov JinanciaI assels ave inlegvaled is lIe
vivluaI disappeavance oJ signiJicanl spveads Ielveen doneslic and oJJsIove inlevesl vales in nosl
cuvvenc inslvunenls oJ nenIevs oJ lIe Ovganizalion Jov Econonic Coopevalion and BeveIop-
nenl |OECB). Begavding lIis suIjecl, see OoIdslein, MalIieson, and Lane, Belevninanls and
Sslenic Consequences oJ InlevnalionaI CapilaI FIovs, pp. 7-11.
inlevnalionaII IinIed lo vaving degvees JinanciaI navIels ave cIoseI IinIed,
equil navIels ave Iess connecled, and navIels Jov Jivn- and seclov-speciJic
capilaI ave quile nalionaII segnenled. In olIev vovds, anong induslviaIized
counlvies, JinanciaI capilaI JIovs JveeI Iul olIev assels JIov veIaliveI Iess JveeI
ov vev IillIe.
InasnucI as capilaI is speciJic lo Iocalion, incveased JinanciaI inlegvalion Ias
onI Iiniled eJJecls on poIicies lavgeled al pavlicuIav induslvies. WIelIev ov nol
a seclov-speciJic poIic is eJJeclive depends gvealI on Iov easiI Jivns can enlev
lIe seclov. FinanciaI navIels can aJJecl lIe ease oJ enlv I exlending Junds lo
nev Jivns. TIe easiev il is Jov nev Jivns lo enlev lIe seclov, lIe nove quicII lIe
IeneJils oJ lIe poIic lo pveexisling Jivns viII dissipale and lIus lIe Iess
eJJeclive lIe poIic viII Ie. TIis is a genevaI Jealuve oJ seclov-speciJic poIicies
and IoIds as Iong as JinanciaI capilaI is noIiIe doneslicaII: il vouId Ie lvue
even iJ capilaI veve nol noIiIe inlevnalionaII.
WIeve cvoss-Iovdev JinanciaI JIovs veduce enlv Iavvievs lo a Javoved seclov,
lIe conlvavene seclov-speciJic poIic. InlevnalionaI capilaI noIiIil na Iave
incveased lIe aIiIil oJ Joveign pvoducevs lo vespond lo lvade pvoleclion I
Iocaling in lIe pvolecled navIel: inasnucI as lIe puvpose oJ pvoleclion vas lo
suppovl IocaII ovned Jivns, lIis oIjeclive na Ie Jvuslvaled. TIe pvoIiJevalion
oJ Japanese-ovned aulonoIiIe Jaclovies in lIe Uniled Slales in vesponse lo
aulonoIiIe inpovl conlvoIs na Iave Ieen nade easiev I lIe inlegvalion oJ
JinanciaI navIels and na Iave veduced sone oJ lIe IeneJils oJ lIe conlvoIs lo
sIaveIoIdevs and enpIoees oJ Anevican-ovned aulonoIiIe nanuJacluvevs.'3
AII in aII, Iovevev, incveased JinanciaI capilaI noIiIil pvoIaII Ias IillIe
eJJecl on nosl seclov-speciJic poIicies. Suppovlevs oJ sucI poIicies can genevaII
design lIen lo avoid lIeiv Jvuslvalion I JinanciaI JIovs, doneslic ov inlevna-
lionaI. FinanciaI capilaI noIiIil, vilIin ov acvoss Iovdevs, is nol IiIeI lo aJJecl
lIe inpacl oJ casI lvansJevs lo Javnevs on lIeiv incones. Nov can JinanciaI
JIovs signiJicanlI inpede govevnnenl IeaIlI and saJel slandavds. FinanciaI
inlegvalion na naIe il nove diJJicuIl lo design sone seclov-speciJic poIicies lo
avoid undesivaIIe side eJJecls |naneI, IeneJils accvuing lo unlavgeled Jivns),
Iul il vaveI naIes lIen unsuslainaIIe.
On lIe olIev Iand, inlegvalion oJ JinanciaI navIels Ias signiJicanl eJJecls on
lIe eJJecliveness and lIe diJJevenliaI dislviIulionaI inpacl oJ nalionaI nacvo-
econonic poIicies. To gel a IandIe on lIe issue, il is useJuI lo slavl vilI vIal
13. AIlIougI I an unavave oJ an sludies oJ lIis pIenonenon, avgunenls lo lIis eJJecl ave
JvequenlI Ieavd anong Anevican conpelilovs oJ lIe Japanese lvanspIanls, oJlen in lIe conlexl oJ
conpIainls ovev lIe Japanese Jivns' access lo Iov-cosl Japanese Junds. TIeve ave veasons lo douIl
lIe accuvac oJ lIe avgunenl, Iovevev. Fivsl, nosl Joveign divecl inveslnenl is Junded in lIe Iosl
counlv. Second, iJ Japanese Jivns Iave pviviIeged access lo Japanese Jinance, lIen JinanciaI
navIels ave nol JuII inlegvaled. TIe vesuIl nigIl Ie due lo pveJevenliaI lies anong Japanese
JinanciaI and nonJinanciaI Jivns, vIicI vouId conslilule a naluvaI Iavviev lo JinanciaI capilaI
noIiIil. FuvlIev slud in lIis vegavd is vequived. A veIaled issue is lIe eJJecl oJ Joveign-ovned
IvancI pIanls on poIilicaI Iineups in lIe Iosl counlv. Fov anecdolaI evidence lIal Japanese
inveslnenl in lIe Uniled Slales Ias cvealed ov veinJovced doneslic inlevesl gvoups lIal Javov Jveev
lvade, see InJIux oJ Foveign CapilaI Mules BeIale on Tvade, TIe Nev YovI Tines, 8 FeIvuav
1987, p. 113.
OIoIaI Jinance 431
nigIl Ie caIIed lIe MundeII-FIening condilions, laIen Jvon lIe nosl
inJIuenliaI appvoacI lo panenls IaIance deveIoped in lIe eavI 1960s.14 TIese
condilions incIude lIe possiIiIil lIal JinanciaI assels na Ie JuII noIiIe
acvoss Iovdevs. |In vIal JoIIovs, I use capilaI noIiIil lo nean lIe noIiIil
oJ JinanciaI capilaI, as does lIe Iilevaluve in queslion.)
SinpI pul, lIe MundeII-FIening appvoacI indicales lIal a counlv can Iave
al nosl lvo oJ lIe JoIIoving lIvee condilions a Jixed excIange vale, nonelav
poIic aulonon, and capilaI noIiIil. WilIoul capilaI noIiIil, nalionaI
aulIovilies can adopl and suslain a nonelav poIic lIal diJJevs Jvon lIe
poIicies oJ lIe vesl oJ lIe vovId and can IoId lIeiv excIange vale conslanl:
Iovevev, vilI noIiIe capilaI, lIe allenpl viII Ie conlvavened I JinanciaI
JIovs. Assune lIe aulIovilies vanl an expansionav nonelav poIic. WilIoul
capilaI noIiIil, a JaII in inlevesl vales viII Iead lo a vise in denand, and lIe
econon viII Ie slinuIaled |ve ignove Iongev-levn eJJecls on lIe panenls
IaIance). WilI capilaI noIiIil, veduced doneslic inlevesl vales viII Iead lo an
oulJIov oJ capilaI in seavcI oJ IigIev inlevesl vales aIvoad, and Iong IeJove
nonelav poIic Ias a veaI eJJecl, inlevesl vales viII Ie Iid IacI up lo vovId
IeveIs.5
TIe veason Jov lIe vesuIl is slvaigIlJovvavd iJ capilaI is JuII noIiIe acvoss
Iovdevs, inlevesl vales ave conslvained lo Ie lIe sane in aII counlvies and
nalionaI nonelav poIic can Iave no eJJecl on nalionaI inlevesl vales.
Hovevev, lo go IacI lo lIe oviginaI condilions, iJ capilaI noIiIil is given |ov
inposed), nonelav poIic can Ie eJJeclive iJ lIe vaIue oJ lIe cuvvenc is
aIIoved lo vav. Monelav poIic opevales, in olIev vovds, via excIange vales
valIev lIan via inlevesl vales as in a lpicaI cIosed-econon nodeI. WilI capilaI
noIiIil, nonelav expansion gvealev lIan lIal in lIe vesl oJ lIe vovId causes a
JinanciaI oulJIov in vIicI inveslovs seII lIe cuvvenc: lIe vesuIl is cuvvenc
depvecialion. Bepvecialion in nosl cases slinuIales lIe econon as pvices oJ
Joveign goods vise veIalive lo pvices oJ doneslicaII pvoduced goods, lIeveI
incveasing IocaI and Joveign denand Jov IocaII pvoduced goods.16
A pavaIIeI slov can Ie loId aIoul JiscaI poIic. IJ capilaI is nol noIiIe and lIe
excIange vale is Jixed, expansionav JiscaI poIic vaises nalionaI inlevesl vales as
lIe govevnnenl Jinances incveased spending I JIoaling nove Ionds. TIe
14. See lIe JoIIoving vovIs oJ BoIevl A. MundeII TIe Appvopviale Use oJ Monelav and
FiscaI FoIic Undev Fixed ExcIange Bales, IMF SlaJJ Fapevs 9 |MavcI 1962), pp. 70-77: CapilaI
MoIiIil and SlaIiIizalion FoIic Undev Fixed and FIexiIIe ExcIange Bales, Canadian JounaI oJ
Econonics and FoIilicaI Science 29 |NovenIev 1963), pp. 475-85: and A BepI CapilaI MoIiIil
and Size, Canadian JounaI oJ Econonics and FoIilicaI Science 30 |Augusl 1964), pp. 421-31. TIe
Iasic nodeI can Ie Jound in an good lexlIooI discussion oJ open-econon nacvoecononics: a
useJuI suvve is W. M. Covden's InJIalion,
ExcIange Bales, and lIe WovId Econon, 3d ed. |CIicago
Univevsil oJ CIicago Fvess, 1986).
15. TIe avgunenl pvesenled Ieve is in sinpIiJied Jovn. Vavialion in nonelav aulonon is
acluaII aIong a conlinuun, nol dicIolonous lIe cIoice is nol slavII Ielveen JuII nonelav
independence and none al aII: il is inslead anong diJJevenl degvees oJ aulonon.
16. TIis ignoves lIe polenliaI conlvavening eJJecls oJ lIe depvecialion on nalionaI incone: lIal
is, il assunes lIal suIslilulion eJJecls doninale incone eJJecls ov lIal expendiluve svilcIing
doninales expendiluve veduclion.
vesuIlanl cvovding oul oJ pvivale inveslnenl danpens lIe expansion.
Hovevev, iJ capilaI noves JveeI acvoss Iovdevs, Ionds JIoaled lo Jinance
incveased govevnnenl spending ave IougIl I inlevnalionaI inveslovs, and
lIeve is no eJJecl on inlevesl vales, vIicI ave sel gIoIaII.'7 BeIaxing lIe Jixed
excIange vale conslvainl Ias diJJevenl eJJecls vilI JiscaI poIic lIan vilI
nonelav poIic. IJ lIe excIange vale vavies, as Joveignevs Iu nove govevn-
nenl Ionds lIe vesuIlanl capilaI inJIov causes a cuvvenc appvecialion lIal
lends lo veduce doneslic denand Jov doneslicaII pvoduced goods and lIus lo
danpen lIe JiscaI expansion.'8
TIe genevaI poinl is lIal in a vovId oJ JuII noIiIe capilaI, nalionaI poIic
cannol aJJecl lIe nalionaI inlevesl vale:'9 il can, Iovevev, aJJecl lIe excIange
vale. TIe aIove discussion oJ open-econon nacvoecononics is neanl sinpI
lo IigIIigIl lIis vesuIl.
Il na seen uninpovlanl lIal lIe vovId Ias cIanged Jvon one in vIicI
nalionaI nacvoecononic poIic opevaled pvinaviI via inlevesl vales lo one in
vIicI poIic opevales pvinaviI via excIange vales, Iul sevevaI poinls lo deJend
lIe signiJicance oJ lIis oIsevvalion can Ie nade. Fivsl, lIe dislviIulionaI eJJecls
oJ inlevesl vale cIanges ave diJJevenl Jvon lIose oJ excIange vale cIanges. IJ
nonelav expansion in a slIized vovId IeJove capilaI noIiIil |BCM) neanl
Iovev inlevesl vales, lIen nonelav expansion in a slIized vovId aJlev capilaI
noIiIil |ACM) neans depvecialion. To laIe one dislviIulionaI exanpIe,
Iovev inlevesl vales ave good Jov lIe vesidenliaI conslvuclion induslv, vIiIe
depvecialion is Iad Jov il inasnucI as il lends lo svilcI doneslic denand ava
Jvon nonlvadaIIe goods and sevvices. B lIe sane loIen, nanuJacluvevs nigIl
Iave Ieen nove snpalIelic lo a ligIl none slance in lIe pasl, vIen lIe
pvincipaI eJJecl oJ lIis slance vas lo vaise inlevesl vales, lIan lIe ave nov,
vIen lIe pvincipaI eJJecl is a cuvvenc appvecialion lIal lends lo incvease
inpovl penelvalion. TIis neans lIal poIic pveJevences oJ econonic inlevesl
gvoups, and lIeveJove poIilicaI coaIilions, ave IiIeI lo diJJev Ielveen lIe BCM
and ACM vovIds. I Ialev veluvn lo lIis poinl and discuss il in delaiI.
