International Economy

Defining Concepts

High Politics: “ Geostrategic issues of national and international security as related to war and peace.”  (Kegley & Wittkopf, World Politics, 8^th Ed., p. 247)  

Low Politics: “The category of global issues related to the economic, social, demographic, and environmental aspects of relations between governments and people.” (Kegley & Wittkopf, World Politics, 8^th Ed., p. 247. 

Political Economy:  “The study of the relationship between politics and economics.” (Kegley & Wittkopf, World Politics, 8^th Ed., p. 246)

Globalization:  The processes of economic, cultural, social, political, and ecological change that are transforming the world from what was essentially a state system into a truly global system.

State System:  The point of view, which sees the world as composed essentially of independent, sovereign states that are legally equal under international law but politically very unequal in the degree of power exercised.  In 1945, the number of sovereign states was in the 50s; in 2008, it is about 200.  Historically, the state system began after the Thirty Years War in Europe with the Treaty of Westphalia in 1648.  Less than a dozen of these states were considered major powers and predominated in the system.  From World War II to 1991, the Soviet Union and the United States were the only two superpowers and the state system was bipolar.  Since 1991, the United States has been the only remaining superpower and exercises a role approaching hegemony in the world.

Global System:  The point of view, which sees the world as much more complicated than being composed primarily of independent, sovereign states.  This point of view criticized the model of the state system as being too simplistic.  States are not unitary actors that bounce off each other like billiard balls.  State-societies are much more permeable to global pressures and much more diverse in their impact on the global system.  While central governments remain the single most important category of international actors, there are many others such as IGOs, NGOs, MNCs, TNBs, and huge numbers of intra-societal actors that sometimes act across state frontiers.  There are also many global forces shaping the global system totally outside the control of any one central government or even group of such governments.  Global environmental factors, pandemics, population movements, technological innovations, religious movements, and global economic changes operate independent of the state system. Economic forces seem to be the single most important factor shaping the global system.

International Political Economy:  “The study of the intersection of politics and economics that illuminates the reasons why changes occur in the distribution of states’ wealth and power.” (Kegley & Wittkopf, World Politics, 8^th Ed., p. 247)

Economics:  The academic study of the adaptation of human societies to their environment in order to feed, clothe, and shelter themselves.

Macroeconomics:  The study of general principles for the management of national and global economies.  Fiscal and monetary policies are the primary tools used for the  management of national economies.  

Microeconomics:  The economic study of individual firms.  

Global Economics: The branch of the academic discipline of economics, which concerns itself with the global system, rather than with particular national economies.  There is as yet no international fiscal policy because no single world government exists.  Foreign aid and loans by particular central governments to other countries has some of the characteristics, which in particular societies would be referred to as fiscal policy.  An international monetary system has been established, which is designed to encourage international trade and private foreign investment.  Since World War II, a Liberal International Economic Order (LIEO) has been the basis on which the international economy has been built.   

Mercantilism:  “A popular theory in the seventeenth century that trading states should increase their wealth and power by expanding exports and protecting their domestic economy from imports.”  (Kegley & Wittkopf, World Politics, 8^th Ed., p.248)

A favorable balance of trade would be a desirable objective of mercantilist policies.  Mercantilism was often associated with bullionism.  This is the idea that a state’s gold reserves are a measure of its wealth and power.  Since trade imbalances used to be adjusted through transfers of gold, at a time when most states’ currencies were backed by gold, ie. the gold standard, large gold reserves were viewed as important to central governments.  This emphasis on gold reserves dates back to the time of feudalism and monarchies, when the king’s treasury included the crown jewels, gold, and other valuables, which, literally, might be used to pay for additional mercenaries and other extraordinary state expenses.   

Mercantilism includes the idea that central governments should promote trade by granting charters, licenses, and monopolies to private trading companies.  Domestic industries should be protected against foreign competition.  Essential national industries, those producing equipment for the military, for example, should be subsidized for the sake of national security.  

