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Power and the Control of Capital

Published online by Cambridge University Press:  13 June 2011

Jeffrey A. Winters
Jeffrey A. Winters
Affiliation:
Northwestern University
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Abstract

This essay reviews three recent books on the political economy of finance in postcolonial Asia and Latin America and suggests a framework for examining the relationship between political power and varying patterns of control over investment resources. The stress is on the constraints different controllers of capital can impose on state leaders, the conditions under which policymakers can subvert these constraints, and how conflicts within the state over the trajectory of policy are mediated by who (or what) supplies critical investment resources and the institutional channels through which the resources flow.

Type
Review Articles
Information
World Politics , Volume 46 , Issue 3 , April 1994 , pp. 419 - 452
Copyright
Copyright © Trustees of Princeton University 1994

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References

1 See Moore, Barrington Jr., The Social Origins of Dictatorship and Democracy: Lord and Peasant in the Making of the Modern World (Boston: Beacon Press, 1966)Google Scholar; Schumpeter, Joseph A., “The Crisis of the Tax State,” in Musgrave, Richard A. and Peacock, Alan T., eds., Classics in the Theory of Public Finance (New York: MacMillan, 1958), esp. 14–16Google Scholar; Bates, Robert H. and Lien, Da-Hsiang Donald, “A Note on Taxation, Development and Representative Government,” Politics and Society 14, no. 1 (1985)CrossRefGoogle Scholar; Kiser, Edgar and Barzel, Yoram, “The Origins of Democracy in England” (Preliminary draft presented at the conference on “Revenue Extraction and the Institutionalization of the State,” Seattle, April 27–29, 1990)Google Scholar.

2 Karl Polanyi writes: “In England it became the unwritten law of the Constitution that the working class must be denied the vote. The Chartist leaders were jailed; their adherents, numbered in the millions, were derided by a legislature representing a bare fraction of the population, and the mere demand for the ballot was often treated as a criminal act by the authorities.” He adds: “Inside and outside England, from Macaulay to Mises, from Spencer to Sumner, there was not a militant liberal who did not express his conviction that popular democracy was a danger to capitalism” (p. 226). Polanyi, , The Great Transformation: The Political and Economic Origins of Our Time (Boston: Beacon Hill Press, 1944)Google Scholar. Robert Dahl makes the point for the United States: one of the deepest concerns of John Adams, Thomas Jefferson, and James Madison, among others at the Constitutional Convention, was that “political equality might conflict with political liberty.” They “had been alarmed by the prospect that democracy, political equality, majority rule, and even political liberty itself would endanger the rights of property owners to preserve their property and use it as they chose” (p. 2). Dahl, , A Preface to Economic Democracy (Berkeley: University of California Press, 1985)Google Scholar.

3 Rudolf Goldscheid writes that “the masses which eventually acquired greater power in the State saw themselves cheated of their prize when they got not the rich State but the poor one.” In the era of constitutional government “state and property became separated” for the first time in history. “The rising bourgeois classes wanted a poor State, a State depending for its revenue on their good graces, because these classes knew their own power to depend upon what the State did or did not have money for” (p. 205). See Goldscheid, “A Sociological Approach to Problems of Public Finance,” in Musgrave and Peacock (fn. 1), 202–13. For an opposing view, see Przeworski, Adam and Wallerstein, Michael, “Structural Dependence of the State on Capital,” American Political Science Review 82 (March 1988)CrossRefGoogle Scholar. Frieden also believes that despite high capital mobility, governments still have significant power to control economic policies. See Frieden, , “Invested Interests: The Politics of National Economic Policies in a World of Global Finance,” International Organization 45 (Autumn 1991)CrossRefGoogle Scholar.

4 Pack, Spencer J., Capitalism as a Moral System (London: Edward Elgar, 1991), provides a useful reviewGoogle Scholar.

5 Of course, Canada, Australia, and the United States are all postcolonial. Throughout this essay the term refers to countries in Asia, Africa, and Latin America. Though not ideal, it is preferable to “Third World” or “developing.”

