Andrew Walter

From Developmental to Regulatory State? Japan's New Financial Regulatory System

Abstract Recent financial reforms in Japan and elsewhere in Asia represent, for various authors, a fundamental shift in financial governance and in state–business relations in the region. The old ‘developmental’ state in East Asia has supposedly made way for a neoliberal ‘regulatory’ state, with its emphases on agency independence and the non-discretionary enforcement of rules. I show in this paper that this interpretation exaggerates the extent of the transformation in the important case of Japan. Although the outward institutional forms of economic governance in Japan, as with many Asian developing countries, has changed dramatically since the mid-1990s, discretion still remains at the core of economic and financial policy. In the area of Japanese banking regulation and supervision, I show how this highly discretionary application and enforcement has been consistent with domestic political pressures. The result is a substantial divergence between superficial convergence upon international regulatory standards and underlying behaviour. I also give reasons why globalization does not mean that this hybrid regulatory model is unsustainable.

Unravelling the Faustian Bargain: Non-state Actors and the Multilateral Agreement on Investment

This chapter examines the influence of non-state actors in the recent controversial and ultimately unsuccessful negotiations concerning a Multilateral Investment Agreement (MAI) at the OECD. For many, these negotiations have epitomized the growing influence of non-state actors in international affairs, and particularly of multinational business. Launched in 1995 at the behest of the US government, the quest for a liberal multilateral regime governing international investment seemed to many to reflect growing corporate power in the new global economy. In the wake of the Uruguay Round of the GATT, with its controversial agreements in areas like trade in services and TRIPS (trade-related intellectual property rights), these new negotiations reflected a new boldness of global firms. These firms, rather than governments and citizens, appeared to be directing the new agenda of global economic governance.

Whatever happened to the Pacific Century

Typical of the opposing trends that have been a part of the decade 1989 to 1999, many of the states in the Asia-Pacific in these ten years have shifted from ‘miracle’ status to crisis. From being the political and economic model for other countries in both the developing and the developed world, they now signal how best to avoid the less savoury pitfalls of rapid development. The miracle status, deriving from two decades or more of impressive growth rates on the basis of a presumed distinctive politico-economic model, was supposed to herald a Pacific Century. The key characteristics of this new era were a newfound regional coherence and a related transfer of economic and above all political power from the Atlantic community towards Asia-Pacific. The crisis, in turn, is seen as marking the end of that shift in the economic and political centres of gravity.

Global norms and major state behaviour: the cases of China and the United States

When do major states conform to or diverge from global behavioural norms? We argue that existing theories find it difficult to explain important aspects of this variation in behaviour and we offer instead a framework consisting of three explanatory variables: degree of ‘fit’ between global norms and dominant domestic-level norms; actor perceptions of procedural and substantive legitimacy; and actor perceptions of consequences for the global power hierarchy. We argue that the relative importance of these variables is contingent on the level of domestic salience of the issue area. When salience is high, the degree of normative fit is the primary driver of behavioural consistency; when salience is low, degree of fit becomes less important and the other two variables play a more powerful role in driving behavioural outcomes. We demonstrate how this framework helps to account for the behaviour of the two most important states in the global system, China and the United States, in five areas of central importance to the contemporary global order: the limited use of force, macroeconomic policy surveillance, the non-proliferation of nuclear weapons, climate protection and financial regulation. Our argument also explains why globalization may reduce rather than increase levels of behavioural consistency with global norms.

Implementation in East Asia

International standards and codes moved to the top of the reform agenda in East Asia after the crisis of 1997–8. To understand why, we need to consider the debate over the causes of the crisis. Initially, two explanations of the 1997–8 Asian crisis dominated the literature: an international explanation and a domestic one. The former located the origins of the crisis in unregulated and volatile international capital flows (Radelet and Sachs, 1998; Wade and Veneroso, 1998). The domestic explanation focused on the ways in which cronyism, corruption and generally poor domestic governance exacerbated problems of moral hazard (Corsetti et al., 1998; Krugman, 1998). The latter explanation predominated in official circles in the developed world and played an important role in the design of the structural reform packages attached as conditions of the IMF-led rescue packages (Blustein, 2001).