Second, aIlIougI I deJinilion lIeve is an inlevnalionaI conponenl lo
excIange vale cIanges, lIeve is nol necessaviI an inlevnalionaI conponenl lo
17. TIe poinl is nol lIal Joveignevs Iu aII lIe govevnnenl Ionds Iul, valIev, lIal lIe incveased
doneslic denand Jov cvedil is nel I an incveased suppI oJ cvedil as capilaI JIovs in, vilI lIe
vesuIl lIal lIe pvice oJ cvedil venains uncIanged. TIis oJ couvse assunes lIal lIe deJicil counlv is
nol Iavge enougI lo aJJecl vovId inlevesl vales, vIicI na nol aIvas Ie lIe case. Il aIso assunes
lIal lIe govevnnenl does nol engage in nonelav poIicies lIal acconnodale lIe JiscaI expansion.
18. Fov a good suvve and evaIualion, see MicIaeI M. HulcIison and CIavIes A. Figoll, BeaI
and FinanciaI LinIages in lIe Macvoecononic Besponse lo Budgel BeJicils An EnpivicaI
Invesligalion, in Sven Avndl and J. Bavid BicIavdson, eds., BeaI-FinanciaI LinIagesAnong Open
Econonies |CanIvidge, Mass. MIT Fvess, 1987), pp. 139-66.
19. Move accuvaleI, il does nol aJJecl lIe coveved inlevesl vale-lIal is, lIe inlevesl vale ninus
|ov pIus) lIe navIel's expeclalion oJ cuvvenc novenenls. OIviousI, iJ inveslovs expecl a cuvvenc
lo JaII, lIe denand a IigIev inlevesl vale Jov secuvilies denoninaled in il, and vice vevsa. Coveved
inlevesl pavil appeavs lo Iave IeId veII Jvon lIe nid-1970s onvavd anong aInosl aII najov
cuvvencies.
OIoIaI Jinance 433
inlevesl vale cIanges. IJ nonelav expansion sinpI veduces nalionaI inlevesl
vales, cIances ave lIal nosl Joveignevs viII Ie indiJJevenl. IJ, Iovevev, il Ieads
lo cuvvenc depvecialion in lIe expansionav counlv, Joveignevs ave IiIeI lo Ie
concevned aIoul lIeiv vesuIlanl Ioss oJ conpeliliveness.20
TIivd, lIe Jocus on Iov nacvoecononic poIic laIes eJJecl lIvougI lIe
excIange vale IeIps cIaviJ sone oIsevved anonaIies oJ lIe ACM vovId. IJ an
Anevican adninislvalion in lIe BCM vovId Iad puvsued JiscaI expansion and
nonelav slvingenc, lIe vesuIl nigIl veII Iave Ieen lIal lIe poIicies canceIed
eacI olIev oul ligIl none vouId Iave veinJovced lIe cvovding oul eJJecls
oJ lIe JiscaI expansion. As il vas, Iovevev, in lIe ACM vovId, lIe Beagan-
VoIcIev JiscaI expansion and nonelav slvingenc oJ lIe eavI 1980s Iad a
navIedI diJJevenl inpacl. FiscaI poIic vas IavgeI Jinanced I Joveign
Iovvoving, vIicI veduced ov eIininaled lIe eJJecls oJ cvovding oul and
conlviIuled lo appvecialion oJ lIe doIIav. Al lIe sane line, ligIl none
veinJovced lIe vise oJ lIe doIIav I slvenglIening lIe inlevnalionaI inveslnenl
allvacliveness oJ doIIav-denoninaled secuvilies. TIe vesuIl vas slviIing IolI on
nacvoecononic gvounds, as lIe doIIav soaved and lIe Uniled Slales Iecane a
najov nel deIlov lo lIe vesl oJ lIe vovId, and on dislviIulionaI gvounds, as lIe
doIIav appvecialion devaslaled U.S. pvoducevs oJ lvadaIIe goods |nanuJacluv-
ing and agvicuIluve) and Javoved pvoducevs oJ nonlvadaIIe goods and sevvices
|veaI eslale, IeaIlI cave, Ieisuve aclivilies, and educalion).
To sunnavize lIis seclion, JinanciaI capilaI noves acvoss lIe Iovdevs oJ
deveIoped counlvies vilI gveal ease, vIiIe olIev assel navIels ave Iess
inlegvaled and sone capilaI venains quile Jixed. In lIis conlexl, vIiIe gIoIaI
JinanciaI inlegvalion na veduce lIe eJJicac oJ sone seclov-speciJic poIicies, il
does nol inpede nosl oJ lIen. And vIiIe inlevnalionaI JinanciaI inlegvalion
does nol naIe nalionaI nacvoecononic poIic oIsoIele, il does sIiJl lIe eJJecl
oJ nacvoecononic poIic Jvon lIe inlevesl vale lo lIe excIange vale. TIese
Jealuves oJ lIe ACM vovId ave expecled lo Iave a signiJicanl inpacl on lIe
inlevesls oJ vavious doneslic econonic inlevesl gvoups. I veluvn lo ACM
inlevesl gvoup conpelilion ovev econonic poIic aJlev Jivsl IooIing al lIe
expecled eJJecls oJ lIe sIiJl Jvon BCM lo ACM ilseIJ.
TIe dislviIulionaI eJJecls oJ capilaI noIiIil
TIe dislinclion I dvav Ieve is nuanced Iul inpovlanl. On lIe one Iand, I an
inlevesled in Iov econonic agenls ave expecled lo acl in a vovId cIavaclevized
I capilaI noIiIil WIal sovls oJ poIicies viII Ie puvsued I vIal sovls oJ
gvoups and coaIilions? On lIe olIev Iand, I an inlevesled in Iov lIe sIiJl Jvon
20. Fov an iIIuninaling discussion oJ cvoss-Iovdev eJJecls, see MicIaeI Mussa, Macvoecononic
Inlevdependence and lIe ExcIange Bale Begine, in Budigev BovnIuscI and JacoI FvenIeI,
eds., InlenalionaI Econonic FoIic TIeov and Evidence |BaIlinove, Md. JoIns HopIins
Univevsil Fvess, 1979), pp. 160-204.
a pve-1970 vovId oJ Iiniled capilaI noIiIil lo a posl-1980 vovId oJ veIaliveI
IigI capilaI noIiIil aJJecled lIe inlevesls and inJIuence oJ econonic agenls
WIo gained and vIo Iosl as ve venl Jvon capilaI innoIiIil lo capilaI
noIiIil? And vIal ave lIe poIilicaI inpIicalions oJ lIese gains and Iosses? In
olIev vovds, in one conlexl I anaIze lIe dnanics oJ lIe ACM vovId: in
anolIev conlexl, I conpave condilions in lIe BCM vovId vilI lIose in lIe
ACM vovId.
TIe Jivsl sel oJ queslions addvessed in lIis seclion pevlains lo lIe ovevaII
inpacl oJ inlevnalionaI JinanciaI inlegvalion on najov econonic inlevesl gvoups
in advanced induslviaIized socielies. Once again, I Iave vecouvse lo vudinen-
lav looIs oJ econonic anaIsis. TIeve ave, Iovevev, sevevaI diJJevenl |aIIeil
polenliaII conpIenenlav) appvoacIes lIal conlend Jov allenlion. Man
anaIses Jocus inpIicilI ov expIicilI on lIe povlJoIio cIoice appvoacI ov on an
appIicalion oJ lIe HecIscIev-OIIin nodeI oJ inlevnalionaI lvade. WIiIe lIese
give inlevesling insigIls, I IeIieve lIal lIe ave nol diveclI veIevanl lo ouv
poIilicaI and poIic queslions. AJlev vevieving lIen, lIen, I sunnavize and
discuss lIe speciJic-Jaclovs nodeI, vIicI I IeIieve is Iesl suiled lo assessing
lIe dislviIulionaI eJJecls oJ incveased capilaI noIiIil and lo delevnining lIe
inpacl oJ lIese dislviIulionaI eJJecls on IoIIing Jov poIic.
FevIaps lIe nosl connon and sinpIesl possiIIe cul inlo lIe pvoIIen is lo
IooI al incveased capilaI noIiIil Jvon lIe slandpoinl oJ inveslovs Jacing
povlJoIio decisions, vIon il nusl IeIp. Il can IavdI Ie Iad Jov capilaIisls lo
Iave nove inveslnenl oplions lIan IeJove, vIicI is vIal capilaI noIiIil gives
lIen. B lIe sane loIen, incveasing lIe oplions oJ capilaI pvesunaII veduces
lIose oJ IaIov I naIing il Iess coslI Jov capilaI lo nove valIev lIan accede lo
IaIov denands.
TIis suvnise capluves inpovlanl eJJecls oJ incveased JinanciaI inlegvalion.
TIe videv nenu oJ inveslnenls open lo assel-IoIdevs incveases lIeiv inJIuence
on govevnnenls, IaIov, and olIevs. TIe 1980s na Iave indeed seen a secuIav
sIiJl in vesponse lo incveased capilaI noIiIil, in vIicI govevnnenls aII ovev
lIe vovId veve Jovced lo pvovide nove allvaclive condilions Jov capilaIisls.
SucI condilions incIude evevlIing Jvon Iovev veaIlI and capilaI gains laxes lo
veIaxed veguIalion oJ JinanciaI aclivilies and IaIov veIalions. In a vovId in vIicI
JinanciaI capilaI noves JveeI acvoss Iovdevs, il is diJJicuIl Jov one counlv lo
insisl on sliJJ capilaI laxalion vIen olIev counlvies ave venoving ov veducing il.
InasnucI as lIis eJJecl IoIds, incveased JinanciaI inlegvalion inpIies an
acvoss-lIe-Ioavd, Iasling incvease in lIe sociaI and poIilicaI povev oJ capilaI.21
21. Anevican lax veJovn in 1986, Jov exanpIe, vas JoIIoved I videspvead OECB novenenl
lovavd lIe nev Anevican covpovale lax vales. B 1989, divecl covpovale lax vales in lIe pvincipaI
EC nenIev counlvies veve aII in lIe 35 lo 42 pevcenl vange. See Fvice WalevIouse, Tax Slvalegic
Covpovale Tax FIanning |London Mevcuv BooIs, 1989). Acvoss induslvies, lIeve is evidence lIal
sucI JoolIoose seclovs as Jinance Jace Iovev eJJeclive lax vales. In lIe Uniled Slales in 1983, Jov
exanpIe, vIiIe lvenl-Jouv nonJinanciaI induslvies paid an avevage eJJeclive JedevaI incone lax
vale oJ 17.5 pevcenl, lIe lIvee JinanciaI seclovs |insuvance, inveslnenl, and JinanciaI sevvices
conpanies) paid an avevage oJ 8.5 pevcenl. See Nev TIveal lo SnoIeslacI Anevica, TIe Nev
YovI Tines, 26 Ma 1985, p. 31.
OIoIaI Jinance 435
Bul lIis picluve is inconpIele, Jov il ignoves lIe dnanic eJJecls oJ aggvegale
povlJoIio cIoices on assel-IoIdevs. TIe aIiIil oJ capilaI lo nove JveeI acvoss
Iovdevs can in Jacl Ie Iad Jov capilaIisls in a given counlv ov good Jov IaIov in
il. TIe vesuIl depends on lIe counlv's undevIing endovnenl oJ capilaI and
olIev vesouvces, and lIis Ieads sone lo IeIieve lIal lIe HecIscIev-OIIin
appvoacI is lIe appvopviale anaIlic looI.
Accovding lo lIe HecIscIev-OIIin lvade nodeI, lIe eJJecls oJ goods
novenenls on veluvns lo Jaclovs viII vav accovding lo vIelIev lIe Jaclovs ave
IocaII scavce ov aIundanl. FevIaps lIe Iesl-Inovn exlension is lIe SloIpev-
SanueIson lIeoven, vIicI posils lIal pvoleclion |lIal is, decveased lvade)
IeneJils lIe IocaII scavce Jaclov pvoleclion is good Jov IaIov in a IaIov-poov
counlv and is good Jov capilaI in a capilaI-poov counlv. TIe inluilion is
slvaigIlJovvavd. WilI lvade, denand Jov lIe pvoducl in vIicI lIe counlv Ias a
conpavalive advanlage viII vise, and lIis conpavalive advanlage is a Junclion
oJ Iov veII endoved lIe counlv is vilI vavious Jaclovs. A IaIov-vicI counlv
lends lo expovl pvoducls lIal use IaIov inlensiveI: lIe nove lIe counlv lvades,
lIe nove IaIov is used, and lIe nove vages vise. Tvade and Jaclov novenenls
ave suIslilules expovling IaIov and IaIov-inlensive pvoducls Iave lIe sane
eJJecl, as do expovling capilaI and capilaI-inlensive pvoducls.
