A Reexamination of the Relationship between Global Finance and Democracy: Structural Domination or Mutually Constituting?

Abstract

The outbreak of the global financial crisis and the subsequent Euro crisis provide a good opportunity to reexamine the relationship between global finance and democracy. This is because the crisis period has lay bare the political foundation of the global financial system. Before the crisis, it was often presumed that financial globalization was an inevitable trend, as was the consequential restraint of democratic politics at the national level. Capital mobility hypothesis and financial policy trilemma have supported this view. Under the condition of high international capital mobility, nation states cannot avoid sacrificing their autonomy in pursuing their economic policies. In other words, democratic governments cannot be as responsive to popular demands, so long as they remain adherent to the demands from global financial markets. However, the outbreak of global financial crisis and subsequent developments put an end to the belief in the possibility of self-regulating financial markets and brought about widespread popular protests against the global financial system and strong demands for strengthening financial regulation. Polanyi’s concept of “double movement” provides an appropriate explanation of this turnaround. Comprehensive and strong financial regulatory reforms have been pursued at both the international and national levels since the crisis. Consecutive G20 summits have been providing political legitimacy and dynamics to this financial reform drive. The Financial Stability Board and the Basel Committee on Banking Supervision have been instrumental in designing and developing new regulatory measures. The so-called ‘systematically important financial institutions,’ or SIFIs, and the shadow banking sector have received special attention because they were believed to be the main weak points of the pre-crisis global financial system. Financial regulatory and supervisory agencies have also been strengthened in the countries of all the major economies. If all these reform measures are to be successfully adopted at both the national and international levels, we may live under a completely different global financial order in the years to come. However, there are still important obstacles ahead, which reflect the fundamental nature of the comtemporary global political economy; namely, the coexistence of globally integrated financial markets and nationally divided regulatory authorities. Under these kinds of circumstances we can hardly be sure that financial regulatory measures will be implemented optimally. This means that the shape of a new international financial order will also be determined through national and international political processes. This is why we argue that the relationship between global finance and democracy should be viewed not from an one-way structural perspective, but from that of a mutually constituting political process. When we adopt this perspective, we come to ascertain that we are living in a period of another great transformation through which democracy and global finance can find a new compromise for their stable coexistence.