Historical Institutionalism in International Political Economy By
Henry Farrell and Abraham L Newman
This article has benefited tremendously from the comments of Mark Blyth, Tim Buthe, James Caporaso, Sanjoy Chakravorty, Richard Deeg, Dan Drezner, Martha Finnemore, Orfeo Fioretos, Alistair Howard, Richard Immerman, Dan Kelemen, Robert Keohane, Julia Lynch, Kate McNamara, Kimberly Morgan, Craig Pollack, Mark Pollack, Louis Pauly, Paul Pierson, Elliot Posner, Chad Rector, Holger Schmidt, John Sides, David Singer, Victoria Tin-Bor Hui, Erik Voeten, David Vogel, Steven Vogel, Steve Weber, Cornelia Woll, Nick Ziegler, and John Zysman. We wish to thank the GWU CIBER program, the BMW Center for German and European Studies and the German Marshall Fund for supporting this research in various ways. We are also grateful for the comments and advice of the reviews and the journal editors. Finally, we thank the participants at presentations held at Georgetown University, George Washington University, Temple University, the University of California, Berkeley and theInternational Studies Association Annual Conference and American Political Science Association Annual Conference.
Keywords: International Political Economy, Markets, Historical Institutionalism, Institutions, Institutional Theory, International Relations
As dramatically evidenced by the global financial crisis, the interaction of domestic regulatory systems has significant international consequences. Nevertheless, these relationships have received only limited attention from IR scholars. This special issue, therefore, provides a detailed examination of international market regulation -- the processes through which the domestic regulatory activities of states and other actors set the effective rules of internationally-exposed markets. To this end, we borrow and extend on arguments developed by historical institutionalists in comparative politics and American political development. In particular, the contributions adapt two mechanisms – policy feedbacks and relative sequencing – to explain state and bureaucratic preferences over international market regulation as well as bargaining strength in relevant negotiations. In addition to contributing to central IPE debates about international economic governance, the individual contributions shed light on a number of important empirical domains such as corporate accounting, intellectual property, pharmaceuticals, hedge funds, and financial market standardization.
How do national rule systems shape outcomes in global markets? This is an important question for scholars of international political economy. In the wake of the worst financial crisis since the Great Depression it is furthermore of major empirical significance. Issues that were previously primarily subject to domestic market regulationi within discrete territories ruled by sovereign actors, have become the locus of cross-border conflict and cooperation. Accounting standards, stock market regulation, mortgage lending, food safety, data privacy, and industrial chemicals are just a few policy areas where national market rules have roiled economic relations among the major advanced industrial economies. This confronts policy makers with the challenge of managing interdependence between different national regimes, a challenge that has stark implications for domestic and international economic policy.
A growing body of scholarship examines how or whether the international forces of globalization constrain domestic regulatory politics (Garrett, 1998; Berger and Dore, 1996; Vogel and Kagan, 2004; Eren-Vural, 2007; Mattli and Woods, 2009). To understand the opposite causal relationship – how domestic regulatory rules may have international economic and political impact – we propose that it is necessary to pay more attention to what we dub international market regulation – the processes through which the domestic regulatory activities of states and other actors set the effective rules of internationally-exposed markets.
International market regulation involves important causal relationships that do not map well onto the traditional subdisciplinary divisions between international relations and comparative politics. The primary focus of international relations scholarship has long been on the outward facing aspects of the state; the state’s role as an international negotiator with other states, wager of war, or creator of international institutions.ii While new literatures have emerged challenging the state-centric account of international affairs, they have typically either examined how non-state actors are creating their own forms of international order (Cutler et al., 1999; Haufler, 2001), or how they may influence intra-state discussions and negotiations (Risse-Kappan, 1995; Milner, 1997). With a few important exceptions (e.g. Newman, 2008a; Farrell, 2006; Singer, 2004; Burley, 1993; Raustiala, 1997; Vogel, 1995; Ikenberry, 1988b; Katzenstein 1976), international relations scholars have neglected how the inward-facing aspects of the state – its domestic regulatory capacities – play an important role in a world where domestic regulation can and does have international consequences.
To understand these interactions, researchers need to expand their theoretical toolbox. First, they need a better account of state preferences – when states or substate actors use their domestic regulatory leverage in order to shape international outcomes (or alternatively domestic outcomes that have international repercussions), what will their preferred goals be? While there is important work that seeks to address preference formation, it is, as its authors acknowledge, only a first cut at the problem.iii
Second, they need to understand better which states (or public actors) will prevail and when – what are the factors that shape states’ relative capacity to obtain outcomes when different states have different regulatory goals? The most influential existing work on this topic emphasizes cases where there is either a single regulatory hegemon or where agreements must be ratified in national parliaments (Simmons, 2001; Oatley and Nabors, 1998). However, it is increasingly the case that powerful actors compete to set the rules of international market regulation and they do this without the formal consent of national legislatures.
