What factors have contributed to the spread of ‘liberal economic institutions’ cross-nationally?

This essay was written as a formative part of my undergraduate studies at the London School of Economics.

Dating as far back as the repeal of the UK’s Corn Laws in 1884, there has been a growing consensus across countries that open markets and free trade brought tangible benefits to the nation state – be they economic, political or cultural.

This assignment looks at the factors driving the spread of neo-liberal institutions around the world, assessing several conflicting opinions from the literature. Ultimately, I argue that the transmission of neo-liberal policy between national polities is likely driven by a number of factors, and success is dependent on cultural, socioeconomic and institutional factors.

Neo-liberal institutions are now virtually innumerable across the Western world, and increasingly so in developing economies; institutions such as independent central banks, bi-lateral and multi-lateral free trade agreements, and quasi-autonomous regulators are increasingly on the rise. The explanations for this phenomenon however, are far from agreed. The literature describes several ways in which institutions and ideas may spread; policy transfer and policy diffusion, which are concerned with “processes by which knowledge about policies, administrative arrangements, institutions and ideas” in one polity shape another (Dolowitz and Marsh 2000), and policy convergence and isomorphism, which are concerned with changes in policy similarity over time, the level of homogenization of different policies, and the rate of policy adoption through policy diffusion (Knill 2005). How policies transfer, diffuse, and converge (herein, ‘transmit’) – or, indeed, if they do at all – is an empirical question, the answers to which have varying levels of plausibility. The literature highlights many different causal mechanisms – characterized by harmonization, imposition, competition, observation, communication, and ‘happy accidents’ – and facilitating factors – centered on similarities between polities and the type of policies concerned; I will approach some of these and discuss their validity.

There is a possibility that the spread of liberal economic institutions is completely coincidental – a kind of ‘happy accident’. Knill (2005) discusses the idea that nations faced with similar domestic pressures have responded with parallel institutional responses, but without knowledge of the actions of other nations, and thus, no coordination. This does seem slightly far-fetched. Global economic pressures, and the rapid growth of technology, mass media and communications make it hard to believe that any one nation can completely insulate itself from the ideas of the rest of the world (Dolowitz and Marsh 2000) – theory and evidence suggests the exact opposite.

The spread of liberal economic institutions may well be informational. ‘New Information’ theory suggests that decision-making requires a certain level of calculus by political agents, and yet, the world is infinitely complex and there are only so many considerations any one actor (or set of actors) can take into account at any one juncture (Simon 1997). Because of the limits in our rationality, we take shortcuts to policy decisions, using policy choices in other polities (be they cross-national or sub-national) to inform our decision-making. Where governments observe policy outcomes that appear favourable, they will choose to implement similar policy choices. The literature on ‘Altered Payoffs’ seems to agree with this explanation in many ways as well; the ‘material’ payoffs theory would suggest that observation of the success and benefits of institutional choices isn’t entirely necessary – simply an anticipation of the benefits will be enough to spur on the spread of institutional setups (Simmons and Elkins 2004). Certainly the evidence seems to support these conclusions; Simmons and Elkins find strong evidence of ‘learning from success’ across several policy areas, and even anecdotally, we can see this; it isn’t entirely a leap-of-faith to suggest that countries have continued, throughout the last 40 years, to seek ascension to the European Union because they saw the political, social and economic benefits of membership – and by default, the neo-liberal institutional framework that accompanies it.

