STRUCTURING THE GLOBAL ECONOMY

1. STRUCTURING THE GLOBAL ECONOMY Chapter 3 Dr. Senem SÖNMEZ SELÇUK

2. In order to understand the major economic structures involved in globalizationtoday one must have a sense of their place in economic history. 2 Global Economic Flows

3. BEFORE BRETTON WOODS 1. A PRIOR EPOCH OF GLOBALIZATION • One important view is that a global economic system, specifically aglobal capitalistsystem, emerged in about 1896 and reached something of a peak throughout theworld in 1914. • There are some interesting analogies between the growth of theglobal capitalist economy during that period and today. 3 Global Economic Flows

4. During the earlier epoch global progress was spurred by such developments intransportationas therailroad and thesteamship, whereas in more recent yearsit is theairplane that played a central role in that development. • Thetelegraph greatly enhanced globalcommunicationsin the early twentiethcentury, while it is theInternet that plays that role nearly a century later. • Global economic development, both then and now, depended on large-scale flowsof capital. • In addition, such development in both periods entailed large-scale immigrationand even the growing importance of remittances to those who remained in thehomeland. 4 Global Economic Flows

5. More generally, global economic specialization among thenations of the world became the norm, then and now. • Furthermore, this specialization operated on the basis of the “law” of comparativeadvantage; that is, that nations should concentrate onwhat they do best. This comparison is internal – that is, a nation should concentrate on what it does best in comparison to the other things itdoes (or coulddo) and not in comparison to what other nations do. • This is related to another similarity between today and a century ago and thatis an emphasis on freetradeand theeliminationoftradebarriers(e.g., tariffs). 5 Global Economic Flows

6. Not only are there structural similarities between global economic developmentin the two periods, but the problems created in the two epochs are also similar. • First, poor nations and the peoples who inhabit them were and are subjugated by the operations of the global economy. • Second, not all parts of the world (e.g.traditional economies) gain(ed) (or gain[ed] equally) from the growth of the globaleconomy. There were/are even sub-areas within those parts of the world that didadvance that did/do not share equally in the gain. 6 Global Economic Flows

7. Third, not only were/are therelosers in this economic competition among geographic areas, but also certainindustries and social classes lose out, at least in comparison to the winners. • Fourth,within nations the poor tend(ed) to suffer most when those nations are forced torepay their debts to other, more developed, nations. In sum, the global economyof a century ago (and much the same could be said today) “was not equally goodfor everyone and was bad for many”. 7 Global Economic Flows

8. ECONOMIC DEVELOPMENT DURING AND AFTER WW II • The development of economic globalization can be seen after WW II inthe context of this prior epoch of economic globalization, as well as its collapse as a resultof WW I, the Depression, and WW II. • All of these events had negative effects onalmost all major economies (the US economy was a major exception, at least interms of the effect of the two world wars). 8 Global Economic Flows

9. Of particular importance in the 1930swas the movement of many countries – notably fascist Italy and Germany – in the direction of autarky, or the turn inward of a nation in order to create as mucheconomic self-sufficiency as possible. • Such a turn inward is, of course, anathemato globalization which requires that various entities – including nation-states – beoutward-looking, rather than inward-looking, not only in the way they view theworld but in their actual dealings with other parts of the world. 9 Global Economic Flows

10. For its part, theUS in the 1930s had a strong tendency toward isolationism, although such an orientation was not quite as antithetical to economic globalization as autarky,largely because it was more political than economic. • However, even in the midst of WW II, the Western world, especially the US andGreat Britain, began planning for a more open international economy. Global Economic Flows

11. A great fearwas the recurrence of the Depression after the end of WW II, especially because of the difficulties those societies would have in absorbing the massive manpowercreated by the demobilization of the military when the war ended. • There was alsofear of a resurrection of barriers to trade and the free flow of money that had becomecommonplace prior to WW II. 11 Global Economic Flows

12. The focus of the planners was on reducing tradebarriersand on creating conditions necessary for the free flow of money and investment. • Another concern was the creation of conditions needed for financial stabilityaround the globe. • This was the background for a meeting in July1944 at the MountWashington Hotel in Bretton Woods, New Hampshire, which led to the beginningof the“Bretton Woods System” by the end of the three-week meeting. 12 Global Economic Flows