In this special issue, we look to an existing approach within comparative politics – historical institutionalism – for conceptual tools that can readily be adapted to meet these theoretical needs. Our work thus builds on an earlier generation of research by scholars such as John Ikenberry, Peter Katzenstein, and Stephen Krasner (Katzenstein 1976; Krasner 1984; Ikenberry 1988) on how differences in state capacity may shape international outcomes. In international relations, this body of literature petered out, but in comparative politics, it instead became the seedbed of a variety of approaches that examine the relationships between state, economy and society, most prominently including historical institutionalism.
Historical institutionalism offers a perspective that stresses the importance of time and timing in causal processes, recognizing both the constitutive nature of institutional contexts and the critical role of unanticipated consequences in driving future policy change. While the IR literature has drawn extensively on rational choice accounts of how domestic institutions affect international outcomes, these arguments often focus either on a narrow set of rules governing choice in legislatures or legislative-executive relations, or on the ‘agency slack’ created when legislatures or executives delegate authority under set conditions (Ballmann, Epstein and O’Halloran 2002; Pollack 2003; Nielson and Tierney 2003). They thus provide important insights into how static sets of rules governing legislative choice or delegation may have substantial international consequences.
Historical institutionalism, by contrast, provides us with a sophisticated account of how public policy institutions (e.g. banking oversight or environmental protection) influence responses to unexpected policy challenges. It helps us to understand the circumstances under which states may easily address these new challenges (when they have previously existing institutions that are easily adapted to meet new needs), and the circumstances under which states have great difficulty in adapting over the short or medium term. In short, historical institutionalism fills a major gap in international relations theory: it sets out mechanisms that explain how actors respond to a changing environment.iv In particular, this special issue examines two of these mechanisms – feedbacks and sequencing – to parse the political dynamics of international market regulation.
We and our co-authors make two important contributions. First, we more precisely conceptualize the role of international market regulation, which encompasses issues discussed in an increasing number of discrete sector studies (e.g. Shaffer, 2000; Farrell, 2003; Raustiala, 1997; Glimstedt, 2001; Young, 2003; Ansell and Vogel, 2006) but lacks a coherent overall framework to integrate empirical analysis. Second, we lay out conceptual tools that will allow international relations scholars to understand better these relationships and their likely consequences for political-economic phenomena. And at the same time, we make our own contribution to this theoretic toolkit, by showing how historical institutional understandings of domestic institutional trajectories can be supplemented and extended by applying them to cross-national issues.
In the next section of this introduction, we discuss the problems of international market regulation in more detail. In the subsequent section, we discuss how mechanisms identified by historical institutionalists – feedbacks and sequencing – allow us to make claims about the preferences that actors (including states) are likely to have over international market regulation, how regulatory capacities are built up over time and thus help us to explain bargaining outcomes between states and between regulatory authorities.
International Market Regulation The concept of international market regulation allows us better to come to grips with the international implications of national regulatory structures. Such structures have been understudied in international relations theory but are becoming increasingly important for the international economy, in part because of the very success of successive rounds of trade liberalization. As official tariffs have reached their lowest levels in decades, they have correspondingly come to have less influence on economic behavior. Nevertheless, research on “missing trade” shows that border effects continue to impose tremendous transaction costs on international economic actors (McCallum, 1995; Trefler, 1995). Differences in domestic regulations account for a considerable proportion of this effect. High-level government proposals, such as the Transatlantic Economic Marketplace initiative or the Strategic Economic Dialogue, demonstrate how important regulatory tensions are, while difficulties in translating these proposals into action suggest how durable regulatory differences can be (Pollack, 2005).
Such tensions place new pressures on states, which are frequently expected by their populations to protect domestic regulatory bargains, especially when they touch on sensitive normative issues. Indeed, as Suzanne Berger (2000) has argued, the consequences of globalization are best understood not as a progressive undermining of the authority of the state, but as a growing set of challenges to pre-existing political and economic bargains. Globalization in this context is less about the creation of one international market then it is about the interaction and exposure of national markets to one another (Zysman and Newman, 2006; Weber, 2001; Berger, 2000).
The international exposure of such markets raises important coordination problems. Businesses have invested in nationally constructed regulatory systems. While firms often have an interest in international regulatory convergence as a way to minimize the transaction costs associated with multiple rule-sets, each national industry stands to lose the distributional benefits granted in its national market should convergence indeed take place.