In lIe HecIscIev-OIIin viev, lIen, incveased capilaI noIiIil |IiIe incveased
vovId lvade) IeneJils capilaI vIeve il is aIundanl and Iuvls capilaI vIeve il is
scavce. CapilaI JIovs oul oJ capilaI-vicI counlvies, vaising lIe veluvn lo IocaI
capilaI, and JIovs lovavd capilaI-poov counlvies, Ioveving lIe veluvn lo IocaI
capilaI. TIe eJJecl is anaIogous lo lIal exanined I BonaId BogovsIi, vIo
assessed peviods in vIicI lIeve vas an exogenous incvease ov decvease in vovId
lvade lo expIove lIe HecIscIev-OIIin eJJecls on nalionaI poIilics.22
To iIIuslvale lIe aIove poinls, ve can conpave lvo counlvies vilI opposile
sels oJ endovnenls. In lIe BCM vovId, lIe Jivsl counlv is vicI in capilaI and
poov in IaIov, so ils IocaI inlevesl vales ave veIaliveI Iov and ils IocaI vages
veIaliveI IigI. In lIe ACM vovId, capilaI is Jvee lo nove lo counlvies in vIicI
lIe vale oJ veluvn is IigIev: lIe IocaI inlevesl vales vise lo lIe vovId IeveI, and
IocaI vages JaII. In lIis case, lIe vesuIl Javovs capilaI and disJavovs IaIov, Iul
lIis is puveI a Junclion oJ lIe Ieginning endovnenls-vIicI ave cIavaclevis-
lic oJ nosl deveIoped counlvies. Nov laIe lIe opposile case. In lIe BCM
vovId, lIe second counlv is poov in capilaI and vicI in IaIov, so ils IocaI inlevesl
vales ave veIaliveI IigI and ils IocaI vages veIaliveI Iov. In lIe ACM vovId,
capilaI viII JIov in, veducing lIe IocaI inlevesl vales and lending lo vaise vages.
In lIis case, since lIe IocaI vale oJ veluvn on capilaI is conslvained lo JaII lo lIe
|Iovev) vovId IeveI, IocaI capilaIisls ave Iavned vIiIe IocaI vovIevs IeneJil.
TIis na capluve sone oJ vIal Ias Iappened as capilaI noIiIil Ias
advanced. CapilaIisls in lIe deveIoped vovId |in counlvies veIaliveI vicI in
capilaI) Iave pvoIaII IeneJiled Jvon inlevnalionaI capilaI noIiIil. Il nigIl
Ie avgued lIal lIe deveIoping counlvies' access lo inlevnalionaI JinanciaI
22. BogovsIi, Connevce and CoaIilions.
navIels lended lo slvenglIen IaIov |pevIaps I incveasing inveslnenl in
IaIov-inlensive aclivilies), Iul lIis seens Jav Jvon cIeav-cul.
In Jacl, vIiIe lIe HecIscIev-OIIin appvoacI na Ie useJuI in pvedicling
Iong-levn econonic lvends, il is pvoIaII nol a vev good va lo anaIze lIe
dislviIulionaI eJJecls oJ inlevnalionaI Jaclov novenenls, Jov sevevaI veasons.
Fivsl, il is exlveneI sensilive lo lIe nunIev oJ Jaclovs invoIved. TIe
pvediclions ave slvaigIlJovvavd vilI lvo Jaclovs, Iul lIe Iecone anIiguous al
Iesl vilI nove lIan lvo. Second, il assunes lIal capilaI, IaIov, and olIev
Jaclovs can nove coslIessI Jvon one aclivil lo anolIev vilIin a counlv, even iJ
lIe ave inlevnalionaII innoIiIe. TIis is cevlainI unlvue, since an aulonoIiIe
Jaclov cannol coslIessI Ie convevled inlo a Ivevev, nov can a seanslvess
coslIessI Iecone an aevospace engineev. AIlIougI Jaclovs oJ pvoduclion na
nove Jvon one use lo anolIev ovev lIe Iong vun, lIe cannol do so in lIe sIovl
and nediun vun, vIicI is lIe line Jvane nove veIevanl lo poIilicaI anaIsis.
And, lIivd, enpivicaI evidence suggesls lIal poIilicaI IeIaviov, especiaII vilI
vegavd lo econonic poIic, is Iess connonI JaclovaI |IaIovevs as a cIass,
capilaIisls as a cIass) lIan seclovaI |lIe sleeI induslv, lIe daiv Javning
induslv).23
As useJuI as lIe HecIscIev-OIIin appvoacI na Ie Jov Iong-levn econonic
anaIsis, il is nove appvopviale lo invesligale lIe poIilicaI econon oJ
inlevnalionaI lvade and capilaI novenenls vilI an appvoacI vIicI assunes
lIal al Ieasl sone Jaclovs oJ pvoduclion ave speciJic lo a pavlicuIav use Jov al
Ieasl lIe sIovl vun. In lIis speciJic-Jaclovs nodeI, cIanges in lIe veIalive
pvices oJ goods Iave lIeiv pvincipaI eJJecl on lIe seclov-speciJic pvoducevs oJ
lIe goods, valIev lIan on a vIoIe cIass oJ Jaclov-ovnevs. TIus, an incvease in
niII pvices is good Jov daiv Javnevs valIev lIan Iandovnevs as a vIoIe: a
decIine in cIolIing pvices is Iad Jov ovnevs and vovIevs in lIe gavnenl induslv
valIev lIan Jov capilaIisls ov vovIevs as a cIass.24
23. TIe cIassic slalenenl is SlepIen Magee's TIvee SinpIe Tesls oJ lIe SloIpev-SanueIson
TIeoven, in Felev OppenIeinev, ed., Issues in InlenalionaI Econonics |London OvieI, 1980), pp.
138-53. In Connevce and CoaIilions, pp. 16-20, BogovsIi addvesses lIese oIjeclions and nove:
needIess lo sa, I an unconvinced I Iis lvealnenl. Benjanin J. CoIen Ias poinled oul lo ne lIal
lIis sinpIe lvansJev oJ lIe HecIscIev-OIIin appvoacI Jvon lvade lo capilaI novenenls ignoves lIe
inIevenl diJJevences Ielveen lIe lvo veaIns and especiaII lIe inpovlance oJ expeclalions in
delevnining assel pvices |and lIeveJove capilaI novenenls). TIis na Ie anolIev veason lo avoid a
slvaigIlJovvavd appIicalion oJ lIe appvoacI lo capilaI novenenls.
24. TIe seninaI nodevn slalenenl is BonaId W. Jones's A TIvee-Faclov ModeI in TIeov,
Tvade, and Hislov, in JagdisI BIagvali el aI., eds., Tvade, BaIance oJ Fanenls, and OvovlI
|Anslevdan NovlI-HoIIand, 1971), pp. 3-21. Tvo olIev inpovlanl avlicIes, vIicI essenliaII
avgue Jov conIining speciJic Jaclovs in lIe sIovl vun vilI lIe HecIscIev-OIIin appvoacI in lIe Iong
vun, ave WoIJgang Maev's SIovl-Bun and Long-Bun EquiIiIviun Jov a SnaII Open Econon,
JounaI oJ FoIilicaI Econon 82 |SeplenIev 1974), pp. 955-68, and MicIaeI Mussa's TaviJJs and
lIe BislviIulion oJ Incone TIe Inpovlance oJ Faclov SpeciJicil, SuIslilulaIiIil, and Inlensil in
lIe SIovl and Long Bun, JounaI oJ FoIilicaI Econon 82 |NovenIev 1974), pp. 1191-1204. Based
on lIese lvo avlicIes, lIe appvoacI is sonelines Inovn as lIe Maev-Mussa JvanevovI. Fov a
useJuI sunnav and geonelvic vepvesenlalion oJ lIe sIovl-levn and Iong-levn adjuslnenl
pvocesses, aIong vilI a cvilique oJ lIe HecIscIev-OIIin assunplion oJ inlevseclovaI capilaI
noIiIil, see J. Felev Neav, SIovl-Bun CapilaI SpeciJicil and lIe Fuve TIeov oJ InlevnalionaI
Tvade, TIe Econonic JounaI 88 |SeplenIev 1978), pp. 488-510.
OIoIaI Jinance 437
In lIe speciJic-Jaclovs appvoacI, vIicI I vegavd as nosl useJuI lo lIe lasI al
Iand, lIe econon is ovganized inlo aclivilies |ov seclovs) lo vIicI Jaclovs ave
speciJic, aIong vilI Jaclovs lIal can nove JveeI Jvon aclivil lo aclivil. TIe
cIassic selup is an econon in vIicI capilaI is speciJic eilIev lo lIe pvoduclion
oJ cIolIing ov lo lIe pvoduclion oJ Iousing, vIiIe IaIov is an inpul Jov IolI
seclovs and can nove JveeI Jvon lIe gavnenl induslv lo lIe conslvuclion
induslv. TIe vesuIl, as nenlioned aIove, is lIal cIanges in lIe pvices oJ goods
Iave lIeiv pvincipaI eJJecls on lIe speciJic Jaclovs, vilI coIIalevaI |and genevaII
anIiguous) eJJecls on lIe noIiIe Jaclov. In lIe aIove exanpIe, an incvease in
lIe veIalive pvice oJ cIolIing, pevIaps due lo a laviJJ, is good Jov capilaI in lIe
gavnenl induslv and Iad Jov capilaI in lIe Iousing induslv: ils eJJecl on IaIov
depends on lIe nix oJ cIolIing and Iousing lIal vovIevs consune. IJ, Iovevev,
lIe suppI |lIus, lIe pvice) oJ lIe noIiIe Jaclov cIanges, lIe inlevesls oJ lIe
speciJic Jaclovs ave opposed lo lIose oJ lIe noIiIe Jaclov. In lIe aIove exanpIe,
iJ lIe suppI oJ IaIov sIvinIs and vages vise, lIis is unanIiguousI good Jov
vovIevs and Iad Jov capilaI in lIe gavnenl and conslvuclion induslvies, since
lIe pvice oJ lIeiv IaIov inpul vises.25
TIe appIicalion oJ lIe speciJic-Jaclovs appvoacI lo ouv pvoIIen is slvaigIl-
Jovvavd. I cIaviJ again lIal vilI capilaI noIiIil I nean lIe noIiIil oJ
JinanciaI capilaI valIev lIan seclov-speciJic capilaI. A secuIav incvease in
inlevnalionaI capilaI noIiIil inpIies novenenl oJ JinanciaI assels Jvon
capilaI-vicI lo capilaI-poov counlvies |Jvon Iov lo IigI inlevesl vales) and
lIeveJove an incvease in lIe suppI oJ Jinance lo counlvies poov in capilaI and a
veduclion in lIe suppI oJ Jinance lo counlvies vicI in capilaI. SpeciJic Jaclovs in
capilaI-poov counlvies do veII, since lIe can nov Iovvov al Iovev inlevesl
vales: speciJic Jaclovs in capilaI-vicI counlvies do IadI, since lIe nusl nov
pa IigIev inlevesl vales: and ovnevs oJ Iiquid JinanciaI assels in capilaI-vicI
counlvies do veII, vIiIe lIose in capilaI-poov counlvies do IadI.
I sIouId nole lIal lIe dislinclion nade Ieve Ielveen capilaI-vicI and
capilaI-poov counlvies na Ie sonevIal nisIeading, ov al Ieasl inconpIele.
CapilaI JIovs in vesponse lo diJJevences in vales oJ veluvn, and inlevesl vales can
vav
Jov veasons olIev lIan undevIing endovnenls oJ capilaI. TIe Uniled
Slales vas a nel capilaI inpovlev in lIe 1980s nol Iecause il Iad suddenI
Iecone capilaI-poov Iul, valIev, Iecause nalionaI savings veve insuJJicienl lo
Jinance doneslic inveslnenl: Joveign savings veve especiaII needed lo IeIp
Jund lIe govevnnenl Iudgel deJicil. B lIe sane loIen, nan deveIoping
counlvies Iecane nel capilaI expovlevs duving lIe 1980s, as lIe Iosl access lo
ovevseas Jinance and Iad lo sevvice lIeiv exisling deIls. Counlvies can inpovl
25. In a sIigIl vavialion on lIe usuaI speciJic-Jaclovs ov Bicavdo-Vinev nodeI, lIe one pvesenled
Ieve inpIies lIal lIeve ave IolI noIiIe and speciJic Jovns oJ IolI IaIov and capilaI. TIe eJJecl oJ
veIalive pvice novenenls and cIanges in endovnenls lIus depends in pavl on lIe polenliaI
suIslilulaIiIil oJ lIe Jovns oJ Jaclovs ov lIe Jaclovs lIenseIves-Jov exanpIe, suIslilulaIiIil oJ
noIiIe Jov speciJic IaIov ov oJ noIiIe IaIov Jov noIiIe capilaI. Fov ouv puvposes, il is suJJicienl lo
slop vilI lIe sinpIev vevsion. Adding conpIexil lo lIe nodeI does nol JundanenlaII cIange lIe
anaIlic poinls: il onI cIanges lIe delaiIs oJ lIeiv enpivicaI appIicalion.
ov expovl capilaI Jov veasons lIal Iave IillIe lo do vilI lIeiv endovnenls,
especiaII ovev lIe sIovl and nediun vun. NonelIeIess and ovev lIe Iongev vun,
deveIoped counlvies lend lo Ie nel capilaI expovlevs, vIiIe deveIoping
counlvies lend lo Ie nel capilaI inpovlevs. TIe poinl is sinpI lIal acluaI
appIicalions vequive allenlion lo speciJic nalionaI civcunslances.
