8. The New Global Political Economy

1. 8. The New Global Political Economy

2. “the world is an unfair place” - Stiglitz

3. is the global political economy based on fair competition? • is inequality inherent in the global political economy? • advocates: its consequences are good for humankind

4. in the eye of the critics free trade appears to be unfair • the trade union in the Global North complains : the lower wages in the Global South give them “unfair” advantages • the Global South complains : that they cannot “fairly” compete against their more productive Global North counterparts

5. how should states rationally cope with the globalized political economy? • the competing ideologies: liberalism and mercantilism

6. Commercial Liberalism • liberalism (international relations) : state and nonstate actors; institutionalizing peace; cooperation; multiple agendas • liberalism (journalists) : a position along an ideological spectrum. favor social welfare, health care, civil rights • liberalism (political theory) : a belief in individual equality, individual liberty, participatory democracy, and limited government • liberalism (economics) : refers to a belief in capitalism and profits, private property, free market, free trade

7. commercial liberalism : open markets and free trade can benefit all and promote peace : through mutually beneficial exchanges • people can benefit • the problems of capitalism (poverty, trade wars) can be solved

8. Adam Smith (The Wealth of Nation) : defined the precepts of classical liberalism (18th century) : the unregulated market’s “invisible hand” • David Ricardo (19th century) : applied the liberal thought to the international economy : principle of comparative advantage - a state will benefit if it specializes in those goods it can produce comparatively cheaply

9. Benjamin Franklin: “No nation was ever ruined by trade” • Free trade is good for all : competition stimulates technological innovation to improve production efficiency : in the long run, the world’s output and income will increase

10. Why has free trade become so controversial? • free trade : has not brought the promised economic benefits • the free trade : requires fair competition and perfect information : but competition is limited • information is far from perfect • free trade is treacherous • free trade appears to be unfair • the trade union in the US complains : the cheap and efficient cars produced in Japan give them “unfair” advantages

11. free trade: bad news for the world’s poor. • free trade : not succeed in reducing poverty • a growing divide between the haves and the have-nots : the actual number of people living in poverty • increased by almost 100 million • free trade : less pay attention to education, public health, industrial capacity, and social cohesion.

12. Asian tigers and China : reaped enormous benefits from their integration into the world economy (free trade) • but look closely : these countries combined their outward orientation with Mercantilism

13. Mercantilism • unlike liberalism, mercantilism : rejects the idea of the invisible hand as the regulator of the marketplace : gives the government a central role in economic development. : state - make resources and financial assistance available to selected industries - provide the essential framework within which development occurs. - invests in education, healthcare, housing, infrastructure

14. it emerged in Europe after the decline of feudalism • Europe: 15th C. into 20th C. : the Dutch in 16th C and 17th C. : Britain in 18th C. : Germany in 19th C and 20th C. • the experience of the U.S. during the 19th C and early 20th C. • the federal government played a central role in : regulating interstate commerce : setting minimum wages and working conditions : providing unemployment and welfare systems

15. Asia: after World War II (export-promotion regimes) : Japan, South Korea, Hong Kong, Singapore, Taiwan, and China

16. How Asian tigers won • the greatest success stories in rapid industrialization : Asian Tigers • why and how were Asian Tigers successful in rapid industrialization? • the success of Asian Tigers : tempted many other Global South to believe that they could follow in its footsteps. • can many other developing countries follow in its footsteps?

17. economic development: forged not by free market but by strong states • Asian Tigers : during their rapid growth experience in the 1960s and 1970s. • the role of Asian Tiger’s state : promote domestic production and employment : reduce imports : stimulate home production : promote exports : protect infant industries : provide financial incentives

18. China : follow a highly unorthodox strategy, violating practically free trade rule. • India : significantly raised its economic growth rate in the early 1980s : one of the world’s most highly protected economies.