However, because of increased cross-border economic flows, national regulatory systems are coming into greater conflict with each other.v As markets that were previously national in scope become exposed to other markets in other countries, decisions by domestic regulatory authorities have broader international consequences. National regulators often find that they haveto take decisions with extraterritorial consequences if they are to fulfill their publicly set objectives within their own jurisdictions. Different regulatory authorities will unsurprisingly have different priorities, and sometimes even radically incompatible goals. A policy decision taken by one regulator in one national system may have substantial direct or indirect consequences for the ability of other regulators to pursue their objectives in their national markets (Vogel 1995). International market regulation, then, involves a broadening of the international political economy to a set of economic and social rules (previously confined to the national setting) that govern global market competition.
In addition, international market regulation is creating greater diversity in the ways in which global governance takes place. In a shrinking number of cases, states continue to rely on formal treaties and international organizations. Often, however, states or other actors employ alternative strategies, including the extraterritorial application of national law (Devuyst, 2001; Simmons, 2001; Young, 2003), transgovernmental cooperation among regulators (Newman, 2008b; Damro, 2006; Slaughter, 2004; Singer, 2004), and indirect regulation through private actors (Mattli and Büthe, 2003; Mattli and Büthe, 2005; Farrell, 2006; Cutler et al., 1999; Vogel, 2008; Perry and Nolke, 2006).
How does international market regulation reshape domestic and international economic relations? Some international relations scholars who have studied similar coordination problems would predict convergence upon the practices of the most economically powerful. They argue that those states with the largest markets are ipso facto in the best position to protect their domestic policy choices most effectively (their markets provide them with direct and indirect leverage), and, where necessary, to impose their preferences on other, weaker states (Drezner, 2007; Drezner, 2004; Simmons, 2001; Shambaugh, 1996; James and Lake, 1989).
Daniel Drezner (2007), in his recent book All Politics is Global: Explaining International Regulatory Regimes, sets out what is perhaps the most sophisticated version of this argument. First, building on the work of David Vogel, Drezner argues that large markets are likely to attract producers who want market access, and who are therefore willing to conform to the standards set for that market. Second, states with large markets are less vulnerable to threats of disruption, and better able to threaten others with economic coercion. Drezner concludes that the key determinant of international regulatory outcomes will be the constellation of great power preferences. Where great powers (in the current international arena, the US and EU) agree, then they will be able to set a standard that other smaller states will conform to. Where they disagree, we will see conflicting standards set by great states, around which different coalitions of smaller states are likely to converge.
These arguments provide a good starting point for understanding the role of market power in the international economy. However, recent studies suggest their limits; while large internal markets are a necessary condition for bargaining leverage under most political constellations, they are certainly not asufficient condition. Indeed, there is cross-sectoral empirical evidence suggesting that powerful states with large markets, such as the US may lose out under some constellations, so that US domestic actors have to adapt their domestic bargains to make them more compatible with the bargains of other states. To take a few examples from the recent literature: US efforts to outlaw Internet gambling are likely to fail when other states allow gambling operations to set up within their jurisdiction, and to market their services to US citizens (Farrell, 2006). Domestic financial regulators may find themselves forced to revise their policies, and to strike informal bargains with foreign authorities in order to effectively regulate their industries (Posner, 2009; Bach and Newman 2007). Private standards organizations in the US may find that their anarchic domestic institutions are a serious hindrance vis-à-vis their European competitors when standard-setting becomes internationalized (Mattli and Büthe, 2003). This research suggests what is missing from Drezner’s account – a discussion of how the presence or absence of appropriate domestic institutions is crucial to explaining states’ ability to leverage their market power. It is precisely here that the inward-facing aspects of the state count the most. Those states that have developed sufficient regulatory capacity are able to utilize their market power to affect outcomes, while those that do not have such capacity are disadvantaged in comparative terms.
International market regulation thus provides a unique jumping off point to consider the concrete and material impact of globalization, and how increasing interdependence between states shapes national and international politics in ways that sometimes are difficult to capture using existing theories. It also provides a fertile test-bed for theory building and testing. How are actors – whether state actors or economic actors – likely to respond to the challenges of regulatory interdependence? How will state actors and interest groups align to protect, or not to protect, existing social bargains? What means will these various actors be likely to employ? By studying international market regulation, we can offer useful answers to these questions in issue areas that offer a high degree of variation across arenas of international cooperation and contestation, encompassing not only more conventional inter-state negotiations, but also transgovernmental networks, private actor governance, and extraterritorial extensions of national law.