From Low to Great Expectations: Banking Crises and Partisan Survival Over the Long Run

How have banking crises affected the survival prospects of political incumbents over the long run? Unlike existing studies, we explore how changing societal expectations concerning how incumbent governments should prevent and respond to crises have reshaped the relationship between crises, institutions, globalization, and politics. We argue that the emergence after 1945 of citizens’ “great expectations” concerning crisis mitigation sharply raised the stakes for incumbent governments in many countries. We test this argument by utilizing a new dataset of 20 developed and developing countries since the early nineteenth century, and show that the survival of political incumbents after crises became increasingly dependent on the perceived ability of governments to respond effectively to them. We also show that the emergence of great expectations was a precondition for the emergence of other factors commonly held to intermediate the political impact of banking crises, including “clarity of political responsibility” and economic openness.

Open economy politics and international security dynamics: Explaining international cooperation in financial crises

Why do states cooperate during international financial crises? A prominent account of such phenomena is provided by the Open Economy Politics approach, which advocates a methodological reductionism that focuses on domestic interests and institutions as explanatory drivers of foreign economic policy. I argue that the appropriateness and utility of this approach diminishes in two important contexts: when levels of economic interdependence and international institutionalization are both high; and when international insecurity is rising. Since the second condition has greater generality in international relations, I test it by focusing on a period when international economic institutionalization was much lower than today: the pre-1914 gold standard system. I show that as levels of interstate rivalry and insecurity rose in the years before 1914, so too did the role of strategic considerations in the international financial policies of the major European powers. The utility of the Open Economy Politics approach for explaining foreign financial policy is therefore contingent on an evolving international context. The argument is of considerable relevance to the contemporary era, when a rapidly evolving international political environment is again reshaping international financial policies.

Policy Responses to Banking Crises Over the Longer Run

What determines government policy responses to banking crises? One prominent analysis of pre-1999 post-war crises claims that democratic governments seek to minimize the public burden of bank insolvency to avoid electoral sanction, and thus are less likely to bail out banks than authoritarian governments. We find no evidence to support this contention. On the contrary, we contend that this limited time window of analysis omits some important dynamic trends; most notably, financialization, that are shaping policy responses to crises in all countries, democratic or otherwise. Drawing on a new dataset of policy responses since the mid-1970s, we use a broader time window to investigate the role of different factors in the evolving policy responses to such crises. We find that rising financialization creates both a generalized bailout propensity for all governments operating in economies likely to be more open to financial innovation, more complexity, and interconnectedness. There is also a specific bailout propensity in democratic countries associated with the relative importance of banks and private sector leverage.

Networked Default: Public Debt, Trade Embeddedness, and Partisan Survival in Democracies Since 1870

Sovereign default is often associated with the downfall of incumbent governments in democratic polities. Existing scholarship directs attention to the relationship between default and domestic politics and institutions rather than the broader international environment wherein repayment and default take place. We explore the possibility that the impact of a country’s decision to default on partisan survival will also be shaped by the prevalence of default amongst its peers in its local network. Illustrating this line of reasoning with international trade, our results support the argument that given networked default, voters see national default as a lost strategic opportunity to elevate a country’s reputation and are more inclined to punish incumbent regimes who fail to repay. These results are inconsistent with an alternative possibility — that networked default might contribute to the decay of a repayment norm and thus provide a justifiable “excuse” for default at home. Furthermore, our results are robust to alternative measures of regime governance and entropy balancing in light of systematic differences between defaulting and non-defaulting regimes. Overall, our findings point to the political interdependence of default and repayment and the need for political scientists to take greater account of network effects in analyzing the consequences of economic misbehavior.

The Mismanagement of Global Imbalances: Why Did Multilateralism Fail?

After all major financial crises, debates about their causes generally continue without resolution for years and even decades. The aftermath of the global financial crisis of 2008–2009 is unlikely to be an exception to this rule. As one example, the debate over whether and how much persistent, large imbalances in international trade and financial flows contributed to the unsustainable boom that preceded the crisis continues.1 In this chapter, I largely leave aside the question of whether global imbalances were an important cause of the crisis, although I argue that the lack of agreement on this issue is one factor — but not the most important — contributing to the continuing inability of governments to take measures that would substantially reduce them. One reason for setting aside the debate about the role of global imbalances in causing the crisis is that even if one took the view that they played little role in producing the crisis, there are a variety of other reasons why they should remain high on the agenda of global economic governance. Not least, continuing large payments imbalances raise concerns about the consequences of the growing net indebtedness of the United States and of the continued accumulation of US dollar-denominated government debt by China, and further complicate the already problematic relationship between Washington and Beijing.2