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Understanding financial globalization in international political economy

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Understanding the nature, origins and consequences of global finance is a central task for contemporary political economy.2 This paper makes three main arguments. First, it is implausible to claim that contemporary levels of financial integration remain low by historical standards (e.g.: Waltz 2000), even if they are not absolutely as high as some believe. Although it is open to dispute as to whether certain countries are more financially integrated today than a century ago, it is indisputable that there has been a dramatic increase in the level of international financial integration since the breakdown of the Bretton Woods system in the early 1970s. Second, I argue that it is now reasonably well-established that financial globalization is not (or at least not yet) the great ‘leveling force’ implied in some of the earlier literature, where it was seen as an increasingly powerful structural constraint upon national policy autonomy in all countries (e.g.: Andrews 1994; Cerny 1995). In fact, the extent to which financial globalization constrains state policy varies considerably both across countries and by policy area, depending upon various national characteristics and institutional structures, as shown in some of the more recent empirical literature (e.g.: Garrett 1998; Quinn 1997; Kitschelt 1999). Third, I argue that it would be wrong to conclude from this somewhat Euro-centric literature that financial globalization has had little effect at all. The emergent international financial structure constrains governments, but very unequally: most of the costs and risks it entails falls largely upon developing countries. Thus, financial liberalization continues to be supported by the major industrialized countries, while there are growing concerns in much of the developing world. This rest of this paper is divided into three sections. The first briefly discusses definitional and empirical issues surrounding the nature and measurement of financial globalization. The second section turns to an assessment of three main contending approaches to understanding financial globalization: technological determinism, hegemonic power, and rationalist interest group explanations. A concluding section discusses the relative merits of the existing dominant approaches in this area and suggests avenues for future research.

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