Published on April 22, 2008
Economic Power and the Institutions of Globalization: Economic Power and the Institutions of Globalization Bretton Woods and Beyond The “International System”: The “International System” July 1944 – 44 countries met in Bretton Woods N.H. to create a new international monetary order: The collapse of the international monetary system in the 1930s demanded that another, more internationally-friendly system was created. Economic nationalism – competitive exchange rate devaluations, formation of competing monetary blocs and the absence of international cooperation had contributed to economic breakdown, domestic political instability and international war. The U.S. Role as Leader: The U.S. Role as Leader American policymakers concluded that one of the chief causes of the international economic and political crises was the failure of American leadership. By the end of WWII, the administration decided that the US would have to assume primary responsibility for establishing a postwar economic order. That order would be designed to prevent economic nationalism by fostering free trade and a high level of international interaction. The System would be a liberal economic one that would be upheld by international cooperation. The New International System: The New International System In two years of bilateral negotiations, the US and Britain drew up a plan for a new system of : I) international monetary management: International Monetary Fund and the International Bank for Reconstruction and Development - 1944 2) international trade relations: The General Agreement on Tariffs and Trade GATT, 1947 3) international military cooperation, NATO – 1949 Capping the new system of international regimes was the creation of the United Nations in 1945. Bretton Woods and the International Monetary Regime: Bretton Woods and the International Monetary Regime The goal of Bretton Woods: to establish an international economic system which would prevent another economic and political collapse and another military conflict. The IMF was designed to promote the stability and liberalization of international monetary transactions; In order to stabilize the exchange rate (for trade purposes), all countries agreed to i) establish the parity of their currencies in terms of gold and ii) to maintain exchange rates within 1 percent, plus or minus, of parity. The IMF: The IMF IMF approval was necessary for any change in exchange rates. It advised countries on policies affecting the monetary system. Most importantly, it could advance credits to the countries with balance of payments deficits. The IMF was provided with a fund, composed of contributions of member countries in gold and in their own currencies. The International Bank for Reconstruction and Development: World Bank: The International Bank for Reconstruction and Development: World Bank The IBRD was created to facilitate postwar recovery. The World Bank as it is commonly known had an authorized capitalization of 10 billion USD and was expected to make loans of its own funds underwrite private loans issue securities to raise new funds – to help (mainly European) countries recover and rebuild after the war. US Pressure to Contribute: US Pressure to Contribute From 1945 to 1947, the US actively pressed for implementation of the Bretton Woods Institutions in the expectation that the new structure would effectively manage the international monetary system. The US participated in the IMF and the IBRD providing resources and pressed other countries to do likewise. To facilitate postwar recovery and to allow for the implementation of the Bretton Woods agreements, the US gave financial assistance of up to 3 billion USD in relief funds, as well as over 3 billion USD to Great Britain alone to enable it to complete reconstruction and return the Pound Sterling to convertibility. Initial Problems: Initial Problems WWII had destroyed the European economic system which had been based largely on international trade. Sources of Europe’s foreign earnings had been wiped out: its productive capacity was destroyed or disrupted; its overseas earnings had turned into debts; shipping was decimated. Bretton Woods institutions were unable to cope with the problem. The modest credit facilities of the IMF were insufficient to deal with Europe’s huge deficit. Economic and Political Crisis: Economic and Political Crisis The economic crisis of 1947 throughout Europe was also linked to crucial political problems: The governments of Italy and France were highly unstable because of the enormous pressure from powerful labor unions. As a result of economic difficulties, Britain withdrew from India and Palestine and abandoned political and security commitments to Greece and Turkey. Moreover, the Soviet Union had established communist governments in the countries it had occupied at the end of the war: Hungary, Romania, Poland and Bulgaria. It had also pressured Iran and Turkey for territorial concessions and refused to cooperate on a postwar settlement for Germany. The US Takes a Leadership Role: The US Takes a Leadership Role By 1947 the US was both willing and able to manage the international monetary system. The strength of the American economy, the lessons of the inter-war period, and security incentives made US leadership acceptable economically and politically to domestic constituents. Out of necessity, the Europeans and the Japanese accepted American management; they needed US assistance to rebuild their domestic production, finance their international trade and provide a setting for political stability. The General Agreement on Tariffs and Trade (1947); WTO (1995): The General Agreement on Tariffs and Trade (1947); WTO (1995) GATT is a legally binding codification of rules for the conduct of trade among its member states. GATT/WTO is located in Geneva, Switzerland and has provided the international infrastructure and the locus for all multilateral tariff-reduction negotiations since WWII. General Goal: to maximize growth in world trade and the global economy through a reduction in trade barriers pursued on a non-discriminatory basis. GATT: GATT GATT sought to promote trade in ways that avoid “beggar thy neighbor” policies or the creation of highly competitive regional and economic blocs (that characterized the 1930s). Protection of domestic industry is to be carried out exclusively through tariff duties – as opposed to other trade barriers such as quotas, controls on the use of foreign exchange, and other non-tariff barriers. The general level