Economic Liberalism:  This refers to the ideas associated with Adam Smith, who advocated free markets unhampered by governmental regulations.  The classical economic theories of Smith, Thomas Malthus, and  David Ricardo are often called laissez-faire or liberal economics. While classical economics has been thoroughly criticized, rejected, and revised with regard to national economies, it continues to be the dominant economic theory with regard to the international economy.

Karl Marks and his followers subjected classical economics to severe criticism, although their alternative model of socialist production has repeatedly failed in practice.    

John Maynard Keynes proposed a completely revised theory of capitalism, which is followed by most modern, democratic societies.  Free markets have proven to be more effective than governmentally controlled markets.  Keynes’ theory allows for governmental interventions under oligopolistic conditions and to achieve greater social justice within countries.  The world economy so far lacks the structural tools for ameliorating the workings of the global market place.

General Economic Terminology

Additional Terminology

Liberal International Economic Order (LIEO)

Liberal International Economic Order (LIEO):  “The set of regimes created after World War II, designed to promote monetary stability and reduce barriers to the free flow of trade and capital.”  (Kegley & Wittkopf, World Politics, 8^th Ed., p.249)  

The establishment of the LIEO depended on several factors.

1.  The experience of the inter-war years and the view that protectionism had increased the severity of the Great Depression.  Depression and protectionism may have contributed to the rise of the great dictators and the outbreak of the second world war.

2.  The willingness of 44 allied states, under the leadership of the United States, to meet a Bretton Woods in New Hampshire in 1944 in order to draft the rules for a new liberal trading and monetary regime.

3.  The fact that these 44 states represented the industrial democracies, which shared a generally liberal, pro free trade point of view.  Potential opposition to these views were not present since the war-time enemies (Germany and Japan), the Soviet Union, and the Global South (as yet largely colonies) were not represented.

4.  The Cold War created Western unity and spread the idea that economic cooperation was necessary for both military security and increasing prosperity.

5.  The United States, as the dominant economy, was willing and able to carry the burden of free trade.  The United States opened its huge market to free trade and  foreign competition,  The US also carried the primary burden of military defense for the entire free world.

Comparative Advantage and the Gains of Free Trade.  “Comparative advantage is the concept in liberal economics that a state will benefit if it specializes in those goods it can produce comparatively cheaply and acquires through trade goods that it can only produce at a higher cost.” (Kegley & Wittkopf, World Politics, 8^th Ed., p. 250)   Despite many alleged examples of how this works, I have never understood how specialization supposedly increases the standard of living for both trading partners.  Total output of products and services may be increased through increases in efficiency, but that these increases translate into better living standards for all has not been demonstrated to my satisfaction.  Laissez faire economics failed within countries as the Great Depression demonstrated convincingly.  The logic of  why it should  work any better when applied to the global marketplace escapes me.

Kegley and Wittkopf seem to agree:  “There is a fly in this liberal ointment, however.  Although commercial liberal theory promises that the “invisible hand” will maximize efficiency so that everyone will gain, it does not promise that everyone will gain equally. . . . The gains from international trade may be distributed quite unequally, even if the principle of comparative advantage governs.  Commercial liberal theory ignores these differences, as it is concerned with absolute gains rather than relative gain.”  (Kegley & Wittkopf, World Politics, 8^th Ed., pp. 252- 253).  

An economy based on comparative advantage may increase total output in the world, but it may decrease my share of it.  Indeed, it may decrease almost everyone’s share except for those of a tiny elite at the top of the economic pyramid.

Hegemonic Stability Theory

Hegemonic Stability Theory.  This is “ a blend of liberalism and mercantilism,” which “holds that when a single state ascends to hold a preponderance of military and economic power, such that a hegemon emerges, international economic stability based on liberal principles can materialize to alleviate the fears of nationalistic mercantilists.” 

