FS07 Globalisation and politics of int1 economy fi

Globalisation and politics of international economy : 

Globalisation and politics of international economy

Slide2: 

Three directions pulling the issue of TRADE-reflecting the three main schools of thought in International Economics 1) a large consensus that a liberal international trading system is desirable 2)Within that liberal consensus individual nation states try to pursue mercantilist policies of tariff based protectionism for certain industries. 3)This can result in direct subsidies and various other forms of direct state aid to certain activities based on structuralist assumptions about the nature of economy

Class Outline: 

Class Outline Political and economic case for global spread of liberal approach to trade Structuralist arguments against dominance of free trade - modernization vs. dependency theory - periphery vs. center - arguments against the “Washington consensus” and international financial facilities and Structural Adjustment Programmes (SAPs) - Aid dependency - Case for mercantilism

1) Political and economic case for global spread of liberal approach to trade: 

1) Political and economic case for global spread of liberal approach to trade Liberals fear the heavy hand of government Liberals believe in freedom, individual rights and free markets

Slide5: 

What are the fundamental elements of classical liberal theories of Smith and Ricardo? How were they refined by Mill and Keynes? Theory of Hegemonic Stability

Theory of Hegemonic Stability: 

Theory of Hegemonic Stability Observes that international markets work best when certain international public goods are present Public goods such as free trade, peace & security and a sound system of international payments Free rider problem One nation dominates – the hegemon – which benefits so much from success of global economy that it is willing to bear the costs of providing the international public goods

Slide7: 

Generally recognized three instances of hegemonic stability in modern history the United Provinces (Holland) 18th C Britain 19th C USA post world war II

Slide8: 

Questions arising Is the USA still a hegemon? Is a sort of group hegemony possible… involving the USA and the EU? the motives and effects of hegemony – benign and unselfish eventually draining itself dry? - selfish and imperialistic draining the rest of the world to fill its coffers?

Globalization and ascendance of neo-liberalism: 

Globalization and ascendance of neo-liberalism Influenced by works of F. Hayek and M. Friedman Aided by the failure of USSR Promoted by US administrations as a key to conduct international trade and help the developing countries “Washington consensus”?

“Washington consensus”: 

“Washington consensus” Originally coined by economist John Williamson in late 1980s A set of recommendations that are believed to be universally applicable to any ailing economy Applied by Washington-based institutions – IMF, WB, US treasury

Slide11: 

The consensus included ten broad sets of recommendations: Fiscal policy discipline; Redirection of public spending from indiscriminate (and often regressive) subsidies toward broad-based provision of key pro-growth, pro-poor services like education, health and infrastructure investment; Tax reform – broadening the tax base and adopting moderate marginal tax rates; Interest rates that are market determined and positive (but moderate) in real terms; Competitive exchange rates; Trade liberalization – liberalization of imports, with particular emphasis on elimination of quantitative restrictions (licensing, etc.); any trade protection to be provided by low and relatively uniform tariffs; Liberalization of inward foreign direct investment; Privatization of state enterprises; Deregulation – abolition of regulations that impede market entry or restrict competition, except for those justified on safety, environmental and consumer protection grounds, and prudent oversight of financial institutions; and, Legal security for property rights.

Reading: 

Reading http://en.wikipedia.org/wiki/Washington_consensus

2) Structuralist arguments opposing free trade: 

2) Structuralist arguments opposing free trade Originate in mercantilist opposition to liberal policies staged by German economist Friedrich List and teachings of Karl Marx and his followers Currently adopted by academics around the world and leaders in developing countries, mainly Latin America (Chavez, Lula, Castro…)

Slide14: 

Karl Marx (1818-1883)…as a young man…

Slide15: 

Karl Marx (1818-1883)…. Somewhat later on….oh well it happens to us all… The main tenets of Marxism?