These theories may not show the whole story, however. Whilst the ‘Altered Payoff’ theory may well explain policy diffusion over time, it doesn’t predict universal policy convergence, much less convergence on liberal economic institutions (Simmons and Elkins 2004). Instead, the theory suggests that there is convergence to any number of different ideological models – be they free market, protectionist or communist. This is because we can think of policy transmission as occurring by degree, rather than a wholesale adoption process; nations sometimes choose to copy outright, but they are equally able to copy principles underlying policies rather than the detail of implementation, or even decide to act on a policy problem but reach totally different solutions (Dolowitz and Marsh 2000). This can be seen with the spread of independent central banks and inflation targeting; where the UK explicitly sets a target inflation rate for the Bank of England, the US Federal Reserve and the European Central Bank have adopted the similar policies – showing convergence to type – but by different means. Moreover, because of the same flaws in human rationality highlighted by Simon (1997) any so-called ‘learning’ of actors may well be superficial as policymakers lack the complete information about the effects of policy when they choose to emulate it. This can lead to incomplete, uninformed, and/or inappropriate policy transfers (Dolowitz and Marsh 2000). The ‘New Information’ and ‘Altered Payoff’ theories also seem somewhat inconsistent with evidence; there is seemingly strong evidence that the positions of policymakers with strong ideas and interests tend to be unresponsive to observations of policy success (Gilardi 2010). Whilst these theoretical frameworks may be useful for explaining some aspects of policy transmission and the spread of liberal economic institutions, they clearly do not account for the whole picture.

The preceding discussion suggests the emergence of a kind of continuum of policy transmission – starting with the completely voluntary lesson-drawing experiences, but moving toward one in which choices are the result of external pressures. Dolowitz and Marsh (2000) view the other end of this spectrum as one of direct imposition or ‘Coercive Transfer’. The spread of liberal institutions across much of the developed world – and increasingly the developing world – can be traced to forms of policy imposition just as easily as it can to voluntary decisions through the prior theories. Consider the example of the European Union; whilst nations voluntarily opted to delegate powers of legislative initiative to the European Commission and adjudication to the European Court of Justice, they are now effectively in a position of receiving coercive, top-down transfers (Radaelli 2000). The spread of liberal economic institutions has been effectively forced in some instances – for example, through the Stability and Growth Pact, and the convergence criteria for membership of the Euro – whilst in others, there remains an element of choice – as seen in the variety of ways in which national governments have been allowed to regulate their financial services industries. This view tends to espouse a far stricter notion of homogenization through policy diffusion and a high-level of isomorphic convergence, and yet, even then, we see that this is only within certain groups of nations, rather than across the world entirely, and even within nations, there is only a convergence trend, rather than exact replication across states (Knill 2005). Nonetheless however, it is clear that institutional factors can create a ‘path dependency’ where economic liberalization is concerned.

The notion of institutional factors, here, highlights the interplay between causal mechanisms and the facilitating factors affecting the effectiveness of policy transmission. Several authors highlight the role of institutional, cultural and socioeconomic similarities across nations as determinants of successful policy transmission (Radaelli 2000, Simmons and Elkins 2004, Knill 2005, Levi-Faur 2005). The more uncertain actors are, and the poorer the information available to them, the more likely they are to seek relevant policy examples from countries in similar situations to them. This seems logically true, and is evidenced to some extent by Simmons and Elkins research, although they highlight that, surprisingly to them, religion is the most important factor in these calculations. Furthermore, the literature argues that the implications leading from the policy that is being transferred will determine the success of transmission. Redistributive policy, as opposed to regulative policy, is more difficult to diffuse cross-nationally, as it mobilizes more interests more vigorously. Where policy is not congruent to existing ideas and interests, it is likely to fail to transmit (Radaelli 2000). This may explain why liberalization has been relatively easy for countries like the UK to liberalise as part of the EU, as they have a tradition of the small state and open economy compared with others like Germany, who took far longer to harmonize their policy as part of the single market. Again, we see support for the idea that rather than homogenization, we are witnessing general tendencies towards liberalism. This is further support for the view that a variety of different factors contributed to the move to liberal market institutions and that no one factor can be deterministic across cases.

I have highlighted several theoretical frameworks within the literature that attempt to explain the spread of liberal market institutions and policy transfer in a broad context. When applied to real world examples, it appears most frameworks are able to provide a plausible account of this spread, but it is clear that any complete account must take into consideration the role of ideas, interests and existing institutions in balance.