19. Hegemonic Stability Theory • hegemon : a single powerful state that exercises predominant influence over global actors : creates and enforces rules to preserve its own dominant position • United States (Pax Americana) now; Britain (Pax Britannica) before

20. hegemons have had special responsibilities : coordinating states’ macroeconomic policies : managing the international monetary system - to enable one state’s money to be exchanged for others’ • hegemon helps provide collective goods : that benefit all and promote free trade and free markets • a hegemon tolerates free riders

21. A Globe without Hegemonic Leadership? • Britain : unable to adapt and fell from its top-ranked position • is the U.S. destined to suffer the same fate? • largest economy • largest debtor nation • the American trade deficit : in 2004, $617.7 billion • the U.S. share of world output (from 50% in 1947 to 20% in the 1990s) and financial reserves declining

22. Domestic manufacturers, labor unions and many Democrats : the huge trade deficit reflects - the erosion of the American manufacturing base and a concurrent loss of jobs “The deficit was the burden on American working families.” - Peter Morici, professor of business at the University of Maryland

23. the Bush administration, by contrast, views the deficit through a different lens. “The imbalance reflects the ability of American consumers to buy more imports.” - Treasury Secretary John W. Snow

24. imperial overstretch? : a hegemon declines that it makes costly commitments in excess of its ability to fulfill them • the U.S. today is less willing to assume : the burdens of maintaining the liberal international economic order - emphasizing competitiveness more than the acceptance of the burdens of making sacrifices to maintain the stability

25. Dollar's Slide Adding to Tensions U.S. Faces Abroad - NYT • the tension over the dollar between the U.S. and the world : becoming a recurring source of friction • the argument around the world : as much about leadership as about the long-term strength of the U.S. economy • unlike the debate over war in Iraq : in this case the complaint - not about American unilateralism, but American retreat.

26. (1) Europe and Asia : the United States needed to reduce its deficits : but, the Bush administration - happy to watch from the sidelines while the dollar heads down. : Washington - retreats from efforts to marshal the biggest economies of the world into a mutual effort at more robust and balanced growth.

27. (2) Bush Administration : Treasury Secretary John W. Snow contends - that the nation's record trade and current account deficits are not particularly worrisome : he played down the tensions - strong foreign interest in investing in the American economy - there is no one to replace the American role

28. The dollar’s fall • “It is a trajectory that is bound to crack: people will stop buying dollars, and domestic politics will make the soaring trade deficit with China just unsustainable.'' - C. Fred Bergsten, director of the Institute for International Economics • “our growth rates are still higher, over the long term, than Europe's and Japan's. … Given that, for foreign investors, there is no reason to think they will sell.'' - Daniel J. Ikenson, a trade policy analyst at the Cato Institute

29. today the Treasury : regarded as a vastly diminished institution - with comparatively little influence in the White House. • Mr. Bush : is seen as far less comfortable dealing with global economic management - than he is sitting in the Situation Room, buried in the details of the Iraqi insurgency or Iran's nuclear threat. • the weakening dollar, to the minds of many from Hong Kong to Berlin, - means that American economic influence has ebbed

30. “It will be a world of chaos without a center.'' - Hideo Kumano, an economist at the Dai-ichi Life Research Institute in Tokyo • Certainly China, while growing in leaps and bounds, : has neither the capacity nor the interest. ''China has a big population and big economic growth, but it is not a mature economic system yet.” “I cannot imagine it replacing Europe or Japan in terms of influence in the world economy.” - Hideo Kumano

31. (1) Optimistic • the dollar's fall may never reach crisis levels • many experts argue : that a further decline is entirely manageable • a collapse of the free trade regime even without a hegemon is unlikely

32. (2) Pessimistic • but the lesson of the 1990's : that currency crises, like the terror strikes of more recent years, are nearly impossible to predict. • market stability cannot be taken for granted forever. • the hegemonic stability theory predicts : that a U.S. leadership decline will inevitably be followed by the liberal trade regime’s closure

33. Hegemony in the World Political Economy - Keohane • international (free-trade) regimes are created by states : to devise rules for cooperation : to establish mechanisms for monitoring and generating shared expectation even without hegemony • the free-trade regime : may no longer depend on the existence of a hegemon