6 Braverman, Harry, Labor and Monopoly Capital: The Degradation of Work in the Twentieth Century (New York: Monthly Review Press, 1974)Google Scholar.

7 On the use of the term “capital controllers” instead of the more narrow “capitalists,” see Dahrendorf, Ralf, Class and Class Conflict in Industrial Society (London: Routledge and Kegan Paul, 1959) esp. 41–48Google Scholar. The literature on the tension between communities and those controlling capital for them is extensive and extremely rich. See Gunn, Christopher and Gunn, Hazel Dayton, Reclaiming Capital: Democratic Initiatives and Community Development (Ithaca, N.Y.: Cornell University Press, 1991)Google Scholar; Logan, John R. and Molotoch, Harvey L., Urban Fortunes: The Political Economy of Place (Berkeley: University of California Press, 1987)Google Scholar; Eisinger, Peter K., The Rise of the Entrepreneurial State: State and Local Economic Development Policy in the United States (Madison: University of Wisconsin Press, 1988)Google Scholar; Crenson, Matthew, The Un-Politics of Air Pollution (Baltimore: Johns Hopkins University Press, 1971)Google Scholar; Peterson, Paul E., City Limits (Chicago and London: University of Chicago Press, 1981)CrossRefGoogle Scholar; Perrons, D. C., “The Role of Ireland in the New International Division of Labour: A Proposed Framework for Regional Analysis,” Regional Studies 15, no. 2 (1981)CrossRefGoogle Scholar; Ward, M. F., “Political Economy, Industrial Location and the European Motor Car Industry in the Postwar Period,” Regional Studies 16, no. 6 (1982)CrossRefGoogle Scholar; Walker, Richard A. and Storper, Michael, “Capital and Industrial Location,” Progress in Human Geography 5, no. 4 (1981)Google Scholar.

8 Polanyi (fn. 2) makes the point nicely. See also Lindblom, Charles E., “The Market as Prison,” Journal of Politics 44 (May 1982)CrossRefGoogle Scholar; idem, Politics and Markets (New York: Basic Books, 1977)Google Scholar; and Block, Fred, “The Ruling Class Does Not Rule: Notes on the Marxist Theory of the State,” Socialist Revolution 7 (May-June 1977)Google Scholar.

9 Those controlling less mobile forms of capital also exercise structural power, though the time between, say, a threat to disinvest and actually doing so tends to be much longer. From the perspective of a government official, more time translates into less pressure.

10 For a useful historical perspective, see Neal, Larry, The Rise of Financial Capitalism: International Capital Markets in the Age of Reason (Cambridge: Cambridge University Press, 1990)Google Scholar. See also Feis, Herbert, Europe, the World's Banker, 1870–1914 (1930; reprint, New York: A. M. Kelley, 1964)Google Scholar.

11 Hilferding, Rudolf, Finance Capital: A Study in the Latest Phase of Capitalist Development, edited with an introduction by Bottomore, Tom (1910; reprint, London: Routledge and Kegan Paul, 1981)Google Scholar; Lenin, V. I., Imperialism: The Highest Stage of Capitalism (1917; reprint, Moscow: Foreign Languages Publishing House, 1950)Google Scholar; Luxemburg, Rosa, The Accumulation of Capital (1913; reprint, London: Routledge and Kegan Paul, 1951)Google Scholar; Bukharin, N., Imperialism and the World Economy (1917; reprint, London: Merlin, 1972)Google Scholar. Hilferding's analysis of the expanding role of banks in industry from the middle of the nineteenth century forward, particularly in Central Europe, prepared the way for Gerschenkron's, Alexander very influential Economic Backwardness in Historical Perspective: A Book of Essays (Cambridge: Belknap Press of Harvard University Press, 1962), esp. chaps. 1, 2, 6Google Scholar.