Realists and mercantilists agree that the balancing of power among competing state-actors is the key to global economic order.  But when an all-powerful single hegemon emerges, it can use its position to enforce free-trade rules.  On this issue, realists and mercantilists diverge from each other.

“Hegemonic stability theory thus ‘assumes that a liberal economic system cannot be self-sustaining but must be maintained over the long term through the actions of the dominant economy.’ (Gilpin, 2001).” (Kegley & Wittkopf, World Politics, 8^th Ed., pp. 255 - 256).

Hegemony is the ability to ‘dictate, or at least dominate, the rules and arrangements by which international relations, political and economic, are conducted’ (Goldstein 1988).  In the world economy, it occurs when a single great power garners a sufficient preponderance of material resources so that it can dominate the international flow of raw materials, capital, and trade. 

“From its preponderant position, a hegemon is able to promote rules for the whole global system that protect the hegemon’s own interests.  Hegemons such as the United States (and Britain before it), whose domestic economies are based on capitalistic principles, have championed liberal international economic systems, because their comparatively greater control of technology, capital, and raw materials has given them more opportunities to profit from a system free of mercantilist restraints.  When they have enforced such free-trade rules, the hegemon’s economies typically have served as ‘engines of growth’ for others in the ‘liberal train. 

“However, historically hegemons have also had special responsibilities.  They have had to coordinate states’ macroeconomic policies, manage the international monetary system to enable one state’s money to be exchanged for others’, make sure that countries facing balance-of-payments deficits (imbalances in their financial inflows and outflows) could find the credits necessary to finance their deficits, and serve as lenders of last resort during financial crises. 

“When the most powerful liberal states could not perform these tasks, they have often backtracked toward more closed (protected or regulated) domestic economies, and in doing so have undermined the open international system that was previously advantageous to them (Block 1977).  This kind of departure historically has made tariffs, monetary regulations, and other mercantilist policies more widespread, and thereby underminded the LIEO regime.” (Kegley & Wittkopf, World Politics, 8^th Ed., pp. 256 - 257).

Causes of Hegemonic Decline.

“’Capitalism and the market system thus tend to destroy the political foundations on which they must ultimately rest.’ (Gilpin 1987, pp. 77 – 78)” (Kegley & Wittkopf, World Politics, 8^th Ed., p. 258).  

U.S. GNP increased by 33% between 1991 and 2000.  But, U.S. share of World GNP declined from 50% in 1946, to 28% in 1960, to 25% in 1970; to less than 20% by the 1990s.  (D. White 1998, p. 42 in Kegley & Wittkopf, World Politics, 8^th Ed., p. 259).  Other indices of danger are listed.

Paul Kennedy’s popular argument of imperial overreach may be undermining the hegemonic position of U.S.

Consequences of Hegemonic Decline

At present, unclear.

“Institutionalized globalization has progressed to a level that makes the continuation of a liberal trading system likely, because too many states  and multilateral institutions have an enormous stake in its preservation.” (Kegley & Wittkopf, World Politics, 8^th Ed., p. 260).

“International regimes are created when states devise rules for cooperation even under international anarchy.  Although most of the liberal international regimes (rules and institutions) that govern international trade today first developed during the era of U.S. dominance, they have continued to flourish. . . The free-trade regime may no longer depend on the existence of an all-powerful hegemon.” (Kegley & Wittkopf, World Politics, 8^th Ed., pp. 260 - 261).

Global Commons, Collective Goods, Free Riders, and Destruction of the Commons

Collective goods are “goods such as safe drinking water from which everyone benefits.”  National security is a collective good from which everyone within a country benefits regardless of how much they contribute (in taxes or service in the military).  An open international economy is viewed as a collective good by most economists.  But, as we stated earlier, an open international economy is not a self sustaining condition.  Free riders are those who exploit a common good.  A country which imposes trade restrictions for a particular sector of its industry, and gets away with it, benefits from the free trade policies existing in other countries.  The cooperation needed to maintain a common good is difficult to achieve without rules and someone to enforce the rules (the hegemon).  