34. hegemony : can facilitate a certain type of cooperation • but there is little reason to believe : that hegemony is either a necessary or a sufficient condition for the cooperation • post-hegemonic cooperation is possible

35. Bretton Woods Monetary System • in 1944, 44 states met Bretton Woods, New Hampshire : to devise new rules and institutions to govern international trade and monetary (Bretton Woods System) • U.S. sought free trade, open market, monetary stability : based on commercial liberalism • Britain (John Maynard Keynes) supported : the principle of strong government action in managing inflation, unemployment, and growth - relied on mercantilism

36. the three political bases of Bretton Woods system: : power was concentrated in the Global North, especially the U.S. : the system’s operation was facilitated - by the dominant states’ shared preference for an open market and free trade with limited government intervention : the U.S. assumed the burdens of leadership

37. the U.S. dollar : the key to the hegemonic role - that the U.S. eagerly assumed as manager of the international monetary system • backed by a vigorous and healthy economy : a fixed relationship between gold and dollar • U.S. dollar : convertible at $35 per ounce of gold • the dollar became ‘as good as gold’ • a dollar-based system : the dollar universally accepted ‘parallel currency’

38. Floating Exchange Rates • the political bases of the Bretton Woods system crumbed in 1972 : U.S. abandoned the system of fixed currency exchange rates • 1971 : Nixon ends dollars for gold • end of Bretton Woods exchange rates • floating exchange rates • vary by changing economic conditions • determined by market forces • compounded by financial crises • since then, international economic relations more volatile • spurred by globalization and interdependence

39. Globalization of Finance • since the 1970s, : states opened their markets to foreign capital • borrowing, lending, currency trade, commercial banking • the growth of a single, unified world market • not centralized in any one state • the free and unregulated flow of money cross borders

40. geographical location no longer matters in finance • high daily turnover in foreign exchange: - $2 trillion - make profits by arbitrage (the selling of one currency and purchase of another to make profits on the changing exchange rates)

41. consequences : states - are losing their capacity to control their own creations : the lack of an effective exchange mechanism to orchestrate : capital transaction “mostly a rich-rich affairs” - 49 poorest Global South countries receive only 0.5 % of total capital flows

42. : the Global South - the most dependent and vulnerable : call for the creation of more reliable international regimes and multilateral mechanisms : G-8 (the U.S., Britain, France, Japan, Germany, Canada, Italy, Russia) - seek to carry out the pledge to coordinate global monetary policy - the twelve European countries in 2002 created : a regional currency union to try to stabilize today’s erratic exchange rate fluctuations

43. Trade Trends and Troubles in the 21st Century • Emerging neo-mercantilism • the U.S. : has not supported free trade as enthusiastically as it claims • the U.S. slaps a 244 % tariff on sugar imports and 174 % on peanuts : two products grown cheaply in poor countries such as Swaziland and Sudan • U.S. trade policy reflects twin instincts : to push for free trade in foreign market : to cushion the impact of imports on the domestic market

44. many states remain : tempted to enhance their domestic well-being by protectionist means • 48% worldwide favor protectionism • the simultaneous pursuit of liberalism and mercantilism today : shows state’s determination - to reap the benefits of interdependence while minimizing the costs • fearful of others’ free riding, the U.S. : looks more like an “ordinary country” than a hegemon

45. (2) Emerging Regional Trade Policies • regional trade blocs : NAFTA (1993), EU • the Free Trade Area of the Americas (FTAA, 2005) : a set of rules to promote free trade among 34 democracies in North and South America : the globe’s largest barrier-free trade zone (800 million) • is the formation of regional block likely to undermine the free-trade regimes?

46. Global Economy Destiny • if the globe’s largest economy (the U.S.) falters, can other countries’ economies stay aloft? • the architecture of the LIEO constructed at Bretton Woods : appeared to rely not only on a consensus among the states but also on U.S. leadership • today, U.S. willingness to absorb the costs of leadership : has waned • Bush : takes a unilateral approach and practices protectionism (in March 2002 to place high tariffs on the import of steel)