14. BRETTON WOODS AND THEBRETTON WOODSSYSTEM • A key factor in the Depression was thought to be a lack of cooperation among nation-states. • That lack of cooperation was associated with high tariffs and otherimport restrictions and protectionist practices, as well as the propensity of governments to devalue their currencies in order to gain an edge in global trade over othercountries. 14 Global Economic Flows

15. Those concerns were the backdrop for the creation of the Bretton Woods systemand its five key elements. • First, each participating state would establish a ‘par value’ for its currency expressedin terms of gold or (equivalently) in terms of the gold value of the US dollar as of July 1944. For example, the US pegged its currency at$35 per ounce of gold, while, to take one example, Nicaragua was 175 cordobasper ounce. This meant that the exchange rate between the two currencies was fivecordobas for one dollar. 15 Global Economic Flows

16. Second, the official monetary authority in each country (a central bank or itsequivalent) would agree to exchange its own currency for those of other countriesat the established exchange rates, plus or minus a one-percent margin. This made international trade possible at or near the exchange rate forthe currencies of the countries involved without the need for any outside intervention. 16 Global Economic Flows

17. Third, the International Monetary Fund (IMF) was created (as was the forerunner of the World Bank) to establish, stabilize, andoversee exchange rates. Forty states became IMF members in 1946 and were requiredto deposit some of their gold reserves with it. The IMF was empowered to approvethe par values of currencies and member states could not change that value by morethan 10 percent. If a currency was destabilized, the IMF was prepared to lend memberstates the money needed to stabilize their currency. 17 Global Economic Flows

18. Fourth, the member states agreed to eliminate, at least eventually, “all restrictionson the use of its currency for international trade”. • Finally, the entire system was based on the US dollar (at the end of WW II theUS had about three-fourths of the world’s gold supply and accounted for over one-fifthof world exports). The US agreed to make the dollar convertible into other currenciesor gold at the fixed par value. The dollar became, in effect, a global currency. 18 Global Economic Flows

19. Bretton Woods had its most powerful effects on global trade, theglobalmonetaryorder, and globalinvestment. • On global trade a key point was the idea of the “unconditional most-favorednation” which “required governments to offer the same trade concessions [reductions in trade barriers, non-discrimination against a nation’s products] to all”. Restrictions on international trade were reduced over the years throughvarious meetings (“rounds”) under the auspices of GATT (General Agreement onTariffs and Trade) and later the WTO. 19 Global Economic Flows

20. In terms of the monetary order, it was the IMFthat took center stage. The goal wasto provide security, as well as flexibility, to the monetary order. • What emerged between1958 and 1971 was a system in which the US could not change the value of its dollar,while all other countries could, but as infrequently as possible. This made exchangerates stable enough to encourage international trade and investment which otherwise would have been discouraged by dramatic fluctuations in those rates. 20 Global Economic Flows

21. In terms of global investment, a key role was envisioned for the World Bank, butmassive US aid through the Marshall Plan, and rapid European post-war recovery,made its work in that period of much less significance than had been anticipated. • A key development in terms of investment involved MNCs, especially American-basedfirms in fields like automobiles and computers, constructing their own plants and/orinvesting in indigenous companies in other countries. • This kind of investment tookcenter stage because the industries involved required very large, often global, organizations in order to function effectively. In addition, this kind of investment made itpossible to get around trade barriers by opening plants within the countries withsuch barriers. 21 Global Economic Flows

22. The global openness encouraged by Bretton Woods also contributed to theemergence or expansion of social welfare programs, indeed the welfare state, in manycountries. • Welfare states sought to deal with various problems – recession, layoffs,reductions in wages, and bankruptcies of uncompetitive firms. • The creation of a socialsafety net within a given country served to protect it and its citizens from theseproblems, at least to some degree. In the process, it gave a nation and its entrepreneursthe cover they needed to be actively involved in the global marketplace. 22 Global Economic Flows

23. The combination of all of these aspects and dimensions of Bretton Woodssatisfied many different nations and constituencies (e.g. capital and labor) and inthe process oversaw the most rapid rates of economic growth and most enduringeconomic stability in modern history. 23 Global Economic Flows

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25. Someof the economic organizations spawned by Bretton Woodseither directly or indirectly are; • International Trade Organization (ITO):while itwas a creation of Bretton Woods, it never got started. • GATT (General Agreement on Tariffs and Trade):was a system for the liberalization of trade that grew out of Bretton Woodsand came into existence in 1947. • Trade-Related Intellectual Property Rights (TRIPS): involve intangible ideas, knowledge,and expressions that require their use be approved by their owner. • Trade-RelatedInvestmentMeasures(TRIMs):WTOagreement ontrade measuresgovernmentscan impose onforeign firms. 25 Global Economic Flows