In an case, I IeIieve lIal lIe speciJic-Jaclovs nodeI Ias lIvee inpovlanl
Jealuves vIicI naIe il useJuI Jov lIe anaIsis oJ lIe poIilicaI econon oJ
inlevnalionaI Jinance. Fivsl, il enpIasizes lIe poIilicaI veIevance oJ sIovl-levn
JIuclualions in lIe veluvns lo diJJevenl sovls oJ econonic aclivil, valIev lIan
Iongev-levn cIanges in lIe condilions oJ vovIevs ov capilaIisls as a cIass.
Second, il assunes lIal nosl peopIe and inveslnenls ave caugIl in lIeiv
cuvvenl aclivil lo one degvee ov anolIev. To Ie suve, sone ave nove caugIl
lIan olIevs, Iul lIeve is no vecouvse lo lIe IigII unveaIislic assunplion
connon in olIev nodeIs lIal, Jov exanpIe, aulonoIiIe vovIevs Jaced vilI
inpovl penelvalion viII Iave no lvouIIe Jinding joIs al lIe sane vage in
anolIev induslv. TIivd, il vecognizes lIal sone Jaclovs na Ie noIiIe, vIiIe
olIevs ave speciJic. Fov exanpIe, il is consonanl vilI lIe speciJic-Jaclovs
appvoacI lo assune lIal unsIiIIed IaIov is quile noIiIe anong induslvies, vIiIe
sIiIIed IaIov is induslv-speciJic, ov lo assune lIal JinanciaI capilaI is noIiIe
anong induslvies, vIiIe pIsicaI capilaI is induslv-speciJic. TIis Jealuve aIIovs
Jov vavialions in lIe degvee lo vIicI peopIe ov inveslnenls ave slucI in one
pIace. TIese lIvee inlevveIaled enpIases-on lIe poIilicaI signiJicance oJ lIe
sIovl vun, on lIe veIalive speciJicil oJ nosl peopIe and inveslnenls lo lIeiv
cuvvenl aclivil, and on lIe possiIiIil lIal sone Jaclovs ave nove noIiIe lIan
olIevs-seen IolI veaIislic and anaIlicaII useJuI.
Fov lIose unJaniIiav vilI lIe nelIod, il na Ie IeIpJuI lo idenliJ il as a
seclovaI appvoacI lo poIilicaI econon as opposed lo a cIass-Iased appvoacI.26
In lIe cIass-Iased appvoacI, diJJevences anong vovIevs ave Iess inpovlanl
lIan diJJevences Ielveen vovIevs and capilaIisls: lIe sane is IeId lo Ie lvue oJ
capilaIisls and Iandovnevs. FoIilics is conpelilion anong lIese cIasses, nol
vilIin lIen. In lIe seclovaI appvoacI, sleeIvovIevs Iave cvoss-culling inlev-
esls. On lIe one Iand, lIe ave vovIevs, and lIeiv inlevesls in lIe Iong vun ave
siniIav lo lIose oJ olIev vovIevs. On lIe olIev Iand, lIe pvoduce sleeI, and
lIeiv inlevesls in lIe sIovl vun ave siniIav lo lIose oJ nanagevs and
sIaveIoIdevs in lIe sleeI induslv. FoIilics, in lIis viev, is pvinaviI conpelilion
anong vavious seclovs oJ lIe econon, aIlIougI Iong-levn cIass inlevesls
sonelines pIa a voIe.
TIe speciJic-Jaclovs ov seclovaI viev oJ lIe vovId leIIs us a gveal deaI aIoul
lIe dislviIulionaI inpIicalions oJ capilaI noIiIil. As indicaled aIove, as ve
26. I veJev Ieve lo lIose Mavxisl |and non-Mavxisl) vievs lIal assune IaIov-capilaI conlvadic-
lions lo Ie lIe pvincipaI axis oJ poIilicaI conJIicl. Man olIev Mavxisls Jocus on inlvacIass
diJJevences ov IIocs: Jov a good exanpIe oJ veIevance lo lIe issue al Iand, see SlepIen B. OiII and
Bavid Lav, OIoIaI Hegenon and lIe SlvucluvaI Fovev oJ CapilaI, InlevnalionaI Sludies
QuavlevI 33 |BecenIev 1989), pp. 475-99.
OIoIaI Jinance 439
nove Jvon a BCM lo an ACM vovId, JinanciaI capilaI Ieaves aveas vIeve vales
oJ veluvn ave Iovev and enlevs aveas vIeve lIe ave IigIev. Inlevesl vales go up
in capilaI-expovling vegions and dovn in capilaI-inpovling vegions: inlevesl
vale vavialions aJJecl nol onI ovnevs oJ JinanciaI assels Iul aIso Iovvovevs, Jov
vIon lIe ave a cosl oJ pvoduclion. In conpavison vilI lIe BCM vovId, in lIe
ACM vovId lIings ave Iellev Jov ovnevs oJ JinanciaI assels in capilaI-expovling
counlvies and Jov ovnevs oJ seclov-speciJic assels |capilaI, sIiIIs, and Iand) in
capilaI-inpovling counlvies, and vice vevsa.
We can aIso inlvoduce anolIev inpovlanl sel oJ econonic aclovs inlevnalion-
aII divevsiJied |nuIlinalionaI) covpovalions. In lIe speciJic-Jaclovs viev oJ lIe
vovId, a cvuciaI dinension oJ vavialion is lIe noIiIil ov speciJicil oJ an assel,
Ie il an inveslnenl, sIiII, ov pIol oJ Iand. In nan vas, lIe dinension oJ
divevsiJicalion pavaIIeIs lIal oJ speciJicil. An inveslov vIo IoIds an assel lIal
can easiI Ie noved Jvon use lo use is in a pavaIIeI posilion lo an inveslov vIose
assel povlJoIio incIudes a Iavge nunIev oJ diJJevenl econonic aclivilies. TIe
nosl vuInevaIIe posilion is lo IoId an assel lIal is conpIeleI speciJic lo one
induslv: il is anaIogousI vuInevaIIe lo Iave an assel povlJoIio lIal incIudes
Jivns in onI one induslv.27 In lIis sense, Jivns vilI opevalions lIal ave
divevsiJied vilI vespecl lo aclivil and Iocalion can Ie vegavded as Iess speciJic
and nove noIiIe lIan Jivns vIose opevalions ave slucI in one aclivil and
one pIace. TIe pveJevences oJ nuIlinalionaI covpovalions, vilI opevalions in
nan counlvies Jacing diJJevenl condilions, lIus pavaIIeI lIe pveJevences oJ
inveslovs vilI nove noIiIe assels and divevge Jvon lIose oJ nalionaII and
seclovaII speciJic covpovalions.8
A sinpIe nap oJ seclovaI inlevesls can lIus Ie dvavn in Iine vilI lIe
speciJic-Jaclovs appvoacI. On lIis nap, incveased capilaI noIiIil is genevaII
good Jov JinanciaI assel-IoIdevs in lIe deveIoped vovId and Iad Jov lIose in lIe
deveIoping vovId: il is good Jov nuIlinalionaI covpovalions: and il is Iad Jov
|nonnuIlinalionaI) speciJic Jaclovs in lIe deveIoped vovId and good Jov lIose
in lIe deveIoping vovId.29
27. TIe poinl is nol lIal povlJoIio divevsiJicalion is lIe sane as assel noIiIil Iul, valIev, lIal
lIe poIic inpIicalions ave pavaIIeI. A nove sopIislicaled Iul sonevIal nove conlvovevsiaI vevsion
oJ lIis avgunenl nigIl Jocus on nuIlinalionaI covpovalions as conIinalions oJ inlangiIIe assels
vilIin a vevlicaII inlegvaled Jivn: lIe veIevanl Iilevaluve is suvveed I Mavlin Fevv in VevlicaI
Inlegvalion Belevninanls and EJJecls, in B. ScInaIensee and B. B. WiIIig, eds., HandIooI oJ
InduslviaI Ovganizalion, voI. 1 |Anslevdan NovlI-HoIIand, 1989), pp. 183-255. InasnucI as sucI
assels can nove easiI Ie noved vilIin nuIlinalionaI covpovalions, lIis does in Jacl naIe lIe assels
oJ lIese covpovalions nove geogvapIicaII noIiIe lIan lIose oJ olIev Jivns in siniIav induslvies.
See, Jov exanpIe, BanieI M. SIapivo, Enlv, Exil, and lIe TIeov oJ lIe MuIlinalionaI
Covpovalion, in CIavIes F. KindIeIevgev and Bavid B. AudvelscI, eds., TIe MuIlinalionaI
Covpovalion in lIe 1980s |CanIvidge, Mass. MIT Fvess, 1983), pp. 103-22.
28. Fov an appIicalion oJ siniIav ideas lo lIe cases oJ U.S. and FvencI lvade poIicies in lIe 1920s
and lIe 1970s, see MiInev, Besisling Fvoleclionisn.
29. Il is vovlI enpIasizing again lIal lIese concIusions aIslvacl Jvon nan speciJics lIal na
indeed ovevvide lIen. Fov exanpIe, in lIe eavI 1980s, JinanciaI assel-IoIdevs in nan Lalin
Anevican counlvies IeneJiled slvongI Jvon capilaI noIiIil. In lIe conlexl oJ poIilicaI inslaIiIil
and slvong and unsuslainaIIe cuvvenc appvecialions, lIe veve aIIe lo gel lIeiv none oul oJ
A Jev exanpIes indicale lIe pIausiIiIil oJ lIis seclovaI nap. TIe opening oJ
gIoIaI JinanciaI navIels lo lIe Iess deveIoped counlvies |LBCs) vas good Jov
induslvies in lIe TIivd WovId, vIicI veve suddenI aIIe lo Iovvov al veduced
vales oJ inlevesl. InduslviaI pvoduclion in lIe LBCs gvev vapidI as Joveign
Jinance JIoved in, IeneJiling ovnevs and nanagevs |and usuaII vovIevs) in
lIese induslvies.30 B lIe sane loIen, ovevseas Iending Jvon deveIoped
counlvies aInosl cevlainI vaised lIe cosl oJ capilaI lo induslvies al Ione,
conlviIuling lo lIe pvoIIens oJ induslviaI seclovs in Weslevn Euvope and
NovlI Anevica. Move genevaII, lIe incveased JinanciaI inlegvalion oJ lIe
advanced induslviaIized counlvies slvenglIened conpelilive pvessuves on
speciJic induslvies and conlviIuled lo lIe induslviaI veslvucluving laIing pIace
in lIen.31
In Iine vilI lIe appvoacI, lIe inlevesls oJ lvo gvoups-lIe ovnevs and
nanagevs oJ JinanciaI assels and lIe nuIlinalionaI covpovalions-ave opposed
lo lIose oJ lIe speciJic Jaclovs, so lIal JinanciaI and nuIlinalionaI inlevesls in
lIe deveIoped counlvies ave expecled lo divevge Jvon lIe inlevesls oJ speciJic
nalionaII Iased induslviaI seclovs. TIis vouId appeav a Jaiv genevaIizalion
Jvon lIe expevience oJ lIe 1970s and 1980s. TIe pvincipaI IeneJiciavies oJ lIe
Ivoad econonic lvends oJ lIe Iasl lvo decades Iave Ieen inlevnalionaII
ovienled Jivns and lIe JinanciaI sevvices induslvies: lIe pvincipaI Iosevs Iave
Ieen nalionaII Iased induslviaI Jivns.32
TIese concIusions aIoul lIe dislviIulionaI eJJecls oJ incveased JinanciaI
inlegvalion can Ie luvned avound lo pvedicl expecled pallevns oJ poIilicaI
suppovl and opposilion lo poIicies lIal viII incvease inlevnalionaI capilaI
noIiIil. FevIaps lIe nosl oIvious poIicies in lIis vegavd concevn lIe venovaI
oJ Iavvievs lo capilaI novenenls acvoss Iovdevs, Iul lIe aIso incIude eJJovls lo
slvenglIen ovganizalions lIal poIice inlevnalionaI JinanciaI navIels, especiaII
lIe InlevnalionaI Monelav Fund |IMF).
In lIe deveIoped vovId, I expecl suppovl Jov incveased JinanciaI inlegvalion
Jvon ovnevs and nanagevs oJ JinanciaI assels and Jvon nuIlinalionaI Jivns vilI
Lalin Anevica and lo ovevseas IanI accounls. On lIe pvocess, see BonaId Lessavd and JoIn
WiIIianson, eds., CapilaI FIigIl and TIivd WovId BeIl |WasIinglon, B.C. Inslilule Jov Inlevna-
lionaI Econonics, 1987). CIeavI, olIev cIavaclevislics oJ lIese poIilicaI econonies oulveigIed lIe
lendencies discussed Ieve.
