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Garrett: Global markets and national politics

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Garrett. 1998. Global markets and national politics: Collision course or virtuous cycle?. International Organization 52 (autumn): 787-824.

MAIN ARGUMENT: Although globalization does impose some new constraints on government, international investors seem more concerned with government debt than with the size of government per se. Those who argue for government interventionism, therefore, need not argue for protectionism as well.

Garret explores the effects of three globalization mechanisms on domestic economic policy

  1. Trade Competitiveness pressures:
    Comparing government spending, deficits, and taxes over time and across countries, he shows that market integration, if anything, puts upward pressures on the size of government. Spending and deficits have increased over the last 40 years as markets have become more integrated. Low tax rates were correlated with greater exposure to trade but the association was weak.
  2. The Multinationalization of production:
    Financial openness was somewhat correlated with smaller deficits and lower taxes. However, FDI flows were weakly associated with higher capital taxes.
  3. The integration of financial markets:
    He shows that financial markets are disinterested in the size and scope of government, but are concerned with deficits and the effect of deficits on inflation.

The reason that governments have maintained control over their economies, according to Garret, is that they provide economically important public goods, including human capital, infrastructure, social stability, and support for the free market (by reducing inequality).

In addition, he finds that the best predictor of the size of government is not globalization pressures or the absence thereof, but the ideological orientation of those in power. Strong left-labor regimes consistently spend more, have higher taxes, and have tighter capital controls regardless of global pressures.

In thinking about these results, recall Katzenstein's argument (from research design) that small countries use a combination of openness and domestic compensation (the welfare state) in managing international economic pressures. Garrett is essentially arguing that as the world becomes more integrated big states will choose to become more like small European states.