Archive | International Political Economy

More on Trade and Labor Rights

I want to expand a bit on Henry’s post about trade and labor rights. There is some very good research that shows a positive effect of trade on labor rights in developing countries. For example, this article (ungated, pdf) in the American Political Science Review by Brian Greenhill, Layna Mosley, and Aseem Prakash demonstrates that the labor rights of exporting countries improve not as a function of their overall trade-openness but as they export more to countries with higher labor standards. They refer to this as a “California effect,” named after the idea that high fuel efficiency standards in California raised fuel efficiency everywhere as car makers adjusted production to Californian standards. This is the opposite of the more familiar “ race to the bottom” where producers drop standards to the lowest common denominator in order to remain competitive.

Yet, Layna Mosley shows in her book Labor Rights and Multinational Production that some forms of multinational production are more likely to produce races to the bottom than others. She identifies subcontracting of the variety that Henry blogged about as the most likely to prompt competitive races to the bottom. Subcontracting is fiercely competitive, focused largely on lowering production costs, based on short-term relationships, and has murky chains of accountability. By contrast, directly owned foreign investment creates longer time horizons and better opportunities for activists and others to hold foreign parties responsible for violations of labor standards (see also this article, pdf ungated).

What this and other research shows is that “the limits of voluntary compliance schemes are manifest,” as the  background paper for the World Development Report (WDR) mentioned by Henry puts it. The competitive pressures in subcontracting are generally too large to be ameliorated by political consumerism and companies worried about their brand names. Yet the research also shows that lower labor standards are not an inevitable byproduct of economic globalization as some (not Henry) would have it. This gives hope that better “aligning incentives so that brands, their suppliers, and governments actually implement those standards” (WDR paper) can indeed ameliorate the problem without resorting to protectionism. It also implies an important role for government regulation in ensuring that open markets function appropriately. The WDR paper has a lot more on that.

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James on EMU

I’ve a review in the new issue of The Nation of Harold James’ history of the euro (Powells, Amazon) which does the usual annoying-reviewer-trick of taking a book and using it to talk about things that the reviewer rather than the book’s author wants to talk about. I think this works better than it sometimes does, since the book has lots of juicy (for administrative history values of ‘juicy’) details about the arguments behind the creation of Economic and Monetary Union, which have obvious implications for European politics today. Anyway, judge for yourselves if you’re interested …

In September, the European Central Bank announced that it had taken decisions on a “number of technical features regarding the Eurosystem’s outright transactions in secondary sovereign bond markets.” The ECB did all it could to make these decisions sound like a nonevent. It claimed that the new policy measures—which it gave the incomprehensible-seeming label Outright Monetary Transactions—had the dull but laudable aim of safeguarding “appropriate monetary policy transmission and the singleness of the monetary policy.” As it turns out, Outright Monetary Transactions are anything but simple “technical features.” They have scant relevance to monetary transmission or to conventional monetary policy. Instead, they allow the ECB to do something that it is not supposed to do: intervene in the market for government debt.
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Power and Voting in the European Central Bank

Sebastian Mallaby has a piece in today’s Financial Times arguing that the European Central Bank’s voting system (in which the Germans are heavily outnumbered, despite their economic clout) is a bad deal for Germany. He goes on to argue:

At the start of the 1990s, Germany agreed to the ECB’s governance structure because its postwar leaders were reluctant to press their national interest and because they wanted European acquiescence in German unification. Today, Germany is more assertive and unification is history. It is naive to expect Germans to tolerate governance arrangements that combine high potential taxation without commensurate representation.

This history is plausible, and indeed widely believed to be true, but new research shows that it is historically incorrect. The actual story of how these voting arrangements came into being is told in Harold James’ new book on the history of European Economic and Monetary Union (it’s very good: my review will be coming out in the Nation a couple of weeks from now). James’ work in the archives reveals that the arrangement came into being for a rather different set of reasons. Proposals for this kind of voting system were floated in private meetings of the Delors Committee (which was investigating the possibility of economic and monetary union) in 1988, before the fall of the Berlin Wall (let alone international bargaining over German unification). The source of this proposal? The then-head of Germany’s Bundesbank, Karl-Otto Pöhl. When outlining early ideas for a ‘European Central Bank Council,’ Pöhl drew:

in particular … [on] the experience of the Bundesbank Council, with representation of the German regional central banks (Landeszentralbanken) but no attempt to have weighted voting (in relation to population or economic size), that provided the strongest basis for arguing against a more political version of a European Central Bank (244)

This paved the way for an agreement in 1990 on non-weighted voting among the committee of central bank governors, who were proposing the broad principles on which a European Central Bank would work.