12 Unlike Bukharin, Hilferding did not believe that interimperialist war was inevitable. Indeed, he felt the new organizing role for industry being played by banks and even the state introduced a degree of regulation and planning in the economy that augured well for socialists. In Hilferding's view, the new relationship between state and bourgeoisie meant that the state should no longer be smashed but rather should be taken over and extended. See Bottomore's discussion in Hilferding (fn. 11), 8–9. In Classes in Contemporary Capitalism (London: Verso, 1978)Google Scholar, esp. parts I and II, Nicos Poulantzas revisits the ideas of Hilferding, Lenin, and Luxemburg concerning finance capital. Polanyi's discussion (fn. 2) of the powerful role played by haute finance in preventing the outbreak of large-scale war in Europe during the nineteenth century is also noteworthy.

13 Gerschenkron (fn. 11); McKinnon, Ronald, Money and Capital in Economic Development (Washington, D.C.: Brookings Institution, 1973)Google Scholar; Shaw, Edward, Financial Deepening in Economic Development (New York: Oxford University Press, 1973)Google Scholar. Maurice Dobb concerns himself only with the matter of the economic efficacy of planning and directing industry, leaving aside the political question of controlling capital. See Dobb, “Some Reflections on the Theory of Investment Planning and Economic Growth,” and idem, “The Question of Investment-Priority for Heavy Industry,” both in Dobb, , Papers on Capitalism, Development, and Planning (New York: International Publishers, 1967)Google Scholar. For an overview of developments in this literature, see Stephan Haggard, Chung Lee, and Sylvia Maxfield, eds., The Politics of Finance in Developing Countries (Ithaca, N.Y.: Cornell University Press, forthcoming), chap. 1.

14 This literature is quite large. Important contributions include Hirsch, Fred and Goldthorpe, John H., eds., The Political Economy of Inflation (Cambridge: Harvard University Press, 1978)Google Scholar; Lindberg, Leon N. and Maier, Charles S., eds., The Politics of Inflation and Economic Stagnation: Theoretical Approaches and International Case Studies (Washington, D.C.: Brookings Institution, 1985)Google Scholar; Ilgen, Thomas, Autonomy and Interdependence: U.S.-Western European Monetary and Trade Relations, 1958–1984 (Totowa, N.J.: Rowman and AUanheld, 1985)Google Scholar. For a business perspective, see Meerschwam, David M., Breaking Financial Boundaries: Global Capital, National Deregulation, and Financial Services Firms (Boston: Harvard Business School Press, 1991)Google Scholar. A recent and thoughtful contribution is O'Brien, Richard, Global Financial Integration: The End of Geography (London: Pinter Publishers, 1994)Google Scholar.

15 A work that was quite influential is Payer, Cheryl, The Debt Trap: The IMF and the Third World (New York and London: Monthly Review Press, 1974)Google Scholar. A more recent work is Broad, Robin, Unequal Alliance: The World Bank, the International Monetary Fund, and the Philippines (Berkeley: University of California Press, 1988)Google Scholar.

16 Important works in this literature include Zysman, John, Governments, Markets, and Growth: Financial Systems and the Politics of Industrial Change (Ithaca, N.Y.: Cornell University Press, 1983)Google Scholar; and Rosenbluth, Frances, Financial Politics in Contemporary Japan (Ithaca, N.Y.: Cornell University Press, 1989)Google Scholar. Another important historical-institutionalist work is Katzenstein, Peter, Between Power and Plenty: Foreign Economic Policies of Advanced Industrial States (Madison: University of Wisconsin Press, 1976)Google Scholar. Works with a long historical perspective include Bagehot, Walter, Lombard Street (1927; reprint, London: Kegan, Paul and Company, 1973)Google Scholar; Smith, Vera C., The Rationale of Central Banking (London: P. S. King and Son, 1936)Google Scholar; Cameron, Rondo E., Banking and Economic Development: Some Lessons of History (New York: Oxford University Press, 1972)Google Scholar; Cameron, Rondo E. et al., eds., Banking in the Early Stages of Industrialization: A Study in Comparative Economic History (New York: Oxford University Press, 1967)Google Scholar; and finally Cottrell, P. L., Lindgren, Hakan, and Teichova, Alice, eds., European Industry and Banking between the Wars: A Review of Bank-Industry Relations (New York: Leicester University Press, 1994)Google Scholar.

