CIAO DATE: 11/2008
March 2005
Institute on Globalization and the Human Condition, McMaster University
key question in studies of economic globalization is how much political autonomy do smaller states dependent on larger economic powers have in devising a monetary policy that fits well the needs of their citizens. In looking at this question in this working paper, Professor Louis Pauly answers: “more than you might think.” He takes as his starting point a crucial policy area: foreign economic policy as it bears upon money and exchange. He selects two countries, so-called follower states, whose economies are tightly linked, if not dependent, on major economic powers: Canada and Austria. Canada’s economy is highly interdependent with the US; currently over 85 per cent of Canada’s foreign trade is with this one country. And Austria, of course, has long been closely tied to Germany’s economy.
In a careful review of the foreign economic policies of these two countries in the era since the end of the Second World War, Pauly demonstrates that both countries were able to pursue monetary and exchange rate policies that demonstrated political autonomy. Here autonomy means the capacity to construct policy buffers between it and the dominant state that permitted the follower state to pursue interests that reflected its own needs and those of its citizens rather than those of the dominant state. In making this argument, Pauly also draws linkages between monetary policy and varying forms of capitalism, the socalled ‘varieties of capitalism’ literature. This innovative linkage extends this literature well beyond the areas of industrial and technological innovation policies which has been its focus. Pauly’s argument thus continues a consistent line in his decade-long research on economic globalization, one that argues that states, even follower ones, have considerable policy instruments at their disposal to shape globalization. They are far from helpless.
Resource link: Monetary Power and Political Autonomy: Exchange Rate Policymaking in Follower States [PDF] - 296K