26. World Trade Organization (WTO):162-member international institution that monitors GATT agreements and mediates international trade disputes, headquartered in Geneva, Switzerland. • World Bank (WB):188members- founded to finance reconstruction after WWII. Primarily funds projects that build or expand a nation’s infrastructure. • International Monetary Fund (IMF):created to promote trade through financial cooperation and the elimination of barriers. 26 Global Economic Flows

27. THE END OF BRETTON WOODS • While many of the economic organizations discussed above remain in place and ofgreat importance in the global economy, and many of those to be discussed belowwere at least inspired by Bretton Woods, it can be argued that Bretton Woods itselfdiedon August 15, 1971. • President Richard Nixon took the US off the gold standardresulting in a devaluation of the dollar and the end of the standard by which thecurrencies of other nations operated. 27 Global Economic Flows

29. The demise of the Bretton Woods system is traceable to several factors. • For one thing, it had been based on the preeminence of the US andthe dollar. • However, as many of the economies of the world recovered from WW II– in part because of Bretton Woods – other nations and currencies grew in importance (e.g. Japan and the yen, the European Union’s euro, and more recently Chinaand the yuan). 29 Global Economic Flows

30. Second, international finance was restored to major importance afteryears of being subordinated to a focus within national economies. This led to thegrowth in speculationin international currencies. • For example, as indications arosethat the interest rates in a given country were likely to rise, speculators would buyup that currency and in the process sell off currencies that were likely to decline becauseof lower interest rates. 30 Global Economic Flows

31. With the declining importance of the US, and increasingdoubt that it could sustain the exchange rate set by Bretton Woods, speculators turnedtheir attention to the US dollar. • To defend the dollar, the Federal Reserve had toraise interest rates and this led to a recession in the US because it raised the priceof American products and made it more difficult forAmerican firms to competein the global marketplace. 31 Global Economic Flows

32. The agreements and understandings that undergirded international trade and investment also came under attack. • There was an agreement among GATT members notto raise tariffs on nonagricultural products. • However, countries began to find otherways to protect themselves from foreign competition. 32 Global Economic Flows

33. For one thing, they accusedother countries of “dumping” their products, that is, selling products at less thanthe cost of production in order to dominate a given market. • For another, countriessought to convince other nations to “voluntarily” restrict (through VoluntaryExport Restraints – VERs) their exports to them. • This indicateda move back towardprotectionismand away from the openness that was the hallmark of GATT. Global Economic Flows

34. Another indication of this shift was a growing reaction against foreign direct investment (FDI). • Developedcountries such as France, as well as less developed countries, began toput limits and restrictions on such investments. 34 Global Economic Flows

35. CHANGES IN, AND CRITIQUES OF, BRETTON-WOODS-ERA ORGANIZATIONS • In the twenty-first century, the organizations that were spawned by Bretton Woods – the World Bank, the International Monetary Fund, and the World TradeOrganization – are undergoing dramatic changes. 35 Global Economic Flows

36. Recent changes in the organizations are traceable to several major forces including globalization (a concept and a process not even dreamt of in 1944), major tradedisputes, and the increasing power and ambition of growing economic powers, especially in Asia. • In terms of the latter, the World Bank has been loaning large sumsof money to countries (e.g. China; including $710 million in early 2009 to helprebuild areas hit by a 2008 earthquake) whose economies did not need such loans. 36 Global Economic Flows

37. In fact, of the bank’s $23 billion in loans in 2006, $13 billion went to “middle-income”countries rather than to poor countries. • Furthermore, the Bank’s loan to “middle-income” and “high-income” economies have far exceeded the loans given to “low-income” economies (in recent years, more than half of the IMF’s lending has gone to European countries). • Even in terms of the funds that do go topoor countries, the World Bank is an increasingly small player in comparison tovarious international and private aid organizations. 37 Global Economic Flows

38. As a result, one professor said:“. . . it’s hard to see what good it [the World Bank] has done anywhere”. • The Bank argues it is helping large numbers of the poverty-stricken in less developed countries, while its critics say it is the opening of marketsthere, and not bank loans, that have helped in poverty reduction. Global Economic Flows