17 Toniolo, Gianni, ed., Central Banks Independence in Historical Perspective (Berlin and New York: Walter de Gruyter, 1988)Google Scholar; Downes, Patrick and Vaez-Zadeh, Reza, eds., The Evolving Role of Central Banks (Washington, D.C.: International Monetary Fund, 1991)Google Scholar; and Goodman, John B., “The Politics of Central Bank Independence,” Comparative Politics 23 (April 1991)CrossRefGoogle Scholar.

18 One of the few attempts besides Maxfield to focus on the power of bankers themselves is Harris, Jose and Thane, Pat, “British and European Bankers 1880–1914: An ‘Aristocratic Bourgeoisie’?” in Thane, Pat, Crossick, Geoffrey, and Floud, Roderick, eds., The Power of the Past: Essays for Eric Hobsbawm (Cambridge: Cambridge University Press, 1984)Google Scholar. Though mainly concerned with Marxist debates over links between the old aristocracy and the emergent bourgeoisie, these authors reconstruct what is known about the social and political affiliations and economic power of bankers and financiers in late-nineteenth and early-twentieth-century Europe. See also Moran, Michael, “Finance Capital and Pressure-Group Politics in Britain,” British Journal of Political Science 11 (October 1981)CrossRefGoogle Scholar.

19 Poknyi (fn. 2) writes: “Bentham was the first to recognize that inflation and deflation were interventions in the right of property: the former a tax on, the latter an interference with, business” (p. 226).

20 See the classic work by Willis, Henry Parker, The Theory and Practice of Central Banking: With Special Reference to the American Experience, 1913–1935 (New York: Harper Publishers, 1936)Google Scholar; Warburg, Paul M., The Federal Reserve System, Its Origins and Growth: Reflections and Recollections (New York: MacMillan, 1930)Google Scholar; Goodhart, Charles A., The Evolution of Central Banks (Cambridge: MIT Press, 1988)Google Scholar; Toniolo (fn. 17); and Goodman (fn. 17). Useful case studies and and comparative volumes include Jucker-Fleetwood, Erin Elver, Money and Finance in Africa: The Experience of Ghana, Morocco Nigeria, the Rhodesias and Nyasaland, the Sudan, and Tunisia from the Establishment of their Central Banks until 1962 (New York: Praeger, 1964)Google Scholar; Lock, Lee Hock, Central Banking in Malaysia: A Study of the Development of the Financial System and Monetary Management (Singapore: Buttersworth, 1987)Google Scholar; Central Banking in an Era of Change: Landmark Speeches, 1959–1988 (Kuala Lumpur: Bank Negara Malaysia, 1989)Google Scholar; Central Bank of Kenya: Its Evolution, Responsibilities, and Organization (Nairobi: Central Bank, 1986)Google Scholar; Badrud-Din, Abdul-Amir, The Bank of Lebanon: Central Banking in a Financial Centre and Entrepot (London: Pinter Publishers, 1984)Google Scholar; The Central Bank of Sri Lanka: Functions and Workings (Colombo: Central Bank, 1986)Google Scholar; Collyns, Charles, Alternatives to the Central Bank in the Developing World, Occasional Paper no. 20 (Washington, D.C.: International Monetary Fund, 1983)CrossRefGoogle Scholar; Kapstein, Ethan B., “Between Power and Purpose: Central Bankers and the Politics of Regulatory Convergence,” International Organization 46 (Winter 1994).Google Scholar

21 A quick list of nationalizations that were (or are being) reversed would include Colombia (1982; reversed in 1992), Peru (1987, when the Banco de Credito's front door was bashed in by a small tank; reversed within two years), El Salvador (1980; reversed in 1993), Pakistan (1972; reversed in early 1990s), India (1969; private banks could open as of 1993), Libya (1970; private banks allowed again in 1993), Portugal (1975; reversed in 1993), and even France (1981–82; reversed in 1987). To my knowledge, nationalizations of the banking sector in the following states have not been reversed: Israel (1983), Iraq (1965), Uganda (1966), Oman (1968), and Tanzania (1967).

