The three articles included in this part reflect the intellectual preoccupations of the time when they were written. But they approached classical questions with new instruments of analysis and generated new answers.

The first puzzle they address concerns the strategies of labor movements under democratic conditions. What motivated this puzzle was the belief, held in the nineteenth century by thinkers across the entire political spectrum, from Thomas Macaulay to Karl Marx, that if workers were to gain political rights in the form of suffrage, they would use this right to confiscate property. Alternatively, if they were to win the right to freely associate, they would destroy productive property by making confiscatory wage demands. The conflict between capital and labor, Marx maintained, was irreconcilable. Even if the economy grew, “profit and wages remain as before in inverse proportions” (Marx 1952a: 37). In turn, Marx (1934, 1952b) and most of his followers expected that, faced with the threat of confiscation by the working class, the bourgeoisie would inevitably turn for protection to arms, and thus subvert democracy. Capitalism and democracy, therefore, could not coexist. Capitalist democracy could be “only the political form of revolution of bourgeois society and not its conservative form of life” (Marx 1934: 18), “only a spasmodic, exceptional state of things … impossible as the normal form of society” (Marx 1971: 198).

Yet they did coexist, uneasily in some countries at times, but quite peacefully and smoothly in several countries of Europe.

Introduction

Unions are in big trouble, as everyone knows. Under attack by conservative politicians, battered by overseas competition, threatened by capital flight, bewildered by changes in the nature of work, and shackled by an outmoded egalitarian ideology, unions increasingly appear like large but aging dinosaurs struggling to adapt as the climate changes. The proportion of workers who belong to unions is in decline. Centralized systems of wage-setting are breaking apart. Incentive pay schemes and profit-sharing arrangements subvert negotiated wage scales. Wage inequality is growing while the median wage stagnates. Past achievements are under attack as European governments blame “labor market rigidities,” i.e. the legal and contractual protections that current workers enjoy, for persistently high unemployment. Even the unions' traditional political allies, the social democratic and labor parties, are keeping their distance, having discovered that being too closely tied to the unions is a political liability.

As is usually the case, what everyone knows to be true is not completely wrong but not completely right either. In this paper, we aim to describe, as precisely as the data allow, what is and is not known about the changing terrain of industrial relations in advanced industrial societies in the postwar period. We survey the empirical research that seeks to explain cross-national and longitudinal variation in union organization and wage-setting procedures. We do not attempt to provide country-by-country descriptions.

Introduction

Scholars have long argued that the spread of ideas and values matters for the adaptation and reform of government policies. (See, for example, the essays in Hall 1989.) In this chapter, we investigate whether and how either liberal or restrictive international financial policies on capital account regulation spread globally, both through the direct effects of changes in global ideology on government policy and indirectly, through policy diffusion between other states.

In the following sections we: (1) provide a detailed account of the mechanisms of diffusion, focusing on the theoretical basis for the global, grassroots spread of ideas that affect government policies; (2) identify valid indicators of ideological change that will aid in identifying the mechanisms through which it is diffused; (3) discuss our models and methods, focusing on how ideology is diffused indirectly and globally through influence on other governments' policies; and (4) report the results of our study, and offer concluding remarks.

How ideas spread

While global convergence toward political and economic liberalism might be a defining story of the last two decades of the twentieth century, we find scant evidence that convergence around a particular set of policies regarding capital account liberalization is consistent over time or space. During the entire twentieth century, many distinct waves of international financial openness and closure diffused worldwide.

Based upon the work of many scholars, we know many of the domestic and international political and economic forces that account for change in international financial openness.

Democracy and democratization in time and space

In 1989, a series of popular protests in the German Democratic Republic (GDR) forced the resignation of Erich Honecker and the fall of the wall separating the East German capital from West Berlin. The speed of the organization of the opposition and the fall of the regime surprised many Western observers. Although dissatisfaction with economic and political conditions was assumed to be widespread in the GDR, the repressive character of the state made opposition very costly. Yet, it grew. The dramatic increase in the open opposition to the regime stemmed in part from changes in external conditions, as liberalization in other Eastern European states facilitated organizing protest in the GDR. The Soviet leader Mikhail Gorbachev had begun to let the countries in the Soviet bloc deal more independently with their own internal and foreign politics. The declining Soviet commitment to the Honecker regime lowered the perceived costs of protest, as a military response and invasion became less likely. Neighboring countries such as Hungary had initiated moves toward open, competitive elections. Since Hungary was a popular travel destination for East Germans, the opportunities for emigration to the German Federal Republic through neighboring states presented a huge problem to the regime in East Berlin. By the middle of 1989, many East Germans were heading to Hungary on “vacation” with all their worldly possessions, having locked one last time their East German apartments.