39. Then there is the issue of the leadership of these organizations, especially the preeminent position occupied in them by the US. • This has become increasingly controversial for various reasons including the fact that the US is not contributingas much money as it used to, at least in comparison to other nations. 39 Global Economic Flows

40. The IMF is saddled with such problems as relentless criticism of past austerityprogramsimposed on poor countries in exchange for bailouts, the bailouts themselves for legitimating and supporting bad policies by countries receiving them, bya shift in global power away from the US and Europe and toward countries likeChina, and the fact that the IMF has been rendered increasingly less relevant by agrowing global economy. 40 Global Economic Flows

41. The biggest problem facing the WTO is the possibility that the failure of the DohaRound could lead to a reversal of the long trend toward more open trading systems. • The fear is a new era of protectionism which, in turn, would lead to a slowdown inthe global economy. 41 Global Economic Flows

42. The IMF was created on the basis of the belief that markets oftenworked badly, but now has become a strong champion of market supremacy. • It wasfounded on the idea of the need to pressure developing countries to expand economically (e.g. increase expenditures, reduce taxes, lower interest rates – all designedto stimulate the economy), but now will provide funds to developing countries onlyif they engage in policies like cutting deficits, raising taxes, or raising interest ratesthat lead to a contraction of the economy. 42 Global Economic Flows

43. The IMF and the World Bank became missionary institutions pushing neo-liberal,“Washington Consensus”ideas (such as market liberalization [the removal of barriers],fiscalausterity, and privatization) on developing countries that were inclined to goalong because they badly needed funds from them. 43 Global Economic Flows

44. Originally, the IMFwas to maintain global stability by dealing with macroeconomicissues such as a “government’s budget deficit, its monetary policy, its inflation, itstrade deficit, its borrowing from abroad”. In short, the task ofthe IMF was to be sure a nation was living within its means. • TheWorldBankwassupposed to eradicate poverty by dealing with structural issues such as what thecountry’s government spent money on, the country’s financial institutions, its labormarkets, its trade policies. 44 Global Economic Flows

45. However, the IMF grew increasingly imperialistic, seeing almost all structural issues as having macroeconomic implications. • As a result, it saw virtually everything falling within its domain. It not only felt that it had the answers to dealingwith these issues, but it tended to apply one set of answers to every country; “it tends to take a ‘one-size-fits-all’ approach”. • It also tended to ignore the inputs from the countries it was ostensibly helping.And the countries that were ignored had little recourse because they needed thefunds that the IMF was offering in exchange for structural changes and reforms. 45 Global Economic Flows

46. In spite of its great ambitions, or perhaps because of them, the IMF is seen as a failure in terms of its missions of providing funds (to create jobs, etc.) to countries to weather economic downturns and more generally to create greater globaleconomic stability. • Among the more specific failures of the IMF was the fact that itsstructural adjustment programs did not bring sustained growth, its imposition ofeconomic austerity often stifled economic growth, and the opening of markets tooquickly to competition led to job losses and increased poverty. • The IMF has not only failed, but its failure (and that of the World Bank) has beenmagnified by the fact that it came to play a much greater global role than was originally envisioned. 46 Global Economic Flows

47. Once distinct, the World Bank and the IMF became increasingly intertwined. • Earlyon, the World Bank focused on making loans for specific projects (e.g. roads, dams),but later moved to broader “structural adjustment loans.” • However, such loans required the approval of the IMF and, along with its approval, the IMF also oftenimposed various conditions on the receiving nations. • As a result, the IMF movedfrom its original role in dealing with crises to becoming a perpetual part of life fordeveloping countries. 47 Global Economic Flows

48. Another set of critiques focuses on who is in charge of the IMF and the WorldBank. • As we saw above, the top positions at the IMF and the World Bank are heldby Europeans and Americans. • More generally, the nations and the largest corporations and financial institutions of the developed countries dominate these organizations. • This, of course, leaves the rest of the world out of leadership positionsand is the source of considerable dissatisfaction. There is no overarching global system to be sure this system functions better and more equitably. 48 Global Economic Flows

49. As a result, we have “global governance without global government”. • The system is run by the few with the few as the main beneficiaries. • Mostof the people in the world have no say in these systems and are either not helpedor are adversely affected by them. 49 Global Economic Flows

50. Still another criticism of the IMF is the lack of transparency in its decision-makingand in its operations. • Those countries served by it do not know how it operates orthe bases for its decisions. • Further, the IMF is not accountable to those nation-states. 50 Global Economic Flows