30. Fov a nove delaiIed avgunenl lo lIis eJJecl, see JeJJv A. Fvieden, TIivd WovId IndeIled
InduslviaIizalion Slale CapilaIisn and InlevnalionaI Finance in Mexico, BvaziI, AIgevia, and SoulI
Kovea, InlevnalionaI Ovganizalion 35 |Sunnev 1981), pp. 407-31. TIe degvee lo vIicI vovIevs
and olIevs IeneJiled Jvon lIe capilaI inJIov vouId depend, in lIis JvanevovI, on Iov speciJic lIeiv
assels veve.
31. Fov an eIaIovalion oJ lIis avgunenl, see Fvieden, BanIing on lIe WovId, especiaII pp.
196-246.
32. MucI oJ lIis discussion aIslvacls lo an exlenl Jvon lIe eJJecls oJ speciJic poIic episodes,
sucI as lIose invoIving lIe Uniled Slales in lIe 1980s. I veluvn lo lIis pvoIIen in lIe JoIIoving
seclion oJ lIe avlicIe. M discussion Ieve aIso does nol laIe inlo accounl sucI signiJicanl nalionaI
vavialions as diJJevenl vales oJ pvoduclivil gvovlI on lIe pavl oJ doneslicaII Iased Jivns.
OIoIaI Jinance 441
inlevnalionaII divevsiJied inveslnenls.33 I expecl opposilion lo incveased
JinanciaI inlegvalion Jvon speciJic induslvies, especiaII lIose lied lo a
pavlicuIav nalionaI navIel. Il is n opinion lIal lIis accuvaleI, aIIeil in lIe
Ivoadesl levns, descviIes pallevns oJ poIilicaI aclivil on lIese issues. In lIe
Uniled Slales, suppovl Jov JinanciaI deveguIalion, incIuding deveguIalion oJ
inlevnalionaI JinanciaI veIalions, Ias cone pvinaviI Jvon lIe counlv's
JinanciaI cenlevs and ils inlevnalionaII ovienled nonJinanciaI covpovalions:
doneslic nanuJacluving and Javn gvoups Iave Ieen anIivaIenl ov IosliIe.34 B
lIe sane loIen, suppovl Jov Anevican IacIing oJ lIe IMF Ias Ieen slvongesl in
lIese seclovs, vIiIe again opposilion lo govevnnenl connilnenls lo lIe
inlevnalionaI JinanciaI ovdev Iave Ieen concenlvaled in lIe induslviaI and
agvicuIluvaI IeavlIands.35
Euvope's Ieading JinanciaI and nuIlinalionaI Jivns Iave Ieen lIe slvongIoId
oJ suppovl Jov IveaIing dovn venaining Iavvievs lo EC JinanciaI and nonelav
inlegvalion.36 AIlIougI sslenalic evidence is nol avaiIaIIe, indicalions ave lIal
lIe slvongesl IacIevs oJ JinanciaI deveguIalion ave in lIe EC's Ieading JinanciaI
cenlevs.37 TIe cIieJ Japanese pvonolevs oJ inlevnalionaI JinanciaI deveguIalion
Iave Ieen, again, JinanciaI and nuIlinalionaI Jivns. In Japan, lIe issue is
conpIex, vilI najov IallIes vilIin lIe JinanciaI connunil ovev lIe conlouvs
33. TIis nusl Ie quaIiJied on lIe Iasis oJ lIe inslilulionaI and induslviaI slvucluve oJ lIe vavious
seclovs. Fov exanpIe, in cases in vIicI lIe doneslic JinanciaI sevvices induslv ov suIseclions oJ il
ave IocaI cavleIs, JinanciaI inlegvalion na sevve lo undevnine lIe cavleI. SucI nuances ave oJ
couvse inpovlanl, Iul so Ivoad a sveep as in lIis avlicIe cannol do lIen juslice.
34. See Bavid BoIIav and JeJJv Fvieden, TIe FoIilicaI Econon oJ FinanciaI BeveguIalion in
lIe Uniled Slales and Japan, in Oiacono Luciani, ed., SlvucluvaI CIange in lIeAnevican FinanciaI
Sslen |Bone Fondazione OIivelli, 1990), pp. 72-102. Again, lIis genevaIizalion ignoves speciJic
nalionaI poIic episodes, sucI as lIal invoIving Anevican capilaI inpovls in lIe 1980s. In n ovn
deJense, Iovevev, I can nole lIal lIose invoIved in poIilicaI deIales ovev lIe veguIalion oJ
inlevnalionaI JinanciaI JIovs lo and Jvon lIe Uniled Slales do appeav lo Iave Iongev-levn
considevalions in nind.
35. Fov delaiIs on lIe 1983 IMF quola incvease deIale, see Fvieden, BanIing on lIe WovId, pp.
179-90.
36. Again, as nenlioned aIove, lIis sIouId Ie quaIiJied vilI caveJuI allenlion lo nalionaI
inslilulionaI diJJevences. In sucI counlvies as Spain and IlaI, lIe nalionaI IanIing sslen lended
lo Junclion as a pvolecled cavleI, so lIal lIe venovaI oJ capilaI conlvoIs and JinanciaI veguIalions
na Iave Iavned segnenls oJ lIe JinanciaI connunil. TIe issue is nol cIeav-cul: IanIs nigIl
suppovl lIe venovaI oJ capilaI conlvoIs Iul oppose lIe enlv oJ Joveign IanIs, and lIe slvongev IocaI
IanIs nigIl veIcone deveguIalion iJ lIis vouId aIIov lIen lo Iegin IuiIding veIalions vilI IanIs
aIvoad. TIis is, oJ couvse, a lopic on vIicI JuvlIev veseavcI nusl Ie done.
37. See Benjanin J. CoIen, Euvopean FinanciaI Inlegvalion and NalionaI BanIing Inlevesls,
in Fiev CavIo Fadoan and FaoIo Ouevvievi, eds., TIe FoIilicaI Econon oJ Euvopean Inlegvalion
|London Havveslev WIealsIeaJ, 1989), pp. 145-70. Fov an inlevesling pevspeclive on lIe
inpIicalions oJ JinanciaI deveguIalion, see lIe JoIIoving vovIs oJ Villovio OviIIi FinanciaI
MavIels and 1992, BvooIings Fapevs on Econonic Aclivil, no. 2, 1989, pp. 301-24: and Euvope
1992 Issues and Fvospecls Jov lIe FinanciaI MavIels, Econonic FoIic 9 |OcloIev 1989), pp.
388-421. Begavding lIe inpovlanl issue oJ lIe U.S. vesponse lo Euvopean and Japanese poIicies,
see TIonas Baavd and KinIevI Ann EIIiol, Becipvocil in FinanciaI Sevvices TIe ScIunev
Anendnenl and lIe Second BanIing Biveclive, nineogvapI, 1990.
oJ lIe veguIalov cIanges. NonelIeIess, lIe genevaI pallevns appeav consonanl
vilI lIe appvoacI sel JovlI Ieve.38
To sunnavize lIis seclion, lIe dislviIulionaI eJJecls oJ incveased cvoss-
Iovdev capilaI noIiIil can Ie slviIing. In a genevaI and Iong-levn sense, il na
Ie lIal inlevnalionaI JinanciaI inlegvalion incveases lIe inJIuence oJ capilaI I
naIing il easiev Jov ovnevs oJ JinanciaI assels lo laIe lIen aIvoad in vesponse
lo nalionaI poIicies lIe do nol IiIe. TIe nove innediale vesuIls in lIe
deveIoped vovId Iave Ieen lo dvive a vedge Ielveen lvo canps, lIe Jivsl
consisling oJ lIe JinanciaI seclov, ovnevs oJ JinanciaI assels, and inlegvaled
nuIlinalionaI Jivns, aII oJ vIicI Iave gained vilI JinanciaI inlegvalion, and lIe
second consisling oJ Jivns speciJic lo a pavlicuIav induslv and Iocalion, aII oJ
vIicI Iave Ieen Iavned I lIe genevaII incveased conpelilion Jov scavce
IoanaIIe Junds. TIe cIeav pvediclion is Jov conJIicl Ielveen lIese inlegvalionisl
Jovces and anli-inlegvalionisl Jovces. Bul poIilicaI deIale Ias nol Ieen and
viII nol Ie veslvicled lo poIicies diveclI concevned vilI incveasing ov velavding
inlevnalionaI capilaI noIiIil, and il is lo lIe dislviIulionaI and poIilicaI
inpIicalions oJ JinanciaI inlegvalion ilseIJ Jov lIese olIev deIales lIal ve nov
luvn.
TIe dislviIulionaI eJJecls oJ econonic poIicies in a
JinanciaII inlegvaled vovId
WIiIe lIe poIilicaI divisions IiIeI lo enevge ovev lIe desived degvee oJ
inlevnalionaI JinanciaI inlegvalion ave inpovlanl, lIe genevaI incvease in
inlevnalionaI capilaI noIiIil is aIso IiIeI lo cIange inlevesl gvoup aclivil on a
vide vange oJ olIev econonic poIic pvoIIens. OIoIaI JinanciaI inlegvalion Ias
aIvead sIiJled nucI poIilicaI aclivil diveclI ov indiveclI lovavd lIe excIange
vale in vas lIal inpI nev socioecononic and poIilicaI divisions. Il vaises
pvoIIens oJ inlevnalionaI poIic coopevalion lIal na Ie loo nev lo anaIze in
delaiI. And, in sone vas, JinanciaI inlegvalion na Iave an inpacl on lIe
slvenglI oJ seclovaI IoIIing. TIis seclion suvves lIese expecled eJJecls.
Again, lIe pvoIIen Ieve is nol lo do vilI lIe IeveI oJ JinanciaI inlegvalion ilseIJ:
I laIe as given a IigI IeveI oJ inlevnalionaI capilaI noIiIil in ovdev lo see Iov
lIis IeveI aJJecls poIilicaI IeIaviov and poIic in olIev veaIns.
38. Tvo exceIIenl sludies ave Louis W. FauI's OpeningFinanciaI MavIels BanIingFoIilics on lIe
FaciJic Bin |IlIaca, N.Y. CovneII Univevsil Fvess, 1988) and Fvances McCaII BosenIIulI's
FinanciaI FoIilics in Conlenpovav Japan |IlIaca, N.Y. CovneII Univevsil Fvess, 1989). In Japan, as
in sone Euvopean nalions, nenIevs oJ lIe IanIing connunil veve veIuclanl lo see inlevnalionaI
conpelilion lIvealen lIeiv doneslic cavleI, Iul lIe vapid gIoIaIizalion oJ JinanciaI navIels appeavs
lo Iave Ied lIen lo vegavd deveguIalion as lIe Iellev oJ lvo eviIs. Fov a nove delaiIed eIaIovalion
oJ lIis avgunenl, see BoIIav and Fvieden, TIe FoIilicaI Econon oJ FinanciaI BeveguIalion in lIe
Uniled Slales and Japan. Fov an avgunenl lIal is conpIenenlav in nan vas lo lIe one
pvesenled Ieve, see JoIn Ooodnan and Louis FauI, TIe Nev FoIilics oJ InlevnalionaI CapilaI
MoIiIil, nineogvapI, Havvavd Univevsil Business ScIooI and Univevsil oJ Tovonlo, 1990.
OIoIaI Jinance 443
One pveIininav oIsevvalion Ias lo do vilI lIe polenliaI eJJecls oJ incveased
inlevnalionaI capilaI noIiIil on lIe inlensil oJ seclovaI inlevesls oJ ovnevs oJ
capilaI. TIe slavling poinl is lIal lIe nove speciJic lIe assel is lo ils cuvvenl
use-lIal is, lIe nove suIslanliaI is lIe cosl allacIed lo noving lIe assel Jvon
ils cuvvenl use lo ils Iesl aIlevnalive use-lIe nove incenlive lIe ovnev oJ lIe
assel viII Iave lo IoII Jov suppovlive govevnnenl poIicies.39 Agenls in a seclov
lo vIicI exil and enlv ave coslIess Iave IillIe ov no incenlive lo spend line,
enevg, and none lo gel govevnnenl suppovl, since lIis suppovl viII Ie
dissipaled I nev enlvanls inlo lIe seclov.
