International Economic R elations

1. International Economic Relations Chapter 1: From Management to Governance

2. Different types of economic systems since WWII are • Bretton Woods System (1947-1971) • Period of Interdependence (1971-1989) • Globalization (1990-present)

3. Bretton Woods • embodied in three organizations • IMF, World Bank, GATT • The system rested on three political foundations: • Concentration of power in a small number of states • The existence of a cluster of important interests shared by those states • The presences of a dominant power willing and able to assume a leadership role

4. Bretton Woods • The Concentration of Power in the BW System • Allowed management by reducing the number of actors whose agreement was necessary to establish rules, institutions and procedures • Management of the BW System • Easier due to the high level of agreement among the systems powerful members on the goals and means of the I.E. system • Similar beliefs included • Belief in capitalism and liberalism • despite that nat’l gov’ts were at the same time, assuming the role of responsibility for the economic well-being of their citizens

5. Bretton Woods • Impact of the Cold War • “Economic weakness in the west made them vulnerable to the USSR” was a prevailing thought/perception • Must, therefore, cooperate economically to rebuild western economies while providing political and military security • The perceived threat led members to subordinate their economic conflicts to their common security interests

6. Bretton Woods • Reliance on the U.S. (as a dominant power) to lead the system • U.S. economy was undamaged by WWII, had a large market, great productive capability, financial facilities, strong currency • U.S. also had a large military force, nukes, and was the leader of the Western alliance • Europeans already needed U.S. assistance to rebuild their domestic production and finance their international trade; now they needed the U.S. to provide military and political stability in which it could happen by being a balancing power to the USSR • U.S. policymakers learned important lesson in the interwar period: • Isolationism led to a collapse of the economic system • Lack of U.S. leadership prior to WWII led to a collapse of the peace

7. Bretton Woods • Outcomes of the BW System • Europe and Japan recovered from WWII • A stable monetary system was established • It encouraged more open trade, finance, investment • Led to a period of rapid economic growth

8. Interdependence (1971-1989) • Replacing BW in the 1970s • Important economic changes challenged the BW system • Ironically, it was the very success of the BW that led to these challenges.”” • Challenges arose from the unforeseen effects of the success of: • Ongoing int’l liberalization(reducing barriers) • Innovations in computing and telecom. • Growing penetration of national economies by int’l trade, investment and monetary flows

9. Interdependence (1971-1989) • Interdependence led to two opposing reactions: • To erect new barriers to limit economic interaction and interdependence (such as NonTariffBarriers) • Critics said tariff reductions were no longer appropriate, so they encouraged NonTariff Barriers (NTBs) to become part of the national policy • Pressures grew for new forms of protection and managed trade AND for efforts to strengthen regional free-trade groupings (CAFTA, EEC) • To go beyond BW and the idea of limited management to new forms of int’l economic cooperation that would manage interdependence • In this view, an open system maximized welfare • International management takes on roles formerly reserved for the state • HOLD REGULAR ECONOMIC SUMMITS! COORDINATE NATIONAL MACROECONOMIC POLICIES!

10. Interdependence (1971-1989) • Changes between 1971-1989 (interdependence period) • Changes in power and leadership altered political management of the IE system • The dominant powers were still the developed countries in the IE system, but states outside the group challenged their right to manage • LDCs sought to increase their access to management and increase their rewards in the IE system • Most colonies had gained independence by by ‘50s-60s and now wanted to improve their economic performance and their influence economically • Different approaches by LDCs • Some tried to work within the prevailing regime and tried to play a bigger role within the system • Others openly opposed it, arguing that open monetary, financial and trade systems perpetuated their poverty. Engaged in protectionism.

11. Interdependence (1971-1989) • Power shifts within the group of advanced industrial nations in70s-80s • EEC grew from 6 (1957) to 12 (1986) and became the EU • Create accustoms union and remove all barriers between them • Japan grew significantly stronger since 1960 and was a powerful competitor to the EU and US • U.S.: Weakened US dollar, “twin deficits” in US, unhappy with the costs of leadership • Meanwhile, the EU and Japan became less willing to accept US leadership in the system • BUT, nobody else was strong enough to take on the leadership role • This period is characterized by ‘periodic crises and conflict among members”

12. Globalization • An extension of the era of independence, but there were important political changes that occur • Political bases of the world shifted dramatically • Developing countries who opposed the IE order, chose to join… this made the system truly global (geographically, at least) • Changes world wide • Capitalist policies were adopted (very neoliberal actually) • Former communist countries joined • Technological developments (information storage, computing, communication, financial transactions), particularly the internet • Free movement of goods, people, capital, 24-hr-per day trading via multiple markets… more open markets in general

13. Globalization • Impact of globalization • Uneven • Asian and Latin Am. Prospered by attracting FDI • Others couldn’t compete, especially in Africa b/c they could not attract investment, making them even more marginalized • Many E. European countries made great progress as they transitioned from communism to capitalism • Questions arose about the effects of globalization • undermining governments’ ability to manage their national economies • Pursue national goals such as environment and labor policies or not?) • Becoming vulnerable to disruptions that happen elsewhere in the world – financial, climactic, weather-related, etc.

14. Globalization • Two opposing reactions to the new challenges to sovereignty • 1. Modernize and expand int’l economic rules, institutions, procedures. Glob. is inevitable, therefore its rules must be updated. • 2. Limits on int’l economic liberalization. View globalization as serving the wealthy, not the poor and it threatens the environment and labor • Balancing occurred economically, but not so much in terms of military and political power • New economic relationships started to change this • Mercosur, ASEAN • These new partnerships actually had the effect of strengthening the trend toward open markets and a liberal world economic order, rather than weakening it.

15. Globalization • Central theme of the era: tension grew between the benefits of open trade and globalization on one hand and the threat to national sovereignty and policies on the other. • Three new challenges of globalization: • The continued political responsibility of governments for the economic welfare of citizens in the face of increased globalization • The transition of former communist countries to democracy and their full participation in the IE system • The reduction of inequalities within and across nations