Britain played the leadership role in the world economy from 1815 to 1914.  The U.S. has assumed this role after World War II.  In the interwar period the system of free trade broke down. (Charles Kindleberger 1973) (Kegley & Wittkopf, World Politics, 8^th Ed., pp. 25257 - 258).

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More on Public Goods

GLOBAL COMMONS AND PUBLIC GOODS 
     Barry B. Hughes, Continuity and Change in World Politics:  The Clash of Perspectives (Englewood Cliffs, NJ:  Prentice-Hall, 1991),

     "International goods are benefits (such as security, access to markets, or the ability to fish the oceans) that states can provide their citizens only through interaction with other states--through global public policy.  Three characteristics of international goods frequently complicate the efforts of states to formulate global public policy and guarantee international goods to their citizens." (pp. 250 - 251).

     1.  Rivalry "characterizes a good when only one individual or state can benefit from a unit of the good."  Ex: territory.  Zero sum game

     2.  Non-excludability "characterizes a good when it is impossible to deny access to toehr individuals or states." Ex:  can't fence in atmosphere.

     3.  Congestion "characterizes a good when the consumption of units of a good interferes with the ability of others to obtain units of it."  Ex:  over-killing of fish or whales.

     There are four types of international goods:  Private Goods; Coordination Goods; Common Property Resources; and Pure Public Goods.

     Private goods:  rivalry and excludability; problem:  defining property rights.

     Common property resources:  rivalry  and non-excludability; problem:  overexploitation; problem can be solved by privatization (if possible, ex: extending exclusive fisheries zone to 200 miles off shore) or common agreement to limit exploitation; Tragedy of the Commons

     Coordination goods:  non-rivalry and excludability; cooperative action creates the good; agreement for an international postal union; deviant behavior can be punished by excluding state from benefits.

     Pure Public Goods:  non-rivalry and non-excludability; very small category.  Ex:  access to radio waves or access to knowledge; Not even the air is a pure public good, ex:  air pollution; As long as congestion is low, many common property resources appear as if they were pure public goods.

     Problems of Collective Action.

     "Both pure and impure public goods . . . , like whales and clean air, are at least initially "natural" and simply free for the taking, others, like global satellite communication services, exist only as a result of state action.  Moreover, when "natural" goods become congested and needs for regulatory systems arise, only collective state action will assure consistent access to the good.  Thus the provision of large numbers of international goods requires COLLECTIVE ACTION.  The general problem that arises surrounding collective action is UNDERPROVISION.  Especially when excludability is not an option (as with common property resources and pure public goods), states have little incentive to contribute to the costs of the collective action and the provision of the COLLECTIVE GOOD.  Instead, they prefer to FREE RIDE, to partake of the good without contribution.  There are even sometimes costs associated with the initial provision of a coordination good (with excludability) that states would prefer someone else paid." (pp. 255-6).

     In a PRIVILEGED GROUP "one or more members has a private incentive to provide some level of the collective good to the benefit of all."  Ex:  Limiting fluorocarbon emissions to protect the ozone in the atmosphere by highly industrialized countries.  A SPOILER is a free rider so large that it frustrates efforts by the privileged group.  Ex:  China increasing production of fluorocarbons for refrigeration.  SIDE PAYMENTS are exchanges among the members of a coalition to equalize any inequalities arising from their cooperation."  Ex:  Highly industrialized nations making advanced technology available to China as an alternate refrigerant.

     WHAT KIND OF A GOOD IS SECURITY? OR TRADE?  pp. 257 - 260)

Levels of Global Cooperation

     1.  Single-Episode Cooperation

     2.  Repeated Interaction and Reciprocity

     3.  Regimes

          Development of Regimes

          Security Regimes

     4.  Complex Interdependence

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