of tariffs were to be reduced in successive multilateral trade negotiations. The WTO has continued to impose tariffication on all export products. Stimulating International Trade: Stimulating International Trade The progressive lowering of tariffs is expected to stimulate international trade. Tariff reductions are to be implemented in a non-discriminatory fashion in accordance with Article 1; the Most Favored Nation Principle (MFN). Any member state in GATT/WTO is assured that its goods will enter the markets of all GATT members at rates of duty no less favorable than those applied to similar products of any country. The MFN principle is designed to accelerate the pace of tariff reductions and trade growth throughout the world as well as to avoid the creation of new preferential trade blocs protected by discriminatory tariff barriers. International Norms of Responsible Trade Policy: International Norms of Responsible Trade Policy By establishing international norms of responsible trade policy, GATT can evaluate member states national trade policies. In cases where there is inconsistencies, there are established procedures to settle grievances – The GATT had ad hoc dispute resolution bodies. The WTO has created a more legalistic and institutional Dispute Settlement Body (DSB). Complementary Institutions: Complementary Institutions GATT was complemented by the IMF. The goals of GATT would have been impossible to achieve without both an adequate global supply of foreign exchange and provisions for capital mobility to finance trade flows. Through the IMF, states became internationally accountable for their monetary policies. These two institutions along with the IBRD became the foundation for multilateral efforts to prevent the political and economic consequences of ‘hyper’ nationalism that proceeded WWII. Monetary Relations: Monetary Relations The increased flow of trade and capital means that monetary relations, including exchange rates, interest rates and other monetary considerations have become an increasingly significant factor in both international and domestic stability. Trade and other economic relations have expanded the importance of monetary interchange. Globalization of Money: Globalization of Money Increased trade, investment and other factors have set off an enormous movement of money through international channels. It is almost impossible to accurately calculate the amount of currency exchange transactions on a daily basis: a survey in the mid-1990s found that the rates were in the billions. US – 244 billion Japan – 161 billion UK – 464 billion Germany – 85 billion Globalization of Money and Banking: Globalization of Money and Banking With these four leading banking centers exchanging at least 954 billion, the currency flow is approximately 1.5 trillion a day or 548 trillion a year. Central banks use their monetary reserves (which include currencies and gold) to try to control exchange rates by buying or selling currency. There has been a parallel globalization of banking. Banks have grown from hometown, to national, to international enterprise. The level of international lending by private banks has also increased. International Lending: International Lending Commercial banks in 1995 held approximately in 8.5 trillion in foreign deposits and had about 8.4 trillion in outstanding loans. Of the international banks, the largest depositories and lenders are the British, with foreign deposits of 1.4 trillion and outstanding foreign loans of 1.3 trillion. Japan and the US are the second and third largest banking centers. These multinational banks are huge financial enterprises, and all international lending transactions have a major impact on the global economy. North-South Banking Practices: North-South Banking Practices The control of money and banking is largely dominated by the North. Thirteen percent of the industrialized nations hold 53% of all foreign reserves. With the exception of a few offshore banks controlled by the North, LDC banks hold only 5% of all foreign deposits and have made only 3% of all foreign loans. Exchange Rates: Exchange Rates Of all facets of international economic relations, the least understood is the importance of the ebb and flow of the world’s currencies. Foreign exchange rates are simply, the values of two currencies in relations to each other. Importantly, most exchange rates are expressed in terms of the world’s most important currencies: U.S. dollar, Japanese Yen, the Euro, and all of the G-8 Nations- that is the 8 most industrialized nations. ER affect several aspects of the balance of payments and the stability of domestic economics. Exchange Rates: Exchange Rates A decline in the exchange rate of a nation’s currency in relation to another nation’s currency will determine the increase or decrease in imports and exports. The most common form of exchange rates are called floating exchange rates- as opposed to the gold standard: rates here are determined by global currency markets in which private investors and governments busy and sell currencies. The international currency markets are in New York, Zurich, Switzerland, Tokyo and Hong Kong and all are linked together with high tech communications networks. Speculative Capital: Speculative Capital Currencies will rise or fall depending on speculative capital: an investor speculates about the future of the value of currencies in different nations. The value of a state’s currency tends to rise or fall relative to others because of changes in the long-term supply and demand for the currency. Supply is determined by the amount of money that a government prints. Currencies: Currencies A strong currency is one that increases its value relative to other currencies in the long term. A weak currency does the opposite. Weak does not equal bad, unless it is a constant occurrence. A weak currency will create a strong export market; e.g. US exports grew a total of 7% during the period between 1980-84 when the dollar was strong. During 1985-89, the dollar weakened and US exports increased a total of 66%. During the first half of the 1990s, the dollar remained relatively weak and US exports grew from $539 billion to 782 billion in 1995 – a cumulative 45% increase. Balance of Payments: Balance of Payments Credits Debits Export of Goods Import of Goods Export of Services Import of Services Foreign Visitors Citizens Traveling Abroad Foreign Aid Received Foreign Aid Given Inflows of Capital (loans, investments) Outflows of Capital Profits and interest earned-DFI Profits and