To picI up Jvon lIe pvevious discussion oJ lIe eJJecls oJ JinanciaI capilaI
noIiIil on seclovaI poIicies, inasnucI as gIoIaI JinanciaI inlegvalion naIes il
easiev Jov inveslovs lo gel inlo ov oul oJ a pavlicuIav seclov, il veduces lIe
incenlive Jov seclovaI IoIIing. AIlIougI lIeve is IillIe evidence lIal lIis eJJecl
Ias Ieen Iavge, il is lIeovelicaII pIausiIIe. An inlegvaled vovIdvide JinanciaI
navIel oJ enovnous size, conpaved vilI nan segnenled nalionaI navIels,
nigIl indeed aIIov Jov lIe deveIopnenl oJ inslvunenls and necIanisns lIal
vouId JaciIilale lIe vedepIonenl oJ capilaI Jvon one use lo anolIev. TIese
couId incIude Ivoadev and deepev Juluves navIels and insuvance scIenes,
Iellev inJovnalion lo polenliaI Iovvovevs and Iendevs, and nove veadiI
avaiIaIIe venluve Jinance.40
IJ indeed inlevnalionaI JinanciaI inlegvalion does veduce Iavvievs lo enlv
and exil oJ inveslovs lo and Jvon speciJic econonic aclivilies, il couId veduce
lIe seclovaI ovienlalion oJ IoIIing I inveslovs.41 IJ JinanciaI inlegvalion naIes
il easiev Jov Jivns lo exil and enlev nan diJJevenl seclovs, lIeiv allacInenl lo a
pavlicuIav seclov na Ie veduced. InasnucI as lIis laIes pIace, ve nigIl
39. TIeve ave a nunIev oJ vas oJ lIinIing aIoul lIis. In one, lIe vesuIl oIlains Iecause
diJJicuIl oJ exil Jvon a seclov conslilules a Iavviev lo enlv lo il lIe InovIedge lIal inveslnenl in
lIe seclov conlains an inpovlanl ivvevevsiIIe conponenl viII veduce lIe IiIeIiIood oJ nev inveslovs
enleving in vesponse lo veIalive pvice cIanges lIal na nol Ie pevnanenl. In lIis sense, Iavvievs lo
exil ave Iavvievs lo enlv: since enlv Iavvievs incvease lIe eJJecliveness oJ seclov-speciJic poIicies in
aiding exisling agenls in lIe seclov, lIe incvease lIe veluvns lo poIilicaI IoIIing.
40. FossiIiIilies sucI as lIese lend lo inpI inpevJecl conpelilion-incveasing veluvns and
Ieavning-I-doing-in lIe JinanciaI seclov, vIicI is aInosl cevlainI lIe case. Fov a vepvesenlalive
lIeovelicaI appvoacI aIong lIese Iines, see SlepIen B. WiIIianson, Incveasing Beluvns lo ScaIe in
FinanciaI Inlevnedialion and lIe Non-NeulvaIil oJ Oovevnnenl FoIic, Beviev oJ Econonic
Sludies 53 |OcloIev 1986), pp. 863-75.
41. TIis is jusl a veslalenenl oJ lIe genevaI nolion lIal lIe capilaI navIels and poIilicaI IoIIing
ave in sone sense suIslilules |aIIeil inpevJecl ones). TIis idea sounds aIsuvd lo nosl poIilicaI
scienlisls, Iul pevJovn lIe JoIIoving lIougIl expevinenl iJ inpovl-conpeling aulonoIiIe
nanuJacluvevs couId seII aII oJ lIeiv equipnenl lo lIe Japanese al a pvice lIal vouId aIIov lIen lo
naIe a navIel pvoJil, lIeiv incenlive lo engage in coslI and line-consuning IoIIing Jov
pvoleclion vouId Ie nucI Iovev. Ov, aIlevnaliveI, iJ aulovovIevs couId in sone va seII lIeiv sIiIIs
and lIeiv seniovil lo Japanese aulovovIevs Jov an anounl equaI lo vIal lIe nigIl Iave Ioped lo
eavn vilI lIese sIiIIs and seniovil, lIeiv incenlive lo IoII vouId Ie Iovev. TIe Jacl lIal navIels
Jov lIese assels ave inconpIele ov nonexislenl sinpI sevves lo poinl oul lIal lIe poIilicizalion oJ
lIe issue is expecled. WIiIe lIeve ave nol navIels Jov lIese assels, lIeve ave good navIels Jov olIev
assels-and ve expecl ovnevs oJ sucI assels lo Ie Iess poIilicaII aclive.
expecl nove poIilicaI aclion I ovnevs oJ capilaI as a cIass and Iess pavlicipa-
lion oJ capilaIisls in seclovaI IoIIing.
Hovevev, as avgued aIove, even iJ lIis lvend exisls, il is enIvonic and ils
inpacl Ias el lo Ie JeIl lIe seclov speciJicil oJ capilaI Ias nol Ieen
neasuvaII veduced I inlevnalionaI JinanciaI inlegvalion. TIe nosl pvoninenl
eJJecl oJ incveased capilaI noIiIil is nol on lIe IeveI oJ seclovaI IoIIing Iul,
valIev, on lIe cIavaclev oJ seclovaI IoIIing and lIe poIic pveJevences avising
vIen lIe seclovs ave lIvovn logelIev in puvsuil oJ govevnnenl suppovl.
TIe inpacl oJ capilaI noIiIil on lIe expecled poIilicaI Iineup ovev
nacvoecononic poIic is in Jacl slviIing. Tvo inlevveIaled dinensions oJ poIic
cIoice ave especiaII inpovlanl lIe degvee oJ excIange vale JIexiIiIil and lIe
IeveI oJ lIe excIange vale ilseIJ. WilI vegavd lo lIe Jivsl dinension, lIe
MundeII-FIening condilions sevve as a poinl oJ veJevence.42 BecaII lIal, vilI
capilaI noIiIil, a counlv Jaces sonelIing oJ a lvade-oJJ Ielveen excIange
vale slaIiIil and nonelav poIic aulonon lIe nove lIe counlv's excIange
vale is IeId conslanl, lIe Iess ils nonelav poIic can deviale Jvon lIal oJ lIe
vesl oJ lIe vovId. WIiIe sone aclovs viII Javov a Iov degvee oJ excIange vale
JIexiIiIil |a Jixed vale sucI as lIe goId slandavd) despile lIe Ioss oJ nonelav
poIic aulonon, olIevs viII Ie viIIing lo accepl a IigI degvee oJ excIange vale
JIexiIiIil |JveeI JIoaling vales) in excIange Jov poIicnaIing aulonon. WilI
vegavd lo lIe second dinension, vIicI is lIe pveJevved IeveI oJ lIe excIange
vale ilseIJ, sone Jixing oJ excIange vales is assuned. WIiIe sone aclovs viII
pveJev a IigI |nove appvecialed) excIange vale, olIevs viII pveJev a Iov |nove
depvecialed) excIange vale. TIe lvo dinensions and lIe expecled poIic
pveJevences oJ socioecononic aclovs aIong lIen ave pvesenled in Figuve 1 and
discussed in delaiI IeIov. We sIouId Ieep in nind lIal lIe Jiguve pvovides onI
vougI appvoxinalions: vavialion is, oJ couvse, aIong a conlinuun valIev lIan
dicIolonous.
TIe Jivsl dinension invoIves lIe desived degvee oJ excIange vale JIexiIiIil,
vIicI can Ie pvesenled nosl slavII as vIelIev lIe vale sIouId Ie Jixed ov
JIexiIIe. Fixing lIe vale in a vovId oJ noIiIe capilaI inpIies Jovgoing nalionaI
nonelav poIic aulonon in Javov oJ gvealev cevlainl aIoul lIe vaIue oJ lIe
cuvvenc: in olIev vovds, il gives pviovil lo a slaIIe excIange vale ovev lIe
aIiIil oJ nalionaI poIic lo aJJecl doneslic pvices. TIis is especiaII allvaclive lo
lvo gvoups oJ aclovs vIose econonic aclivilies diveclI invoIve inlevnalionaI
lvade and panenls and vIo lIeveJove ave IigII sensilive lo cuvvenc
JIuclualions. InlevnalionaI lvadevs and inveslovs and lIe pvoducevs oJ expovl-
ovienled lvadaIIe goods lend lo suJJev Jvon excIange navIel voIaliIil, since il
42. Sone conpIicalions na vesuIl Jvon lIis neIding oJ lIe MundeII-FIening and speciJic-
Jaclovs nodeIs. TIe MundeII-FIening nodeI genevaII assunes sone unuliIized vesouvces and
sone vage slicIiness, vIiIe lIe speciJic-Jaclovs nodeI does nol. TIe conlvadiclion na Ie veIevanl
Jov lIe anaIsis oJ eJJecls on nalionaI veIJave, Iul il does nol appeav lo nallev nucI Jov lIe sIovl-
and nediun-levn dislviIulionaI eJJecls, vIicI ave lIe Jocus Ieve. Fov a discussion, see Covden,
InJIalion,
ExcIange Bales, and lIe WovId Econon, pp. 22-34.
OIoIaI Jinance 445
FveJevved degvee oJ excIange vale JIexiIiIil
and nalionaI nonelav poIic aulonon
HigI Lov
Inpovl-conpeling Expovl-ovienled
pvoducevs oJ pvoducevs oJ
: oi
lvadaIIe
goods
lvadaIIe
goods
Jov lIe doneslic
navIel
Fvoducevs oJ InlevnalionaI
nonlvadaIIe lvadevs and
goods and sevvices inveslovs
FIOUBE 1. Snopsis oJ lIe poIic pveJevences oJ vavious socioecononic aclovs in
a vovId oJ noIiIe capilaI
naIes lIeiv Iusiness visIiev.43 B lIe sane loIen, lIese aclovs ave veIaliveI
unconcevned aIoul doneslic nacvoecononic condilions, since lIe can ve-
spond lo depvessed IocaI denand I sIiJling lIeiv Iusiness lo olIev counlvies.
In conlvasl, lvo olIev gvoups oJ aclovs lend lo Ie IigII concevned aIoul
doneslic nacvoecononic condilions and lIus Javov lIe nalionaI nonelav
poIic aulonon nade possiIIe I a JIexiIIe excIange vale. TIe Jivsl oJ lIese
gvoups consisls oJ pvoducevs oJ nonlvadaIIe goods and sevvices. Since lIeiv
Iusiness does nol invoIve lIe use oJ Joveign excIange and since cuvvenc
voIaliIil Ias onI indivecl eJJecls al Iesl on lIen, lIe lend lo Iave no cIeav
pveJevence Jov slaIIe excIange vales.44 TIe second gvoup consisls oJ pvoducevs
oJ inpovl-conpeling lvadaIIe goods Jov lIe doneslic navIel, vIo lend lo Ie
veIaliveI indiJJevenl aIoul excIange vale voIaliIil |vIicI na even veduce
inpovl pvessuve inasnucI as il naIes inpovling visIiev) and pvinaviI
concevned aIoul poIicnaIing aulonon.
TIe pveJevences oJ lIe vavious gvoups ave veIevanl, nosl pvoninenlI, lo
poIic deIales aIoul slaIiIizing excIange vales. Based on lIe aIove avgunenls,
43. TIeve ave exceplions pvoducevs oJ lvadaIIe goods in vIicI conpelilion is nol pvinaviI on
pvice |and is inslead, Jov exanpIe, on quaIil) viII Ie Iess sensilive lo excIange vale novenenls.
44. InasnucI as a devaIualion cIanges lIe pvice oJ lvadaIIe goods veIalive lo lIal oJ
nonlvadaIIe goods, il aJJecls pvoducevs in lIe nonlvadaIIes seclov. Hovevev, sucI pvice voIaliIil
aJJecls aII nalionaI nonlvadaIIes pvoducevs nove ov Iess equaII and is lIeveJove Jav Iess signiJicanl
lo lIen lIan il is lo lvadaIIes pvoducevs, vIo see lIeiv oulpul cIange in pvice veIalive lo lIal oJ
lIeiv conpelilovs.
ve can expecl nuIlinalionaI Jivns, inlevnalionaI inveslovs nove genevaII, and
inlevnalionaII ovienled pvoducevs oJ lvadaIIe goods lo Ie nove snpalIelic lo
cuvvenc slaIiIil, vIiIe ve can expecl pvoducevs in lIe nonlvadaIIes seclov
and pvoducevs oJ inpovl-conpeling lvadaIIe goods lo Ie nosl inlevesled in
nalionaI nonelav poIic aulonon.
In poIic deIales aIoul lIe IeveI oJ lIe excIange vale, vIicI is lIe second
dinension noled in Figuve 1, ve can expecl lIe inlevesls oJ vavious econonic
seclovs lo lvacI lIe veIalive pvice cIanges invoIved in depvecialion ov
appvecialion oJ lIe cuvvenc. Fvon a diJJevenliaI dislviIulionaI slandpoinl, lIe
Iovev |nove depvecialed) lIe excIange vale, lIe IigIev is lIe pvice oJ lvadaIIe
goods veIalive lo nonlvadaIIe goods. TIis, oJ couvse, lends lo IeIp pvoducevs oJ
lvadaIIe goods-vIose oulpul pvices vise nove lIan lIe pvices oJ lIe
nonlvadaIIe inpuls lIe use-and lo Iuvl pvoducevs oJ nonlvadaIIe goods.