22 This point receives further elaboration in Centeno, Miguel Angel and Maxfield, Sylvia, “The Marriage of Finance and Order: Changes in the Mexican Political Elite,” Journal of 'Latin American Studies 24 (February 1994).Google Scholar

23 She clarifies her argument still further when she says elsewhere: “The more vulnerable Mexico was to international capital outflows and, conversely, the greater the country's need for foreign inflows, the more leverage the bankers' alliance had in domestic policy debates” (p. 165).

24 It is clear that this leverage was solidly restored by the time Silva Herzog, the minister of finance in the early 1980s and a core representative of the bankers' alliance, was scheduled to fly to Toronto to negotiate with the World Bank and IMF for relief on the country's massive debt, which was in desperate need of restructuring. Herzog objected to some of the president's choices to head the newly nationalized banks in 1982. “The finance minister refused to leave for the meeting in Toronto,” Maxfield writes, “until several names were stricken from the list of new bank directors.” A bank analyst said that by the time Herzog was through, “there was no one the former owners [of the banks] could object to” (p. 149). These early victories were crucial in subverting the attempt by the Mexican state to seize control of the country's financial structure. By the early 1990s the banks would be privatized.

25 The structural power of private capital controllers associated with the bankers' alliance was restored almost as rapidly as it had been undermined. Kuo reports the following figures: Between the early 1970s and the early 1980s, international bank lending to developing countries totaled $700 billion. Annual flows of medium- and long-term credit peaked in 1982 at $37.6 billion. The drop thereafter was precipitous. Lending (in billions) in 1983 was S23.9; in 1984 just 118.9; in 1985 down to $14.1. In the first half of 1986 the volume of long- and medium-term bank loans to postcolonial states was only $2.9 billion! See Kuo, Chich-Heng, International Capital Movements and the Developing World: The Case of Taiwan (New York: Praeger, 1991), 5.Google Scholar

26 See Maxfield, 126. A similar development occurred in Indonesia about the same time, with the creation of Tim Keppres Sepuluh, or “Team 10.” See Jeffrey A. Winters, Power in Motion: Capital Mobility and the Indonesian State (Ithaca, N.Y.: Cornell University Press, forthcoming), chap. 3.

27 Maxfield's excellent discussion of the CCE (Consejo Coordinador Empresarial) and other business groups can be found on pp. 55–56 and pp. 120–30.

28 In Mexico, Maxfield notes, “Central Bank and Finance Ministry officials often ruled out policy changes expected to displease bankers and large-scale industrialists, on the grounds that they would cause capital flight” (p. 183). On the importance of signaling and anticipation, see Hirschman, Albert O., Exit, Voice and Loyalty: Response to Decline in Firms, Organizations, and States (Cambridge Harvard University Press, 1970)Google Scholar; Bates and Lien (fn.l); Block (fn. 8); and Winters (fn. 26).

29 In this vein, see Wade's devastating attack on the “neoliberal paradigm,” which he characterizes as having entered a “degenerative stage, taking on attributes of a disciplined delusional system” (p. 280). Wade, Robert, “East Asia's Economic Success: Conflicting Perspectives, Partial Insights, Shaky Evidence,” World Politics 44 (January 1994).Google Scholar

