INTERNATIONAL POLITICAL ECONOMY I. Management to Governance

ONE  International Economic Regimes-norms, rules and, institutions intended to achieve common economic goals among the world’s peoples.  They range from bilateral to complex multilateral, regional and, universal.  Regimes are shaped by political factors such as the distribution of power, degree of shared goals and, interests, nature of leadership.  International economic systems are clusters of regimes.  Since WWII, three 1) Bretton Woods WWII ) Interdependence ) Globalization 1989-present.

ONE  Bretton Woods  For nearly two decades controlled conflict and helped participants to achieve common objectives.  The regime was built upon three pillars: the International Monetary Fund (IMF); the International Bank for Reconstruction and Development (World Bank) and; the General Agreements on Tariffs and Trade (GATT)  In the early years interaction was limited but growing. Nations were recovering. Protectionism was difficult to unwind. International investment was limited.

ONE  There were three political foundations: the concentration of power in a small number of states; the existence of a cluster of shared interests and; the presence of a dominant power willing and able to lead. Developed nations were the drivers. 2 nd World were no challenge. 3 rd world was inchoate. Japan was an outlier.  Management was made easier by the great degree of consensus that existed. There was a shared belief in CAPITALISM and LIBERALISM, with a reliance upon market mechanisms.  They agreed on the principle of INTERVENTION founded upon Keynesian/Welfare state approach.

ONE  Liberal international economic system. The beggar-thy-neighbor era of the interwar years provided and object lesson. But there was an acknowledgement that free markets could be unstable.  There was a belief that a liberal international economy could assist in the achievement and maintenance of international peace as well as the expansion of economic prosperity and integration.  The Cold War intensified the sense of community in the West.  They agreed upon a stable system, reduction of impediments to the free flow of economic instruments and, a stable monetary system.  US power and leadership was central.

ONE  Reasons for US leadership.  Interdependence  Changes in the nature of international interaction and shift in balance of power brought about the transition.  Economic changes occurred. Growth and liberalization increased volume of interactions and penetration. National economies became more interdependent. Domestic conditions were increasingly challenging. Monetary affairs were particularly problematic.  Reactions: New barriers arose in response to challenges, eg., NTBs, Managed trade, regionalism.

ONE  Secondly, new forms of management occurred. Economic summits and the Tokyo and Uruguay Rounds of trade negotiations occurred.  Changes in power and leadership also altered the political management of the system. The developed countries were dominant but states outside of the group challenged particularly LDCs with NIEO  The 2 nd world sought limited participation with Gorbachev’s initiatives taking root.  Power shifted within North. The European idea was maturing, Japan emerged. The US was weakening with b of p and b of t difficulties. Détente also diminished the perceived sense of urgency. Unsettled era.

ONE  Globalization  1990s emergence. Continued liberalization and improved technologies set it off. Politics also: 1) End of the cold war. No more 2 nd World. Capitalism was global. Globalized world emerged.  Wrenching change ensued. New challenges to national policy emerged, along with pressure to maintain them.  Greater vulnerability and, thus, challenges to rules and institutions.  New states emerged as powers, the so-called “emerging markets.”  EU, Mercosur, ASEAN, WTO.

TWO  Governing the International Monetary System  Central to the international economy. Framework for trade, investment, transactions and, payments, across international boundaries. Money.  How nations have worked together to create and manage the international monetary system while maintaining sovereignty over national currencies.  Three central functions: adequate liquidity, timely adjustment, and confidence in systemic stability.  No central government. Requires agreed upon media of exchange. Gold and national currencies have been the principal answers.

TWO  19 th and early 20 th c gold backed currencies. Later, the British pound sterling served as the reserve, transaction and, intervention currency.  After WWII, the dollar became key.  Monetary and fiscal policies have been developed for adjusting imbalances.  For Bretton Woods, the system was fixed exchange rate. They floated among major participants, most notably, in Europe.  Stability essential.

TWO  Bretton Woods: Origins  July 1-15, 1944, economic ministers of 44 nations met in Bretton Woods, NH.  A system reliant upon market forces was inadequate. What was required was a more publicly managed system. Similar to what necessitated the Keynesian New Deal approach but, with global political and economic stakes.  To avoid economic nationalism free trade and international economic interaction were thought to be remedies. An Anglo-American bilateral plan was the basis.  IMF and IBRD were the principal monetary institutions.

TWO  Rules: 1) Fixed exchange rate system. Floating rates of the 30s were unstable. Parity or par value required. Exchange rates against gold and allowed to float only 1% above or below par value 2) IMF would be keeper of rules. Weighted voting for decision-making 3) Dues would involve gold and national currencies. Countries could borrow against quota for the short term.  National solutions were still required.  The recovery period was expected to be five years.  By 1947 it was clear that more time and effort would be required.

TWO  US LEADERSHIP  The US assumed a lead role because of the combination of hardship and the emergence of a cold war between Eastern and Western blocs of nations.  The $ began to play a hegemonic role as the hard currency of the Western World. $35/ounce of gold.  Dollar shortages globally posed a liquidity problem though so the US needed to run balance of payments deficits the US encouraged an outflow of dollars. Bilateral and multilateral aid programs played a role: Truman Doctrine, Marshall Plan. Between 1948 and West European nations received $17 billion. Defense spending also.