The concurrent rise of liberal politics and free market economics around the world was a defining feature of the latter part of the twentieth century. The social sciences were not well positioned to explain this global phenomenon. Models of policymaking and political change had privileged domestic factors for at least half a century. From Lipset's view of democracy as the product of economic modernization within countries to Shonfield's division of the world into divergent national capitalisms, the underlying meta-model of political and policy change was one of unconnected domestic processes.

As democracy and markets swept to the four corners of the globe, the limitations of purely domestic models became increasingly apparent. Countries democratized that Lipset would have considered too poor to do so. Chile and the United Kingdom, countries that Shonfield would surely never have associated as kindred capitalist spirits, led the world in privatization and deregulation. Phenomena such as these led pundits to propose common exogenous forces as the driver of global political and economic change. Globalization, fueled by technological innovations lowering costs to international exchange of goods, services, capital, and information, was seen as forcing governments to embrace the market and as undermining economically inefficient authoritarian regimes – leading to “the end of history,” in Fukuyama's famous formulation.

But the grandiose claims about the ubiquity of liberalism soon came to be challenged by events, notably anti-globalization protests and anti-modernity terrorist attacks.

Introduction

Privatization is the distribution of state-owned assets to private owners. This distribution can happen by permitting spontaneous privatization, as frequently witnessed in Central and Eastern Europe; by giving or selling vouchers to the population to be redeemed for shares; or by sales through stock markets, private placements, or managerial buyouts. Privatization witnessed a global explosion in the 1980s and 1990s. Brune (2006) estimates that privatization revenues amounted to $1.3 trillion between 1985 and 2001, not including the mass privatization programs of the transition economies. Bortolotti, Fantini, and Siniscalco (2001) report that the global share of value added by state-owned enterprises fell from 9 percent to 6 percent in the 1978–1991 period. Privatization has been, in summary, of historic economic importance, reflecting a changed view of the state and its role in national economies.

Why do countries decide to implement privatization programs at a given time? The orientation of political parties in power (Bortolotti, Fantini, and Siniscalco 2001), the legal orientation of an economy (La Porta et al. 1998), the speed of privatization (Lopez-de-Silanes et al. 1997), and concerns over budgetary control and international financial institutions (Brune, Garrett, and Kogut 2004) have been found to be consequential for the volume and value of privatization. This line of inquiry points to a more fundamental question: why should these factors matter now? Countries were in debt and had right-wing governments in previous decades without privatizing. These factors have fluctuated repeatedly over time.

A worldwide human rights regime has emerged, expanded, and intensified throughout the twentieth century, especially in the post-Second World War era. This regime involves a global system of expanding organizations, social movements, conferences, rules, and discourse promoting the human rights of individuals. This regime is universalistic in aspiration: all humans are expected to be covered by the regime. This universalism involves a discursive and organizational reframing of the more limited and more varying national citizenship emphasis; human rights in principle accrue to all individuals, regardless of their citizenship or residency. And, a growing number of types of individual persons can press for their human rights: women, children, ethnic minorities, indigenous peoples, gays and lesbians, the elderly, the disabled, and the imprisoned. The content of the human rights at stake also expands, from the rights of “abstract individuals” to the rights of individual members of a specific collectivity, e.g. from suffrage to reproduction rights for women. Also on the rise is both worldwide attention to human rights abuses and violations and national displays of commitment to human rights principles and policies. These unexpected developments have increasingly been highlighted by scholars working within both the disciplines of international relations (e.g. Donnelly 1986; Finnemore and Sikkink 1998; Keck and Sikkink 1998; Hathaway 2002; Vreeland (forthcoming)) and macrosociology (Hafner-Burton and Tsutsui 2005; Tsutsui and Wotipka 2004; Smith 1995; Soysal 1994).

The global market for productive capital is more integrated than ever before. The growth of foreign direct investment (FDI) is a clear example. According to World Bank data, gross FDI as a percentage of total world production increased seven-fold from 1.2 percent to 8.9 percent between 1970 and 2000. Though such investments tend to be highly skewed across jurisdictions – developed countries account for more than 93 percent of outflows and 68 percent of inflows – foreign capital has come to play a much more visible role in many more countries worldwide.