Fvoducevs in lIe lvadaIIes seclov lIeveJove Javov a veaIev cuvvenc lIal naIes
lIeiv pvoducls nove conpelilive in Ione and Joveign navIels. In conlvasl,
pvoducevs in lIe nonlvadaIIes seclov genevaII IeneJil Jvon cuvvenc appvecia-
lion, vIicI vaises lIe doneslic veIalive pvice oJ lIeiv pvoducls and Iovevs lIe
doneslic veIalive pvice oJ lvadaIIe goods.45 SiniIavI, inlevnalionaI lvadevs and
inveslovs, vIo ave inlevesled in puvcIasing assels ovevseas, Javov a slvong
cuvvenc.46
45. Fov lIose unJaniIiav vilI lIe appvoacI, lIe veaI excIange vale can Ie expvessed as lIe
veIalionsIip Ielveen lIe pvice oJ nonlvadaIIe goods and lIal oJ lvadaIIe goods. B assunplion, lIe
pvice oJ lvadaIIes is sel on vovId navIels and cannol Ie cIanged |in Joveign cuvvenc levns) I
nalionaI poIic. In olIev vovds, lIe Joveign cuvvenc pvice oJ lvadaIIes is an ancIov avound vIicI
doneslic pvices nove. Bepvecialion naIes lvadaIIes veIaliveI nove expensive in doneslic
cuvvenc levns, vIiIe nonlvadaIIes Iecone veIaliveI cIeapev. Appvecialion Ias lIe opposile
eJJecls. In lIe veaI vovId, lIese eJJecls can Ie oJJsel, Jov exanpIe I cIavaclevislics oJ pvoducl
navIels, Iul lIeve is IillIe douIl lIal lIe genevaI pallevn IoIds. WIen lIe doIIav vas slvong, lIe
doIIav pvices oJ leIevision sels and cIolIing veve Iov, vIiIe lIe pvice oJ Iousing soaved. As lIe
doIIav JeII, lIe doIIav pvice oJ Iavd goods vose, vIiIe lIe pvice oJ Iousing slagnaled ov decIined.
Bespile sone conlvovevs aIoul lIe appvoacI, il is cIose enougI lo consensuaI lo vavvanl ils use.
One inpovlanl considevalion lo Ieep in nind is lIe exlenl lo vIicI lIe veIalive pvice eJJecl |sa
oJ an appvecialion on vaising denand Jov nonlvadaIIe goods) na Ie counlevacled I lIe
nacvoecononic eJJecl |sa oJ veduced aggvegale denand nove genevaII): lIis is, so lo speaI, lIe
conlesl Ielveen lIe incone and suIslilulion eJJecls ov Ielveen expendiluve veduclion and
expendiluve svilcIing. Fov a useJuI suvve and appIicalion lo lIe LBCs, see SeIaslian Edvavds,
BeaI ExcIange Bales, BevaIualion and Adjuslnenl |CanIvidge, Mass. MIT Fvess, 1989). Fov nove
lecInicaI essas, see JoIn BiIson and BicIavd Mavslon, eds., ExcIange Bale TIeov and Fvaclice
|CIicago Univevsil oJ CIicago Fvess, 1984). AnolIev poinl lo Ieep in nind is lIal lIe
nonlvadaIIe goods and sevvices seclov incIudes lIose vIo opevale IeIind pvoIiIilive Iavvievs lo
lvade |especiaII quolas).
46. OJ couvse, Jvon lIe slandpoinl oJ an ovevseas inveslov, lIe desive Jov a slvong Ione cuvvenc
lo aIIov gvealev puvcIases oJ ovevseas assels is IaIanced I lIe desive lo naxinize Ione cuvvenc
eavnings Jvon lIese assels, vIicI denands a veaI Ione cuvvenc. TIe Iesl possiIIe scenavio, as
usuaI, is lo Iu cIeap and seII deav-lIal is, lo Iu Joveign cuvvenc vIen lIe Ione cuvvenc is
slvong and seII il vIen lIe Ione cuvvenc is veaI. TIeve ave a nunIev oJ deJensiIIe lIeovelicaI
veasons vI inlevnalionaI inveslovs nigIl Javov slvong Ione cuvvencies: il is pvoIaII enougI lo
nole Ieve lIal enpivicaII lIe lend lo do so. On lIe veIalionsIip Ielveen Joveign divecl
inveslnenl and lIe excIange vale, see Sleven W. KoIIIagen, ExcIange Bale CIanges,
FvoJilaIiIil, and Bivecl Foveign Inveslnenl, SoulIen Econonic JounaI 44 |JuI 1977), pp. 43-52.
OIoIaI Jinance 447
FveIininav evidence seens lo Ieav oul lIese expeclalions IolI on lIe
dinension oJ excIange vale JIexiIiIil and on lIal oJ lIe IeveI oJ lIe excIange
vale ilseIJ.47 FevIaps lIe avena in vIicI lIe cIoice Ielveen nonelav poIic
aulonon and cuvvenc slaIiIil Ias Ieen posed nosl diveclI is in lIe
deveIopnenl oJ lIe excIange vale necIanisn oJ lIe Euvopean Monelav
Sslen |EMS) and lIe suIsequenl novenenl lovavd a singIe EC cuvvenc.48
TIe aIove discussion Ias sslenalic pvediclions aIoul pvivale-seclov alli-
ludes lovavd lIe excIange vale necIanisn |EBM) oJ lIe EMS.49 I expecl lIe
EBM lo Ie nosl JavovaIIe Jov, and lo evince lIe nosl enlIusiasn Jvon, Jivns in
lIe JinanciaI seclov, najov expovlevs, and divevsiJied nuIlinalionaI covpovalions
vilI najov inveslnenls ov cuslonevs in lIe EC. Evidence is scanl, Iul sone
can Ie pvesenled. One slud oJ polenliaI BvilisI vinnevs and Iosevs Jvon
Bvilain's aJJiIialion vilI lIe EBM essenliaII lvacIs n expeclalions. Inlevna-
lionaII ovienled nanuJacluving and Jinance and veIaled sevvices veve expecled
lo do veII, vIiIe lIe doneslicaII ovienled nanuJacluving and sevvices seclovs
veve expecled lo Ie veaIev.5 OJ Bvilain's lveIve covpovale nenIevs in lIe
Associalion Jov Monelav Union in Euvope, a pvivale-seclov IoIIing ovganiza-
47. FvaclicaII lIe onI sslenalic enpivicaI slud on lIese issues in vecenl eavs is I. M. BeslIev
and C. BandaII Henning's BoIIav FoIilics ExcIange Bale FoIicnaIing in lIe Uniled Slales
|WasIinglon, B.C. Inslilule Jov InlevnalionaI Econonics, 1989), vIicI appeavs lo Ieav oul sone
oJ lIese oIsevvalions. TIe issue is sonevIal cIouded I lIe diJJicuIl, vIicI BeslIev and Henning
vecognize, oJ sepavaling deIales ovev lIe IeveI oJ lIe excIange vale Jvon deIales ovev ils voIaliIil:
in lIe eavI 1980s in lIe Uniled Slales, lIe Jovnev lended lo doninale lIe Iallev. TIe aulIovs nole
lIal inlevnalionaI JinanciaI inslilulions IeneJil Jvon excIange navIel voIaliIil, vIicI can naIe
lIeiv lvading desIs exlveneI pvoJilaIIe. Hovevev, lIe sIouId-and nan do-veigI lIis IeneJil
againsl lIe cosl oJ inlevnalionaI Iusiness Jovegone Iecause oJ uncevlainl aIoul cuvvenc vaIues.
Al Ieasl sone povlion oJ lIe inlevnalionaI Iusiness oJ Anevican none-cenlev IanIs is due lo lIe
videspvead IeIieJ in lIe veIiaIiIil oJ lIe doIIav and lIe Anevican nacvoecononic envivonnenl
nove genevaII.
48. TIe Iilevaluve on lIe EMS is nov enovnous, and aInosl aII oJ il is puveI econonic in
conlenl. Fov an exceIIenl suvve aIong lIese Iines, see Fvancesco Oiavazzi and AIIevlo Oiovannini,
Liniling ExcIange Bale FIexiIiIil TIe Euvopean Monelav Sslen |CanIvidge, Mass. MIT Fvess,
1989). Fov a good slud lIal discusses nan oJ lIe doneslic and inlevnalionaI poIilicaI aspecls oJ
lIe EMS, see Felev LudIov, TIe MaIing oJ lIe Euvopean Monelav Sslen |London BullevvovlI,
1982): unJovlunaleI, evenls Iave noved Jav Ieond vIal LudIov descviIed in 1982.
49. I avoid lIvee issues lIal ave nove cIoseI associaled vilI a singIe cuvvenc pev se lIe
polenliaI veIJave cosls oJ veduced seignovage oppovlunilies, lIe veIJave gains associaled vilI
veduced lvansaclions cosls, and lIe polenliaII diJJevenliaI inpacl oJ lIese veduced lvansaclions
cosls on vavious econonic agenls. I Jocus enliveI on lIe nove innediale issue oJ lIe diJJevenliaI
eJJecls oJ Jixed Iul adjuslaIIe excIange vales vilIin lIe EMS. Fov a discussion oJ sone oJ lIese
olIev issues, see Bavv EicIengveen, One Mone Jov Euvope? Econonic FoIic 5 |ApviI 1990),
pp. 118-87.
50. See S. O. WavIuvg Secuvilies, Inlo lIe EBM TIe OulIooI Jov lIe UK Econon and Equil
MavIel, London, Augusl 1990. A sunnav laIIe is on p. 31, Iul nove useJuI seclovaI sunnavies ave
on pp. 32-52. TIe pvojeclions ave conpIicaled a Iil |Jov ouv puvposes) I lIe slud's conJIalion oJ
gvealev excIange vale slaIiIil vilI a Jivnev pound slevIing, IolI oJ vIicI il expecls lo ensue Iul
vIicI na opevale in sIigIlI diJJevenl diveclions dislviIulionaII, as I discuss IeIov. TIe slud aIso
noles lIal vIiIe 45 pevcenl oJ pvoJils Jvon Jivns in lIe FinanciaI Tines slocI excIange index ave
Jvon ovevseas aclivilies |expovls and pvoJils oJ Joveign aJJiIiales), onI 13 pevcenl cone Jvon lIe EC
and 17 pevcenl Jvon NovlI Anevica. TIis na IeIp expIain sone oJ lIe BvilisI veIuclance lo lie
slevIing lo lIe EBM, especiaII al a line vIen lIe Euvopean cuvvencies veve appvecialing slvongI
againsl lIe doIIav.
lion Jov vapid cuvvenc union, eigIl ave Jvon Jivns in lIe JinanciaI and veIaled
sevvices seclovs, lvo ave Jvon divevsiJied nuIlinalionaI covpovalions, and lvo
ave najov expovlevs.5 In lIe aIsence oJ sslenalic enpivicaI vovI, Jev sevious
assessnenls can Ie nade, Iul lIe pallevns ave suggeslive.52
TIe second dinension, lIe IeveI oJ lIe excIange vale, is a JaniIiav lopic oJ
deIale in nan counlvies, especiaII lIose Jov vIicI inlevnalionaI lvade is vev
inpovlanl and lIose vIicI Iave a Iislov oJ excIange vale voIaliIil |cIavaclev-
islics lIal appI pvinaviI lo deveIoping and snaII deveIoped counlvies).
FoIilicaI conJIicl ovev lIe excIange vale Ias Iecone inpovlanl in Iavgev nalions
as veII. One slviIing exanpIe is lIe Uniled Slales, vIeve Ielveen 1981 and
1986 nucI oJ lIe poIilicaI aclivil lIal nigIl olIevvise Iave laIen lIe Jovn oJ
pvessuve Jov lvade pvoleclion inslead Jocused on lving lo gel lIe aulIovilies ov
olIev aclovs lo Jovce lIe doIIav lo depveciale veIalive lo lIe cuvvencies oJ lIe
counlv's najov lvading pavlnevs.53 TIe evidence, especiaII Jvon lIe Uniled
Slales in lIe 1980s, appeavs consonanl vilI lIe expeclalions pvesenled aIove.54
TIese vaving excIange vale pveJevences in luvn aJJecl pveJevences lovavd
diJJevenl nacvoecononic poIicies. WilI capilaI noIiIil, an expansionav
nonelav poIic Ieads lo depvecialion oJ lIe cuvvenc, vIiIe an expansionav
JiscaI poIic Ieads lo appvecialion. Fvoducevs oJ lvadaIIe goods sIouId lIus
pveJev nonelav expansion, and pvoducevs oJ nonlvadaIIe goods and sevvices
sIouId pveJev JiscaI expansion. TIis viII especiaII Ie lIe case iJ lIe JiscaI
expansion laIes lIe Jovn oJ a divecl ov indivecl incvease in spending on
nonlvadaIIe goods, vIicI is quile IiIeI vIeve govevnnenl spending is invoIved
|deJense, inJvaslvucluve, and sociaI spending ave genevaII nonlvadaIIes). TIis
na IeIp expIain lIe pecuIiav pallevn oJ U.S. econonic poIic duving lIe
Beagan eavs. WilI lIe adninislvalion's pvincipaI Iases oJ suppovl in lIe
deJense connunil, in veaI eslale and veIaled seclovs, and in lIe inlevnalionaI
inveslovs gvoup, pvessuves veve Jov incveased spending on nonlvadaIIes. TIe
vesuIlanl appvecialion nigIl Iave Ieen counleved I nonelav expansion, as
vas in Jacl denanded I lIe lvadaIIe goods pvoducevs Iuvl I lIe inpovl
suvge, Iul lIe nonlvadaIIes consliluencies vanled il veinJovced I ligIl none,
nol dissipaled. In olIev vovds, lIe nix oJ Ioose JiscaI and ligIl nonelav
poIicies na Iave Ieen Iess a nislaIe, as nosl econonisls and oIsevvevs
51. TIe lveIve covpovale nenIevs ave BavcIas, BvilisI Aevospace, BvilisI Anevican ToIacco,
BvilisI FelvoIeun, CiliIanI, Evnsl and Young, OoIdnan SacIs, InpeviaI CIenicaI Induslvies,
MidIand Monlagu, SaIonon InlevnalionaI, SIeavson BvolIevs, and S. O. WavIuvg. TIe Associa-
lion oJ Covpovale Tveasuvevs is aIso a nenIev.