In July, the CoG agreed on the “one man one vote” principle for the ECB Executive Board, which in the case of a conflict would apparently mean that the effective power of the Bundesbank would be greatly reduced. There would be no rotation of voting equivalent to the arrangement that prevails in the Open Market Committee of the Federal Reserve banks, whereby only the New York bank …. has a permanent vote. The central bankers thus rejected the original plan of the EC Commission, which would have made the system much more political. The shift later attracted a great deal of criticism in Germany, which looked to be the loser if the institution was viewed in terms of a balance of power, with influence shifting to the numerous softer-currency and southern countries. But in fact the decision reflected the experience of successful consensus forming in the CoG and indicated the extent to which the Bundesbank was now prepared to trust the stability-oriented monetary philosophies now emerging in other central banks. The exercise of consensus formation in practice, as events later materialized, combined with the avoidance of the formal votes that characterized the Federal Reserve’s Open Market Committee, generally gave German interests a greater rather than a lesser voice in the ECB Council. (284-285)

In short, the decision had nothing to do with tradeoffs surrounding German unification, and instead was a consequence of the Bundesbank’s comfort with its own domestic arrangements and its perception that other central banks shared its basic precepts, so that brute voting strength was likely to be less valuable than more subtle forms of suasion and consensus shaping. Of course, as Mallaby argues, the Bundesbank finds itself in a quite different strategic situation now than it did then, and likely bitterly regrets its earlier decision. More broadly, this story of institution building is an interesting one for international relations scholarship. Typically, IR scholars have tried to explain voting patterns in international organization using versions of Mallaby’s logic, and arguing that states will try to push for voting schemes that favor their interests in hard-elbowed one-shot bargaining situations. This instance of institutional design, however, plausibly fits better with constructivist arguments, which emphasize the ability to persuade, to tacitly shape consensus etc, as a ‘face’ of power that cannot be neglected.

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Is Foreign Aid Effective? The View from Citizens in a Recipient Country

We are delighted to welcome the following guest post by Helen Milner (Princeton), Daniel Nielson (BYU), and Michael Findley (UT-Austin) in which they discuss the implications of a new working paper not presented at APSA.

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Is foreign aid effective? Much research on this question has focused on quantitative measures of large-scale outcomes like a country’s economic growth or level of democracy. These studies have come to mixed conclusions, and debate still rages over whether aid can effectively promote economic development, human rights, democracy, or countless other outcomes.

Prominent critics of aid, such as William Easterly and Dambisa Moyo, recite many of these studies’ findings about aid ineffectiveness.  Easterly and others attribute a good share of aid’s failings to the lack of feedback and accountability. As Easterly (2006:17) says, “The needs of the poor don’t get met because the poor have little political power with which to make their needs known and they cannot hold anyone accountable to meet those needs.”

We strongly agree with the point that feedback is a major problem for foreign aid. But criticisms of aid seem to assume that, in the absence of foreign funds, domestic governments would do a good—or even better—job helping the poor. However, we know that even in rich democratic countries the poor have a very hard time getting their voice heard by their own governments (Bartels 2008; Gilens 2012). The broken feedback loop motivated us to ask people in recipient countries what they thought of aid. In particular, we think the implicit assumption that governments in recipient countries are more attentive to the needs of the poor may be questionable.

We wanted to look at the question of aid effectiveness from a different angle.  What do the citizens in recipient countries think of aid? Do they perceive it to be useful and desirable? Few, if any, systematic studies of citizens’ views of aid in recipient countries have been conducted. Foreign donors sometimes collect such information, but do not release it for public consumption or scrutiny. To explore citizens’ reactions to aid, this summer we conducted a survey and field experiment on a nationally representative sample of Ugandans, as well as on a sample of local village council leaders, provincial governors, and members of parliament. We now have the data from roughly 3,600 Ugandan citizens, and our first report on these data is now available: http://ssrn.com/abstract=2134409.

We learned that Ugandans really like aid, and they want more of it. Uganda is a very poor country and it is heavily aid dependent. But even so, Ugandans by large majorities support additional foreign aid. More than 80% of respondents told us they wanted to see aid increased a lot as opposed to the one percent preferring that it be decreased substantially; 93% preferred at least some increase in aid versus 4% that preferred some decrease.

How do these results relate to aid effectiveness? Aid’s popularity seems to indicate that citizens in recipient countries see aid as beneficial.  However, nearly 80% of respondents also reported that they themselves have not directly benefited from aid, and nearly two-thirds of participants believed that more than half of aid dollars were not spent as intended.  How do we reconcile these beliefs with their strong desire for more aid?

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The International Consequences of US Anti-Bribery Law

The New York Times has an article today on the foreign consequences of the US Foreign Corrupt Practices Act.

A law intended to prohibit the payment of bribes to foreign officials by United States businesses has produced more than $3 billion in settlements. But a list of the top companies making these settlements is notable in one respect: its lack of American names. The companies that have reached the biggest settlements under the law, known as the Foreign Corrupt Practices Act, include Siemens, the German engineering giant; Daimler, the maker of Mercedes-Benz vehicles; Alcatel-Lucent, the French telecommunications company; and the JGC Corporation, a Japanese consulting company. The lone American company in the top 10 is KBR, the former Kellogg Brown & Root, a subsidiary of Halliburton, the Texas oil services company. As a group, they have paid nearly $3.2 billion in settlements.

The article doesn’t discuss the consequences that this has for enforcement of anti-bribery law in the home jurisdictions of these and other foreign companies. Sarah Kaczmarek and Abe Newman find (in an article published late last year in International Organization that there is a robust statistical effect.

The association between U.S. extraterritorial cases and national enforcement is positive and substantively very strong. Holding all other variables constant, the odds of a country enforcing its first case are twenty times greater if a country has experienced extraterritorial application of the FCPA as compared to countries that have not. This finding offers considerable support for our expectation that extraterritorial interventions will be positively associated with the behavior of the target jurisdiction’s enforcement activities.

In other words, many countries that have anti-bribery legislation on their books are disinclined to enforce this legislation against their firms, until the US makes an issue of prosecuting their firms for them. This results in a remarkably large rise in the likelihood of subsequent enforcement.

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