Interest paid Out Government Receipts from Abroad Government Overseas expenses Several aspects of a country’s economy such as exports and imports, investment capital and investment returns, and international borrowing, combine to determine the balance of payments – a figure that represents the entire flow of money into and out of a nation. Markets and Global Patterns of Trade: Liberalism: Markets and Global Patterns of Trade: Liberalism In International Political Economy (IPE), liberalism is the dominant theoretical underpinning, and mercantilism is the second. Liberalism focuses on gains and wealth to a state and international trade has generated both for nations. When there is no coercion used, both actors in a trade exchange can gain. The Liberal view is that the most important goal of economic policy is the maximization of total wealth by maximizing output and minimizing waste – or by achieving optimal efficiency. Mercantilism: Mercantilism Mercantilism is concerned more with the most favorable distribution of wealth, since mercantilists focus on relative power (in this case, economic power). Unlike liberalist thinking, mercantilists focus on a state maximizing its own interests. The period most identified with mercantilism was the that of the British Empire and its accumulation of wealth from colonies. GB controlled the flow of trade – its colonies could not trade with any other country. Resources such as gold, silver, and other precious metals, as well as agricultural products were stockpiled and utilized for industrialization. Neo-Mercantilism: Neo-Mercantilism By the nineteenth century, mercantilism began to decline and was replaced with free trade. With the weakening of the liberal international order in the 1970s, mercantilism re-emerged. The international economic order has again shifted to resemble the early 20th C. – global free trade led by big MNCs and the mergers of international conglomerates. Globalization of Production: Globalization of Production The catch-phrase for today’s IPE is globalization: What is the process of globalization of production? How do we produce globally? Who Benefits? Who are the Actors involved? Where do the profits go? How does Globalization and Globalism differ? Globalization of Production (G.O.P.): Globalization of Production (G.O.P.) The G.O.P. is, at the simplest level, the opening up of markets to the free flow of capital, goods, and services. What does it mean to open up your markets? Global and/or Regional trade is perhaps the most common form. A Common market involves even more intense liberalization: free flow of labor and the harmonization of currency – as the EU experiment shows. Trade as the Channel for Globalization: Trade as the Channel for Globalization Most nations are dependent on trade in order to maximize their potential for economic growth. Industrialized nations conduct the most trading activity, the LDCs conduct the least: LDCs make up ¾ of the world’s nations but only accounts for 25% of world trade. DCs including North America, Europe and Japan accounts for 75% of trade. New Trend: blocs versus international trade. Comparative Advantage: Comparative Advantage CA: A liberal concept made popular by David Ricardo in the 19th Century; If states produced what they are geographically, climatically and resource-rich in, major gains can be made through trade. Logic: if every state would produce and trade what it is best at producing, all states would benefit – both the transaction costs (amount to transport goods and process information) and producing the item are low and continue to decline. More cost effective – products made cheaply in one country, relative to international market prices should continue to produce and supply the world market. Examples include oil and autos – Saudi Arabia-Japan. Free trade allocates global resources to states that have the greatest comparative advantage in producing each kind of commodity. Production becomes increasingly oriented to the world market. Problems with Comparative Advantage: Problems with Comparative Advantage Vulnerability of gearing the economy towards one that is outward-oriented – that is global and based on the few products one country may produce. Domestic supply is almost totally dependent on foreign inputs/imports. Unequal benefits within society and between nations Command Economies: Command Economies Command economies are an alternative to a market economy (as are protectionist markets). The state sets prices and quotas for production; production and pricing is established through a state-plan system. Logic: to create an economy that has as its goals equal distribution for a just society. By controlling the economy the state could guarantee the basic needs of the people. For political reasons, most countries have tended to fall between becoming completely market-oriented and protectionist or command economies. The Politics of International Markets: The Politics of International Markets Terms such as market imperfections, monopolies, cartels, oligopolies, corruption reveal something other than the exchange of goods in a free price-setting environment. There are market imperfections if markets are governed by anything other than price and quality considerations, such as clear transparent information about other participants and transactions in the market place and a willingness to deal with each other. World markets are often effected by politics; When governments are key players in national companies there are fewer players in the international arena. When governments get involved in trade wars over certain items. Slide37: Monopolies are another market-imperfection that can occur with or without the government. Here one supplier dominates the market and can set the price at will. An oligopoly can occur where a few suppliers band together and agree to coordinate or force a price increase. For example, big airlines use similar tactics to corner the market – maintain hubs, drive out smaller, lower price competition. Governments can attempt to break up monopolies through anti-trust legislation such as the attempt with Microsoft (Bell Telephone, IBM, Standard Oil). Foreign governments cannot break up monopolies. Trade Sanctions: Trade Sanctions Trade sanctions are the most politically fuelled international economic activity. Political power prohibits an economic exchange that would otherwise have been mutually beneficial. Economic sanctions take business away from foreign industries that may otherwise profit – as well as from the country itself.