52. Fov an evaIualion oJ nan oJ lIese deveIopnenls, see JeJJve FvanIeI, TIe MaIing oJ
ExcIange Bale FoIic in lIe 1980s, nineogvapI, Univevsil oJ CaIiJovnia al BevIeIe, 1990.
Again, lIe poIilicaI econon conponenl oJ FvanIeI's discussion Jocuses, as did nosl oJ lIe
deIales, on lIe IeveI oJ lIe excIange vale valIev lIan on ils voIaliIil.
53. In BoIIav FoIilics, pp. 17-80, BeslIev and Henning pvovide an exceIIenl inlevpvelive suvve oJ
lIe couvse oJ doIIav poIilics and poIicies ovev lIe 1980s.
54. Fov descviplions oJ lIe inlevpIa oJ lIe vavious inlevesl gvoups, see BeslIev and Henning,
BoIIav FoIilics: FvanIeI, TIe MaIing oJ ExcIange Bale FoIic in lIe 1980s: and C. BandaII
Henning, InlevnalionaI Monelav FoIicnaIing WilIin lIe Counlvies oJ lIe Ovoup oJ Five,
nineogvapI, 1990.
OIoIaI Jinance 449
concIuded al lIe line, lIan il vas a veJIeclion oJ lIe doninance oJ poIilicaI
pvessuves Jvon nonlvadaIIe goods pvoducevs and olIev suppovlevs oJ a slvong
doIIav ovev lvadaIIe goods pvoducevs vIo vanled a veaIev doIIav.
AnolIev issue lIal Ias gained in inpovlance in a vovId oJ gveal capilaI
noIiIil is inlevnalionaI poIic coovdinalion. Because JinanciaI inlegvalion can
naIe il diJJicuIl Jov nalionaI aulIovilies lo puvsue nacvoecononic poIicies lIal
diJJev Jvon lIose oJ lIeiv JinanciaI neigIIovs, il na naIe sense lo
coovdinale sucI poIicies. TIis vouId, Jov exanpIe, avoid conpelilive cuvvenc
depvecialions, in vIicI a counlv puvsuing an expansionav nonelav poIic
and lIus cuvvenc depvecialion againsl ils lvading pavlnevs Jinds ilseIJ JoiIed as
ils pavlnevs nalcI lIe nonelav expansion and depvecialion, Ieaving lIe
cuvvencies' veIalive IeveIs uncIanged. AIlevnaliveI, counlvies lving lo pvevenl
lIeiv cuvvencies Jvon depvecialing nigIl unnecessaviI Iid up inlevesl vales in a
conpelilive allenpl lo avoid a capilaI oulJIov. TIe oIvious soIulion lo sucI
pvoIIens is Jov lIe veIevanl poIicnaIevs lo coopevale in lavgeling excIange
vales and olIev nacvoecononic indicalovs.55
TIeve ave nan polenliaI pvoIIens vilI inlevnalionaI nacvoecononic poIic
coovdinalion. Sone IeIieve lIal sucI govevnnenl inlevvenlion is Iess desivaIIe
lIan Ielling lIe navIels laIe lIeiv couvse: olIevs IeIieve lIal lIe diJJicuIlies oJ
coovdinalion ave neavI insuvnounlaIIe.56 Anong lIe coovdinalion pvoIIens is
lIal sIigIl divevgences in vievs anong nalionaI poIicnaIevs na naIe
veIJave-inpvoving coopevalion exlveneI diJJicuIl.57 Il is indeed IiIeI lIal lIe
doneslic poIilicaI undevpinnings oJ lIe polenliaI coopevaling govevnnenls viII
diJJev, Ieading lo diJJevenl pveJevences ov inlevpvelalions aIoul lIe gains Jvon
coopevalion and Iov lIe nigIl Iesl Ie acIieved.
In lIis IigIl, once again lIe diJJevenliaI doneslic dislviIulionaI eJJecls oJ
sucI poIic coovdinalion ave veIevanl. Nol suvpvisingI, I expecl lIose vIose
econonic aclivilies ave nosl sensilive lo Joveign JinanciaI and excIange navIel
condilions lo Ie nosl JavovaIIe lo lIe sacviJice oJ nalionaI poIic aulonon
inpIied I poIic coovdinalion. InlevnalionaI inveslovs, lvadevs, and lIe IiIe ave
apl lo Ie veII disposed, vIiIe lIose in lIe nonlvadaIIes seclov-vIose
Iusinesses na Ie Iavned I lIe sacviJice oJ aulonon vilI IillIe ov no
covvesponding IeneJil Jvon coovdinalion-ave pvone lo Ie opposed. A veIaled
sel oJ issues Ias lo do vilI lIe coovdinalion oJ olIev nalionaI poIicies, sucI as
55. One inJIuenliaI and conlvovevsiaI pvoposaI vas oJJeved I JoIn WiIIianson and Mavcus
MiIIev in Tavgels and Indicalovs A BIuepvinl Jov lIe InlenalionaI Coovdinalion oJ Econonic FoIic
|WasIinglon, B.C. Inslilule Jov InlevnalionaI Econonics, 1987).
56. Fov sone vepvesenlalive suvves oJ lIis vapidI gvoving Iilevaluve, see Mavlin FeIdslein, ed.,
InlenalionaI FoIic Coovdinalion |CIicago Univevsil oJ CIicago Fvess, 1988): and JeJJve FvanIeI,
OIslacIes lo InlenalionaI Macvoecononic FoIic Coovdinalion, Fvincelon Sludies in InlevnalionaI
Finance no. 64 |Fvincelon, N.J. Bepavlnenl oJ Econonics, InlevnalionaI Finance Seclion, 1988).
57. Fov a denonslvalion oJ lIis poinl, see JeJJve FvanIeI and KalIavine BocIell, InlevnalionaI
Macvoecononic FoIic Coovdinalion WIen FoIic-MaIevs Bo Nol Agvee on lIe Tvue ModeI,
Anevican Econonic Beviev 78 |June 1988), pp. 318-40. TIe avgunenl is conlvovevsiaI: anong
olIev lIings, il assunes lIal poIicnaIevs lv lo naxinize nalionaI veIJave, ignoves lIe polenliaI
cosls oJ nol coopevaling |ov nol appeaving lo coopevale), and naIes il diJJicuIl lo expIain
civcunslances in vIicI coovdinalion Ias appavenlI Ieen acIieved.
laxalion.58 On lIis suIjecl, lIeve is so IillIe anaIlic vovI and indeed so IillIe
expevience in lIe veaI vovId lIal coovdinalion is noslI specuIalion. Hovevev,
IolI lIe lvends vilIin lIe EC and lIe discussions anong olIev deveIoped
counlvies indicale lIal il viII IiIeI Ie a lopic oJ gveal inpovlance in lIe 1990s.
TIese oIsevvalions Iave lo do vilI lIe inlevesls in pIa, nol necessaviI vilI
lIe oulcone oJ poIilicaI conJIicl anong lIen. FoIilicaI and poIic oulcones viII
oJ couvse depend on Iov inlense pveJevences ave, Iov concenlvaled and
ovganized lIe vavious inlevesls ave, and Iov poIilicaI and olIev sociaI
inslilulions inJIuence lIeiv inlevaclion. Hov successJuI lIe vavious inlevesl
gvoups viII Ie al oIlaining lIeiv oIjeclives viII vav Jvon case lo case and Jvon
counlv lo counlv. NonelIeIess, a cIeav undevslanding oJ lIe econonic
inlevesls invoIved is a cvuciaI slavling poinl Jov anaIsis.
TIis seclion can Ie sunnavized quile sinpI. FinanciaI inlegvalion Ias
inpIicalions Jov lIe dislviIulionaI eJJecls-and lIeveJove lIe poIilics-oJ
nalionaI poIicies. Ovev lIe Iong vun, access lo Ivoadev and deepev JinanciaI
navIels na lend lo veduce lIe seclovaI speciJicil oJ capilaI and lIeveI
danpen sone seclovaI denands-Iul lIis gvaduaI pvocess is unIiIeI evev lo
eIininale sucI denands. TIe nove innediale inpIicalion is lIal poIilicaI
Iineups ovev nacvoecononic poIicies ave IiIeI lo cIange quile signiJicanlI.
A lvade-oJJ Ielveen nalionaI nacvoecononic poIic aulonon and excIange
vale slaIiIil Ias deveIoped, vilI inlevnalionaI inveslovs and lvadevs nove
viIIing lo give up aulonon Jov slaIiIil and vilI lIe nonlvadaIIes and
doneslicaII ovienled seclovs nove inlevesled in aulonon lIan in JIuclualions
in lIe excIange vale. ConJIicl Ias inlensiJied nol onI ovev lIe JIexiIiIil Iul
aIso ovev lIe IeveI oJ lIe excIange vale. WIiIe suppovl Jov nonelav expansion
and depvecialion Ias lended lo cone Jvon pvoducevs oJ lvadaIIe goods,
suppovl Jov nonelav conlvaclion and appvecialion Ias cone Jvon inlevna-
lionaI inveslovs and pvoducevs oJ nonlvadaIIe goods and sevvices. Al lIe sane
line, lIe coovdinalion oJ nalionaI nacvoecononic poIicies Ias Iecone an
inpovlanl poIilicaI pvoIIen al IolI lIe inlevnalionaI and lIe doneslic IeveI.
Nol suvpvisingI, lIose Jov vIon ovevseas econonic condilions ave nove
veIevanl |inlevnalionaI inveslovs and lvadevs and pvoducevs oJ lvadaIIe
goods) viII Javov nove coovdinaled poIicies-and lIus a suvvendev oJ nove
nalionaI poIic aulonon-lIan viII lIose Jov vIon doneslic condilions ave
delevninanl.
ConcIusions
WilIoul vepealing lIe poinls nade in lIe avlicIe, I can enpIasize a Jev
concIusions. Hanpeved as nalionaI govevnnenls na Ie ov appeav lo Ie in lIe
58. See, Jov exanpIe, AIIevlo Oiovannini, NalionaI Tax Sslens Vevsus lIe Euvopean CapilaI
MavIel, Econonic FoIic 9 |OcloIev 1989), pp. 346-86.
OIoIaI Jinance 451
Jace oJ an inlevnalionaII inlegvaled JinanciaI sslen, lIe conlinue lo Iave
veapons in lIeiv poIic avsenaI. TIese veapons na nol Ie as sIavp ov
nunevous as IeJove, Iul lIe exisl. Man seclovaI poIicies can Ie eJJeclive, as
can nacvoecononic poIicies iJ poIicnaIevs aIIov lIe excIange vale lo vav.
Hovevev, lIe dislviIulionaI inpIicalions oJ inlevnalionaI capilaI noIiIil ave
slviIing. In lIe Iong vun, ovnevs oJ capilaI Iave pvoIaII gained veIalive lo
olIev gvoups. In lIe sIovlev vun, ovnevs and vovIevs in speciJic seclovs in lIe
deveIoped vovId Jace sevious cosls in adjusling lo incveased capilaI noIiIil.
InlevnalionaI capilaI noIiIil aIso cIanges lIe pallevn oJ IoIIing ovev
nalionaI poIicies. Il na, ovev lIe Iong vun, danpen sone seclovaI denands
Jvon ovnevs oJ capilaI. Move speciJicaII, and in lIe sIovlev vun, il lends lo
sIiJl deIale lovavd lIe excIange vale as an inlevnediale ov uIlinale poIic
inslvunenl, lIeveI dviving a vedge Ielveen lIose nove sensilive and lIose
Iess sensilive lo excIange vale JIuclualions and Ielveen lIose vIo Javov
cuvvenc appvecialion and lIose vIo Javov depvecialion. To sone exlenl, lIis
lvacIs a division oJ lIe econon Ielveen pvoducevs oJ lvadaIIe goods on lIe
one Iand and inlevnalionaI inveslovs and pvoducevs oJ nonlvadaIIe goods and
sevvices on lIe olIev.
TIis avlicIe sels JovlI a sevies oJ pvoposilions lIal can Ie IvougIl lo Ieav on a
vide vaviel oJ pvoIIens Iaving lo do vilI lIe poIilics oJ lIe inlevnalionaI
novenenl oJ capilaI. SucI pvoIIens, il is saJe lo pvojecl, viII Ie oJ gveal
anaIlic and poIic inpovlance in eavs lo cone. TIe possiIiIil Jov lIe
enpivicaI evaIualion oJ lIe appvoacI pvesenled Ieve and Jov JuvlIev lIeovelicaI
and enpivicaI eIaIovalion is cIeav. As ve appvoacI 1992 and as pavaIIeI
deveIopnenls evoIve eIsevIeve in lIe vovId, lIe oppovlunil Jov and necessil
oJ sucI vovI viII Ie enovnous, and a Iellev undevslanding oJ vIal is al slaIe
viII Ie oJ gveal inpovlance.

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Invesled Inlevesls TIe FoIilics oJ NalionaI Econonic FoIicies in a WovId oJ OIoIaI Finance

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