The Political-Economy Trilemma
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The Political-Economy Trilemma Joshua Aizenman 1 & Hiro Ito 2 # Springer Science+Business Media, LLC, part of Springer Nature 2020
Abstract This paper investigates Rodrik’s political-economy trilemma: policy makers face a trade-off of choosing two out of three policy goals or governance styles, namely, (hyper-) globalization, national sovereignty, and democracy. We develop a set of indexes that measure the extent of attainment of the three factors for 139 countries in the period of 1975–2016. Using these indexes, we examine the validity of the hypothesis of the political-economy trilemma by testing whether the three trilemma variables are linearly related. We find that, for industrialized countries, there is a linear relationship between globalization and national sovereignty (i.e., a dilemma), and that for developing countries, all three indexes are linearly correlated (i.e., a trilemma). We also investigate whether and how three political-economic factors affect the degree of political and financial stability. The results indicate that more democratic industrialized countries tend to experience more political instability while developing countries tend to be able to stabilize their politics if they are more democratic. The lower level of national sovereignty an industrialized country attains, the more stable its political situation tends to be, while a higher level of sovereignty helps a developing country to stabilize its politics. Globalization brings about political stability for both groups of countries. Furthermore, more globalized countries, whether industrial or developing, tend to experience more financial stability. Future data will allow us to test the possibility of regime changes associated with the post-2016 dynamics. Keywords Impossible trinity . globalization . financial crisis
This paper was conceived when Ito was visiting the Research Institute of Economy, Trade and Industry (RIETI, Japan) as a visiting fellow. The authors are grateful for helpful comments and suggestions by Discussion Paper seminar participants at RIETI.
* Joshua Aizenman [email protected] Hiro Ito [email protected] Extended author information available on the last page of the article
Aizenman J., Ito H.
1 Introduction In the international macroeconomics literature, the complexity of open macro policy management is viewed through the lens of the “open economy trilemma.” This hypothesis, advanced by Mundell and Fleming in the 1960s, states that a country may simultaneously choose any two, but not all, of the three goals of monetary policy independence, exchange rate stability, and financial market openness to the full extent.1 Figure 1 (a) is a textbook graphical presentation of the policy trade-offs associated with this trilemma. Each of the three sides – representing monetary independence, exchange rate stability, and financial integration – depicts a potentially desirable goal, yet it is not possible to be simultaneously on all three sides of the triangle. The top vertex – labeled “floating exchange rate regime” – is associated
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