30 I present a somewhat similar analysis of Indonesian's deregulation of finance in the early 1980s. I argue that economic ministers in Indonesia did not passively manage crises originating in international financial linkages, but instead manipulated and even augmented them as part of their struggles against opponents within the state. See Winters, Jeffrey A., “Banking Reform in Indonesia: External Linkages and Created Crises” (Mimeo, December 1994)Google Scholar. An early version of this paper was presented at the annual meeting of the American Political Science Association, Chicago, September 1992. For an excellent analysis of the myriad ways private bankers in the U.S. have used their control of finance to exert political pressure, see Glasberg, Davita Silfen, The Power of Collective Purse Strings: The Effects of Bank Hegemony on Corporations and the State (Berkeley: University of California Press, 1989).Google Scholar

31 On the absence of an effective regulatory framework for these funds and also on why banks loaned in the risky manner they did in the 1970s, see Wellons, Phillip A., Borrowing by Developing Countries on the Euro-Currency Market, Development Centre Studies (Paris: Development Centre of the OECD, 1977)Google Scholar. The difficulties faced by Indonesian economic officials and their allies in the World Bank and IMF as they tried to control Pertamina's borrowing spree are discussed in Winters (fn. 26), chap. 2.

32 In an attempt to counter what Korean officials were doing with U.S. money flows, Arthur Bloomfield, an economist with the U.S. Federal Reserve, was sent to Korea in the 1950s to create a financial system with a “genuine central bank.” Bloomfield's efforts resulted in a call for the privatization of the banking system and the drafting of the Act Establishing the Bank of Korea, which, according to Woo-Cumings, “would remain by and large a curiosity on paper” (p. 51).

33 See Gerschenkron (fn. 11); and Anderson, Perry, Lineages of the Absolutist State (London: Verso Press, 1979)Google Scholar, esp. pt. II.

34 In 1960 foreign assistance passing through state channels still accounted for more than threequarters of all investment in Korea (p. 81). By the late 1960s the proportion still hovered around 50 percent (p. 108).

35 Woo-Cumings builds on the insights here of Keohane, Robert O., “The Big Influence of Small Allies,” Foreign Policy 2 (1971)Google Scholar, which, not surprisingly, focuses mostly on Korea and Taiwan. Callaghy also underscores the point in a different context, in noting that “the international system also has important particularistic characteristics as its constituent states, corporations, organizations, and classes pursue their own ideal and material interests. This allows … states some relative autonomy [externally].” See Callaghy, Thomas M., The State-Society Struggle: Zaire in Comparative Perspective (New York: Columbia University Press, 1984), 33.Google Scholar

36 One can hardly fault the South Koreans for feeling insecure. “Of some 629 guerrilla-related incidents reported for 1968 alone,” Woo-Cumings writes, “the most noteworthy was a North Korean commando attack on the presidential residence that claimed some 100 casualties and was a near miss on Park's life” (p. 122).

37 See Woo-Cumings, 229 n. 27.

38 Frieden sprinkles disclaimers around to alert his audience that he knows he has made “heroic simplifications” and, true to the neoclassical view of things, has stripped reality down to a few core motives and relations. “I do this,” he writes, “in the interest of explanatory power and expository simplicity” (p. x). He adds that his book represents “an opening salvo” and that “more complex and nuanced tools than generally used here” will be needed as “modern political economy” develops (p. 12).

39 Frieden's chapter on Brazil is particularly wide-ranging, including numerous references to works written in Portuguese. He also conducted interviews with “hundreds” of officials, investors, scholars, and journalists in Latin America. Regrettably, evidence of these interviews appears only five or six times in the footnotes.

40 Frieden relies mainly on Williamson for his concept of asset specificity and on Olson and Hardin for concentration and the associated collective action problems. See Williamson, Oliver E., The Economic Institutions of Capitalism (New York: Free Press, 1985)Google Scholar; Olson, Mancur, The Logic of Collective Action: Public Goods and the Theory of Groups (Cambridge: Harvard University Press, 1965)Google Scholar; and Hardin, Russell, Collective Action (Baltimore: Johns Hopkins University Press, 1982)Google Scholar. Also see Warr, Peter G., “The Private Provision of a Public Good Is Independent of the Distribution of Income,” Economics Letters 23 (1983), 207–11.CrossRefGoogle Scholar

