Room to move: International financial markets and national welfare states

A central research question in international and comparative political economy con-cerns the in uence of international nancial markets on government policy out-comes. To what extent does international capital mobility limit government policy choices? Does capital market openness render impossible the public provision of education and health care, income redistribution, and active labor market policies— all hallmarks of the contemporary welfare state? I argue that the in uence of international nancial markets on the governments of advanced industrial democracies is somewhat strong, but also somewhat narrow. Capital market openness allows participants in nancial markets to react dramati-cally to changes in government policy outcomes. Market participants, however, con-sider only a small set of government policies when deciding how to allocate their assets. Therefore, governments face pressures to adopt market-pleasing policies in aggregate policy areas but retain ‘‘room to move’ ’ in many other policy areas. De-spite nancial internationalization, we will observe a signi cant amount of cross-national policy divergence among advanced industrial democracies