8. The New Global Political Economy

• “the world is an unfair place” - Stiglitz

• is the global political economy based on fair competition?

• is inequality inherent in the global political economy?

• advocates: its consequences are good for humankind

• 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

• how should states rationally cope with the globalized political economy?

• the competing ideologies: liberalism and mercantilism

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

• commercial liberalism

: open markets and free trade can benefit all and promote peace

: through mutually beneficial exchanges, people

- can benefit and the problems of capitalism (poverty, trade wars) can be solved

• 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

• Benjamin Franklin: “No nation was ever ruined by trade”

• trade competition is good for all

: competition stimulates technological innovation to improve production efficiency

: in the long run, the world’s output and income will increase

• comparative advantage

• oil shocks in 1970s: rise of gas, Japanese car looks much better

• more imports mean more layoffs• protection of workers• import quotas• bad news for buyers: higher prices• good news for manufactures

• given the clear-cut advantages of free market and trade: why did governments protectively resist open

markets?- free trade is treacherous- in the eye of the beholder 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

• the free trade: requires fair competition and perfect information : but competition is limited

- information is far from perfect • the free trade

: requires clearly established property rights and the courts to enforce them

• well-functioning competitive markets : can’t be established overnight

Why has free trade become so controversial?

• free trade helps : economic development when a country’s exports

drive its economic growth

• but, free trade: has not brought the promised economic benefits

• 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: bad news for the world’s poor.• free trade seriously distorts policy-makers’

priorities

: focusing on free trade and free market

: less pay attention to education, public health, industrial capacity, and social cohesion.

: forget the slum dwellers or campesinos who live amidst crime and poverty

: fewer secondary-school teachers or reduced spending on primary education for girls

Trading in Illusions – Dani Rodrik• openness or free trade does not deliver on its

promise• liberalists overstate

: the effectiveness of free trade as a tool for fostering development

• there is plenty of evidence : financial liberalization (free trade) is often

followed by financial crisis– Mexico, Thailand, South Korea, Turkey

• 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

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

• it emerged in Europe after the decline of feudalism

• Europe: 15th c. into 20th c. : the Dutch in 16th and 17th c. : Britain in 18th c. : Germany in 19 and 20th c.

• the experience of the U.S. during the 19th C. • the federal government played a central role in

: regulating interstate commerce : setting minimum wages and working conditions: providing unemployment and welfare systems

• Asia: after World War II (export-promotion regimes)

: Japan, South Korea, Singapore, Taiwan, and China

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?

• economic development: forged not by free market but by strong states

• Asian Tigers: during their rapid growth experience in the

1960s and 1970s. : global free trade rules – sparse: abide by few international constraints : none of today’s common pressures to open their

borders to capital flows.

• 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

• such policies: precluded by today’s trade rules: frowned upon by the IMF and the World Bank.

• 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.

Mercantilist policies: Protectionism • beggar-thy-neighbor policies

: seek to enhance domestic welfare by promoting trade surpluses that can be realized only at other countries’ expense such as currency devaluations, tariffs etc

• import quotas: unilaterally specify the quantity of a particular product

that can be imported from abroad• protection of infant industries

: nurture young industries until they mature and compete effectively in the global marketplace

• antidumping duties: duties imposed to offset another state’s alleged selling of

a product at below the cost to produce it

Hegemonic Stability Theory

• hegemon: a single powerful state that exercises predominant influence over global actors

• the hegemon creates and enforces rules to preserve its own dominant position

• peace and free trade depend upon a great power willing and able to use economic and military strength to promote global stability

• United States (Pax Americana) now; Britain (Pax Britannica) before

• when hegemons have enforced such free-trade rules: the hegemon’s economies have served as “engines of

growth” for others in the “liberal train”• hegemons have had special responsibilities

: they have had to coordinate states’ macroeconomic policies and manage 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

: those who enjoy the benefits of collective goods but pay little or nothing for them

• positive-sum game

: the benefits that a hegemon provide encourage free riders to accept a hegemon’s dictates and then both gain

• zero-sum game

: if the costs of leadership begin to multiply, a hegemon will tend to become less tolerant of other’s free riding.

- in such a situation cooperation will be seen as zero-sum because most of benefits come at the expense of the hegemon

A Globe without Hegemonic Leadership?

• Britain was 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 U.S. share of world output (from 50% in 1947

to 20% in the 1990s) and financial reserves declining

• the American trade deficit broke the $600 billion barrier in 2004, soaring to $617.7 billion

• 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

• 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

• imperial overstretch?

- a hegemon declines that it makes costly commitments in excess of its ability to fulfill them

• the end of commercial liberalism? • 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