41 Lonsdale, John, “States and Social Processes in Africa: A Historiographical Survey,” African Studies Review 24 (June-September 1981), 144.CrossRefGoogle Scholar

42 See Frieden, Jeffry, “Classes, Sectors, and Foreign Debt in Latin America,” Comparative Politics 21, no.l (1988).CrossRefGoogle Scholar

43 This sort of high-low, effective-ineffective, interventionist-noninterventionist dualism informs the entire study. One wonders where cases like Indonesia would fit in; Frieden would probably classify it as “low class conflict,” because of the massacre of nearly a million alleged communists in 1965. Since the late 1960s its economic policy has been a dizzying mixture of markets and intervention, though not along sectoral lines, it should be said. And what of the Philippines, where Marcos steadfastly pursued crony-capitalism even as the New People's Army took control of ever wider areas of the country? See Hutchcroft's, Paul D. excellent essay, “Oligarchs and Cronies in the Philippine State: The Politics of Patrimonial Plunder, World Politics 43 (April 1991).CrossRefGoogle Scholar

44 Frieden's choice of words is reminiscent of standard American press reports in which labor always “demands” and management always “offers.” In Chile, he says, “labor militancy grew by leaps and bounds” (p. 149). Politics became “increasingly polarized” thanks to the “strength of the Chilean left,” which “drove the country's business community to a level of concern over property rights unmatched elsewhere in Latin America” and thereby “set the stage for the military coup of September 1973” (p. 143). In Argentina, the Peronists had “alienated business” (p. 206) and were responsible for the “political unrest” that rendered that country unattractive to potential lenders (p. 207). One wonders where “business militancy” was in all of this or even what it might look like.

45 “The general point,” Frieden writes, “is that economic characteristics of assets determine the policy preferences of their owners” (p. 22).

46 Frieden downplays this point in his book, though he has written lucidly on it elsewhere. See Frieden (fn. 42). For further insights into the ways those with mobile assets were able to respond to debt problems in Latin America, see Felix, David and Sanchez, Juana, “Pooling Foreign Assets and Liabilities of Latin American Debtors to Solve Their Debt Crisis: Estimates of Capital Flight and Alternative Pooling Mechanisms,” Research in International Business and Finance 7 (1989).Google Scholar

47 In an appendix to his chapter on Brazil, Frieden tries to show that a disproportionate share of foreign loans did go to concentrated/cohesive sectors with high asset specificity. A single indicator, the four-firm concentration ratio (the percentage of output accounted for by the largest four firms in an industry), tells us all we need to know. Frieden assumes that a high concentration of output among the top four firms occurs because of high asset specificity. This same ratio, remarkably, gives a “rough sense of cohesion” because “more concentrated sectors are easier to organize” (p. 139). Here Frieden has either changed what he means by “cohesion” (from a measure of relations between labor and capital within a sector to relations among firms), or he thinks it is easier to organize good relations between labor and capital when a sector's four-firm concentration ratio is high. In any event, it is convenient to have a single indicator that measures everything. Maxfield reiterates in Governing Capital that foreign loans flowed to large firms in Mexico while small and medium-size firms in Canacintra were forced to borrow from higher-priced domestic institutions. Woo-Cumings, as we saw, also stresses firm size as a critical factor in who received financial resources from the state in Korea. She adds: “Korean bankers, who are state employees, and Ministry of Finance officials might show favoritism to larger enterprises in anticipation of their 'retirement' into business” (p. 230 n. 38). Meanwhile, small and medium-scale firms borrowed at more expensive rates through the “curb,” an informal network. My own observations of conditions across Southeast Asia support the conclusion that foreign commercial loans flow overwhelmingly to large businesses and investors with important political and military connections. In his zeal to show that asset specificity explains loan patterns, Frieden uses data from a single study to conclude: “No correlation was found between the prevalence of large firms in each sector and the sector's external borrowing. … Many other potential independent variables—participation of foreign corporations, capital-output ratios, export orientation—were also tested, with no statistically significant results” (p. 140).