TWO  The US provided liquidity and managed imbalances. It allowed for European and Asian protection, particularly on the part of West Germany and Japan.  The result was recovery.  MULTILATERAL MANAGEMENT UNDER US LEADERSHIP  The system relied upon a mechanism that would, ultimately, undermine confidence in the system, US dollar outflows and deficits.  By 1958 the US no longer sought deficits. Run on dollar in November 1960 when speculators converted dollars into gold. The IMF also began to emerge. Also the Bank of International Settlements or Basel Group emerged. Central bankers met to manage crises.

TWO  Group of 10 formed December p. 19 It created an exchange rate management mechanism for liquidity issues.  In 1968 Special Drawing Rights (SDRs), artificial reserve units created by the IMF could settle accounts.  Currency crises happened nonetheless in 1967 and  BRETTON WOODS TO INTERDEPENDENCE  Financial interdependence grew in the 60s with European and Asian recovery. Multinational banks were especially active vehicles in that process. A multiplicity of currencies emerged as hard currencies, facilitating that process.

TWO  Nixon Shock and Floating Rates  The US policy could be summed up as “benign neglect.” By the summer of 1971 that was no longer a tenable approach. There were runs on US gold stocks and the supply was dwindling.  August 15, 1971 suspended the convertibility of the dollar into gold and imposed a 10% surcharge on imports.  December 15, the G-10 group came up with the Smithsonian Agreement that would devalue that dollar and allow for greater par value flexibility, raising the float from %.  March 1973, fully floating international monetary system.

TWO  Petrodollar recycling  The Oil Crisis of led to a sharp increase in oil prices. Oil exporting countries, needing an outlet for their surplus funds, began to funnel them back to the oil importing countries. Private banks were the vehicles.  Monetary pressure precipitated a meeting of the heads of government o of the major powers in November They formed the G-6 group (US, UK, France, WG, Japan, Italy) formally, in January Floating exchange rate system was legitimated.  Economic summits on page 28.

TWO  INTEDEPENDENCE  national governments wrestled with balance between multilateral cooperation and national autonomy.  Financial Interdependence: Markets became integrated by accident and by design. Highly integrated world financial and capital markets meant that what happened in one region would effect all of the others, sometimes positively, often negatively.  Liquidity of the dollar.  $ maintained a central role despite pressures. Other vehicles would emerge. Still rates were allowed to float. Occasional intervention occurred. The G-7 Group was the principal manager, thus, multilateral.

TWO  $ Crisis of 1978 ensued, nonetheless. Tight monetary policy was the approach. The Fed became an important instrument of monetary policy.  High interest rates tightened the money supply, reducing inflation and stabilizing the currency. The overall economy suffered though.  Under Reagan there was a more unilateral approach that would focus on supply-side (p. 34). Reaganomics would undermine this approach.  Stability and Crisis Management: There were difficulties coordinating normally but crisis management worked out reasonably well.  Debt Crisis was a major source of consternation in the 1980s. IMF intervened with Paris Club (public) and London Club (private) efforts.

TWO  The debt crisis did compel the US to abandon unilateralism on occasion and take a multilateral approach. The US began to accumulate debt of its own that was largely left unchecked. Balance of payments and balance of trade difficulties occurred.  September 22, 1985 Plaza Agreement among G-5 of G-7 allowed for coordinated market intervention. Finance Ministers would agree to regular market coordination meetings. Formalized in Tokyo May  Louvre Agreement February 1987, more coordination. G-7 stronger than ever.  European Monetary System (EMS). After 1972 “snake” emerged (4.5%).

TWO  December 1978 “zone of monetary stability” with a basket of currencies. Exchange Rate Mechanism (ERM) agreed to create European Central Bank (ECM)  GLOBALIZATION  Globalization of financial markets. US-Japan partnerships in the 90s for coordination.  EU Single European Act (SEA) Maastricht 1992 provided for further integration.  Euro would follow. January 1, 1999 first introduced. January 1, 2002, circulated. Former communist countries got into the mix.

TWO  The expansion of financial and capital flows put strains on the international monetary system. The pressure to maintain par values in a fixed exchange rate regime was a major burden. Flexibility was limited. Disequilibria that was short-term could remedied reasonably smoothly. Structural or long-term disequlibria could force devalue and revaluations of currency, considerably more intrusive upon national sovereignty. National economic management was increasingly at-risk.  The US was an exception for awhile, in part because of the strength of the US economy and confidence in it, along with intervention to maintain the exchange rate. Dissatisfaction with the dollar and, confidence in it began to wane in the late 60s.

TWO  Adjustment: Improvement of fundamentals became a priority. The US under Clinton took steps to reduce deficit. The economy was resurgent, often, at the expense of western partners.  Crisis Management: Peso 1994, Asian , Russian 1998, Argentine  Subprime Mortgage Crisis  Crisis Prevention: IMF, New Arrangement to Borrow (NAB) principal.  Monetary Governance in the 21 st Century: complicated by conflicts between globalization and national sovereignty.