Theories of Domestic Institutions in International Relations – Adding a Temporal Dimension How exactly do domestic institutions shape international outcomes? We have seen renewed attention paid to this question in the wake of the difficulties that Cold War systemic theories have had in explaining many observed outcomes in international politics. International relations scholarship in general and political economy in particular has sought to explore how domestic factors shape states’ negotiating positions. Typically, this work starts from a broad rational choice perspective, in which the preferences of domestic actors serve as both a constraint and a source of strength for state negotiators (Putnam, 1988; Evans et al., 1993). More recently, scholars in this tradition have sought to explore the role that domestic institutions may play in channeling these preferences (Milner, 1997; Milner, 1998).
This literature has made substantial contributions to our understanding of the relationship between domestic and international arenas, illuminating major empirical phenomena such as trade liberalization, regional economic integration, and financial market globalization (Rogowski 1989; Moravcsik 1998; Frieden 1991). Yet there is good reason to believe that the very construction of these arguments leave important empirical puzzles unexplored or unexplained, particularly in the area of international market regulation. This literature’s account of the key causal factors – institutions, preferences and information – focuses primarily on how formal political institutions allocate decision-making power between the legislative and executive branches, giving little consideration to broader institutions such as public policy regimes. Furthermore, its account of outcomes focuses nearly exclusively on formal inter-state negotiations.vi Such negotiations continue to matter – but their role in the international economy is decreasing as a variety of more complex forms of bargaining and adjustment between states, semi-independent regulatory authorities and private actors emerge.
We argue that the burgeoning historical institutionalist literature in comparative politics, and American political development in US politics, provide us with a set of tools that will shed light on several of the key outstanding puzzles highlighted above. These tools have, with a few important exceptionsvii, been surprisingly under-employed in international relations debates.We focus on two specific mechanisms – policy feedback processes and relative temporal sequencing -- and how they affect regulatory capacity, by shaping states’ preferences over outcomes and their institutionally determined fallback payoffs in direct and indirect bargaining situations. Underlying our approach is an interest in a broader set of institutions than those currently emphasized in international relations scholarship. We do not confine our studies to the formal political institutions governing legislative choices. Instead, we are explicitly interested in the wider set of institutions that structure public policy regimes. This set naturally includes systems of regulatory oversight, policy rules that define market competition, and state systems of interest aggregation and mediation.viii
The historical institutionalist approach, in its earliest form, began from the premise that institutions shaped not only actors’ strategies but also their goals, and that (a) institutions tend to be sticky over time, but (b) that a theory of institutional ‘dynamism’ was necessary as a corrective to overly static approaches (Thelen and Steinmo 1992). Its core problematic has thus always been to explain the relationship between stability and change; how institutions structure the resources and interests of actors as they face changes in external political processes, and explaining the resultant political bargains. A second generation of historical institutionalism invoked the notion of path dependence to understand the circumstances under which institutions will tend to reproduce themselves, and the circumstances under which they will break down so that new paths are chosen (Mahoney 2000; Pierson 2000, 2004). However, path dependence, especially if employed in a generic fashion, has its own conceptual deficiencies (Crouch and Farrell, 2004), and may sometimes serve to obscure the actual drivers of broader dynamics of adjustment.
Hence, the most recent generation of work in historical institutionalism has sought specifically to identify the particular mechanisms underlying institutional stability and change (such as recent work on institutional layering and conversion e.g. Thelen, 2004; Hacker, 2004; Jackson and Deeg, 2008; for an alternative set of mechanisms, see Farrell and Shalizi, unpublished). In this most recent wave of research, historical institutionalism is not a static account but rather offers tools to understand how the characteristics of public policy institutions shape actor behavior, interests, and strategy, especially in moments of environmental uncertainty. To demonstrate the usefulness of this approach, we limit our investigation to two outcomes – state preferences and bargaining strength – within the context of international market regulation.
In the remainder of this short overview, we set out our arguments about domestic institutions in greater depth. First, we show how these arguments provide an account of actor preferences that usefully complements and extends more traditional approaches in the field. Next, we discuss the ways in which domestic institutional factors not only shape the preferences of actors, but also their ability to act successfully upon those preferences. We discuss in succession how the relative sequencing of institutions matters, and how domestic state capacities shape the reversion points that traditional bargaining approaches have focused on. We then argue that detailed qualitative theory-testing, whether it be described as “process tracing” or “analytic narratives” provides a useful means for understanding how these causal relationships are likely to play out in the field of international market regulation (George and Bennett, 2005; Bates et al., 2000). Finally, we discuss the contribution that our arguments make to the literature in international relations and sketch a promissory note for a future research agenda.