48 Frieden's footnotes and even his own writings indicate he is fully aware of these other modalities of power. For the sake of the modern political economy method, he has apparently decided to treat them as unimportant.

49 Within states are nested subjurisdictions (provinces, counties, cities). In recent decades supranational jurisdictional lines have also begun to form (the European Community and, on a much more modest scale, NAFTA).

50 Chapter 7 in Maxfield, which compares Brazil and Mexico, provides an excellent discussion of the sorts of historical-institutional differences that help account for cross-national variations.

51 The will to monitor is not always strong, particularly when the recipient diverting the money to unintended uses happens to be an important ally. In 19901 watched officials at USAID in Jakarta scramble as a U.S. Government Accounting Office mission swept through with calculators in hand. The USAID people pleaded with the pointy-headed GAO team to “take into account the delicate situation we face in Indonesia.”

52 Private lenders—who provide the largest fraction of international lending—have been loathe to involve themselves in the internal affairs of borrowing nations, for both political and business reasons. Most international banks have a variety of financial interests in potential borrowing countries, and these interests make it important for the banks to maintain good relations with the host governments. Involvement in domestic economic policy could threaten these relations. Further, it is difficult for any one bank to impose stringent conditions on a borrower because the opportunity often exists for the borrower to take his business elsewhere.” U.S. Participation in the Witteveen Facility: The Need for a New Source of International Finance, Budget Issue Paper for Fiscal Year 1979 (Washington, D.C.: Congressional Budget Office, GPO, March 1978), 16.Google Scholar

53 See Brown, Brendan, The Flight of International Capital: A Contemporary History (London: Croom Helm, 1987).Google Scholar

54 See Bates and Lien (fn.l); Lindblom (fn. 8, 1977, 1982); Block (fn. 8); Winters (fn. 26). The “resource dependence” school in sociology is crucial to the structuralist view. See Hawley, Amos H., Human Ecology: A Theory of Community Structure (New York: Ronald Press, 1950)Google Scholar; Pfeffer, Jeffrey and Salancik, Gerald S., The External Control of Organizations: A Resource Dependence Perspective (New York: Harper and Row, 1978)Google Scholar; Pfeffer, Jeffrey, Power in Organizations (Boston: Pitman Publishers, 1981)Google Scholar.

55 The stock market, meanwhile, is a daily barometer of business confidence. With good news, like the announcement of an austerity budget that cuts spending for subsidies and social services, the stock index will soar. On word of policies business finds deeply injurious or invasive, the market can collapse.

56 Frieden makes the point very nicely:

Today, long-term international investment flows are extraordinarily large, and direct investment has been dwarfed by other, more arms-length, forms of cross-border capital movements. According to one source, net international bond and bank lending was $440 billion in 1989, up from $180 billion just five years earlier. Capital outflows from the thirteen leading industrialized countries averaged $444 billion in 1989, with almost two-thirds of the amount consisting of portfolio investment, in contrast to $52 billion in the late 1970s, with two-thirds consisting of foreign direct investment. Capital outflows were equivalent to 15 percent of world merchandise trade in 1989, in contrast to 7 percent in the late 1970s. According to another source, the outstanding stock of international bank and bond lending was $3.6 trillion in 1989, equivalent to 25 percent of the aggregate gross national product (GNP) of the industrialized countries, in contrast to under $200 billion and 5 percent of aggregate GNP in 1973. (p. 428)

See Frieden, Jeffry A., “Invested Interests: The Politics of National Economic Policies in a World of Global Finance,” International Organization 45 (Autumn 1991)CrossRefGoogle Scholar.

57 Block and Skocpol discuss the exceptional circumstances under which the structural power of capital controllers is undermined. See Block (fn. 8); and Skocpol, Theda, “Political Response to Capitalist Crisis: Neo-Marxist Theories of the State and the Case of the New Deal,” Politics and Society 10, no. 2 (1980)CrossRefGoogle Scholar.