It is widely recognized that economic globalization requires market-supporting institutions to flourish. But unlike trade and monetary relations, virtually no multilateral rules for FDI exist. Direct investments in developing countries are overwhelmingly governed by bilateral investment treaties (BITs). BITs are agreements establishing the terms and conditions for private investment by nationals and companies of one country in the jurisdiction of another. Virtually all BITs cover four substantive areas: FDI admission, treatment, expropriation, and the settlement of disputes. These bilateral arrangements have proliferated over the past forty-five years, and especially in the past two decades, even as political controversies have plagued efforts to establish a multilateral regime for FDI.

Why the profusion of bilateral agreements? The popularity of BITs contrasts sharply with the collective resistance developing countries have shown toward pro-investment principles under customary international law and the failure of the international community to make progress on a multilateral investment agreement.

The twentieth century as a whole, and particularly the three decades after the Second World War, witnessed steady growth in government size and responsibility. States developed extensive social safety nets, actively managed aggregate demand, and regulated a widening swath of economic and social life. This trajectory of expansion was linked to powerful forces of economic development and demographic change, and anchored in a broad political consensus.

The 1980s and 1990s saw a sea change in the rate of public sector growth. British Prime Minister Margaret Thatcher and US President Ronald Reagan led the way with privatization, outsourcing, and load shedding of public responsibilities. But the shift in direction was not limited to radicals on the right. Country reports to the Public Management Committee (PUMA) of the Organization for Economic Cooperation and Development (OECD) – itself an outspoken advocate of downsizing – point to widespread efforts to reduce the public sector. In 1995, for example, Denmark commercialized its railways and gave business autonomy to its postal service; Finland diminished the size of its Forestry Administration; France suppressed 7,400 public sector jobs; Greece froze new government appointments; Norway promoted competition between public agencies and private firms; Spain decentralized core government functions; and Sweden reduced public sector employment by 62,000.

During the same period, discourse on the appropriate size, role, and functioning of government underwent an even sharper transformation. On the left, O'Connor and Offe depicted state growth as driven by contradictory demands for accumulation and legitimation that were ultimately unsustainable.

The worldwide spread of economic and political liberalism was one of the defining features of the late twentieth century. Free-market oriented economic reforms – macroeconomic stabilization, liberalization of foreign economic policies, privatization, and deregulation – took root in many parts of the world. At more or less the same time, a “third wave” of democratization and liberal constitutionalism washed over much of the globe. Most economists believe the gains to developing countries from the liberalization of economic policies to be in the hundreds of billions of dollars. But they also acknowledge the instability and human insecurity sometimes left in liberalization's wake. Political scientists argue that the rise of democracy has contributed to the betterment of both human rights and international security. While the precise effects of these twin waves of liberalization are still debated, it is hard to deny that they have had a tremendous impact on the contemporary world. This book examines the forces that help account for the spread of political and economic liberalization. Why has much of the world come to accept markets and democracy?

Some commentators focus on the exercise of American power. According to this line of argument, the hegemonic United States – often acting through the Bretton Woods international economic institutions it helped create after the Second World War – has used a combination of carrots (political and military support as well as preferential access to American markets) and sticks (from strings attached to financial assistance to threats of military coercion) to impose its vision for political and economic liberalism on the rest of the world.

Neoliberal reforms in public policies and economic institutions proliferated across the developed democracies and the globe in the latter decades of the twentieth century. National structures of taxation have not been immune to neoliberalism. Beginning in the early 1980s, policymakers throughout the Organization for Economic Cooperation and Development (OECD) significantly altered the content of tax policies. The relative priority accorded equity and growth goals, the use of investment and behavioral incentives, and the level of tax rates were all notably changed: marginal income and corporate profits tax rates were scaled back, the number of brackets were cut and inflation-indexed, and tax-based investment incentives were eliminated or reduced to broaden the tax base. Why have nearly all developed nations enacted this set of market-conforming tax policies?

To answer this question, I build on my recent work on the determinants of change in tax policy in the developed democracies and explore the dynamics of diffusion of the neoliberal tax policy paradigm in the area of capital taxation. While I assess general competition, policy learning, and social emulation models of tax policy diffusion, I argue that the highly visible 1986 market-conforming tax reform in the United States should be especially important in promoting diffusion. Specifically, I argue that (asymmetric) competition for mobile assets associated with US reforms significantly influences national policy choices in other polities.