Opposing liberal ideas – historical perspective: 

Opposing liberal ideas – historical perspective FREE TRADE - no more than an academic justification of English trade hegemony in 19th Century (F. List) Compare with the situation today Infant industries of the USA must be protected (Alexander Hamilton) Comparative advantage – the shift in industries not easy; especially painful for developing economies Resources not as flexible as free traders assume

Influence of Marxism: 

Influence of Marxism Flawed assumption that Marxism died with USSR Traditionaly popular in Latin America – inspiration for all major socialist/labor parties Counterweight to the American influence Structuralism – a general heading for contemporary theories analysing international economy in terms of economic structures  Inspired by Marxism and mercantilism

Structuralism and global economy: 

Structuralism and global economy Structure conditions outcome …both the domestic and global economic structures are the most significant determinants of subsequent economic and political developments. Liberals make individuals and the state their basic units of analysis Structuralists focus on the nature of long term relations between different sectors across the globe and examine the power relations across the world derived from economic power.

Slide19: 

Structuralists believe that developed countries needed to impose such a world order that would enable them to grow rich and satisfy their domestic voters These policies are in the interests of powerful corporations Developed nations of the world impose the conditions of lending and intellectual property The ownership of technological advantage coupled with pressure against protective policies makes developing countries unable to build their own industries

Structuralist analytical assumptions: 

Structuralist analytical assumptions Economies are inflexible; change is restrained by persistent rigidities Demand is not always price-elastic (especially in case of food, which is greater problem for poorer countries) Development requires a radical transformation of structure of production The market cannot solve problem of developing countries because it is formed by external forces  Exemplified by dependency theory

Dependency Theory: 

Dependency Theory A reaction to modernization theory – developed countries prescribe “treatment” for LDCs + provide loans & investment  LDCs become developed D.T. claims that such an involvement is always disastrous Such relationship is always one of dependency and exploitation

Periphery vs. Centre: 

Periphery vs. Centre LDCs often depending on one key product  dependant on the buyer countries Between 1960s and 1990s exports of West-African countries increased by 25%, but profit fell by 20% The indebtedness of weak “peripheral” LDCs made them even more dependant on the developed states and international financial institutions

Structuralism vs. Washington Consensus: 

Structuralism vs. Washington Consensus The Structural Adjustment Programmes (SAP) prescribed by IMF & WB considered another way to weaken already weak LDC governments SAP usually involve draconic measures that provoke electorate Fiscal discipline usually dominates the agenda at the expense of sound policies (Bulgaria) Debt repayment being often the first imperative Disregard for specific local conditions (Argentine)

Structuralism vs. Washington Consensus (2): 

Structuralism vs. Washington Consensus (2) Structuralist “treatment”: Keep up the trade barriers to protect infant industries Invest into industries with high level of linkages to other sectors - Import substitution by domestic production (Tata group in India) caveat: countries often incapable to create competitive industries without FDI (car industry in Brazil) Governments not always capable or motivated to administer industrial policies

The Role of Aid in World Economy: 

The Role of Aid in World Economy Humanitarian/rescue aid vs. development aid Is development aid beneficial per se? Under what conditions would development aid be beneficial?

Slide26: 

Aid and conditionality - requirements set by IMF & WB, developed countries and their domestic interests Aid affects structure of recipient society – elites benefit disproportionately Aid may distort structure of local economy Concept of “aid ownership”

Slide27: 

Since 1990s total amount of aid declined (due to ending of Cold War); this trend reversing only in last few years However, contemporary aid policies better targeted (largely due to influence of NGOs) Give the means rather than giving the products

Case for Mercantilism: 

Case for Mercantilism STATES naturally desire to protect themselves and their industries from the negative effects of trade - Farmers for example often appeal to and receive protection form the rigors of FREE TRADE - they tend to have strong lobbies in USA, Western Europe and Japan Nation states FEAR becoming too dependent upon other nations for certain goods Developing nations feel that under WTO rules they are deprived of their opportunity to develop their fledgling industries

Conclusions: 

Conclusions Liberal ideas are the main driving force behind economic globalization, but often challenged for serving political goals Major challenge through various structuralist theories Structuralism very salient among intellectuals in developing world  provides means to pass the blame for LDCs failures However, some of its criticisms seem valid (such as imposition of tough liberal requirements on struggling economies)

Reading: 

Reading Structuralism: http://americas.sas.ac.uk/about/die_structuralism.pdf Dependency Theory: http://www.mtholyoke.edu/acad/intrel/depend.htm