Transcript Global Economy and the Future of Capitalism File

WEEK 5
Global Economy and the
Future of Capitalism
•The Suez Canal crisis of 1956
Egypt’s efforts to nationalize the Suez Canal in 1956 that
was operated by the Universal Suez Canal Company,
owned primarily by British and French.
Britain’s oil supply flowed through the Suez Canal so keen
on regaining the control of the canal.
French believed Egypt helped Algerians resist French
colonial rule; Israel believed Egypt supported guerilla
attacks against Israel. The US aimed to find a negotiated
solution to the problem as US President Dwight
Eisenhower was engaged in a reelection campaign, and
the Republican party had emphasized his contributions to
international peace.
October 29 1956, Israelis attacked the Egyptian army and
the following day the British and French announced they
would intervene to protect the Suez canal.
The Suez Canal crisis of 1956
 British paratroopers landed in Suez on November 5. US
President furious with what he saw as a British deception
on the eve of American elections.
 The following day, US Secretary of the Treasury gave
the British an ultimatum: either agree to a cease-fire or
the United States would ruin the pound sterling.
 Unless the British withdrew, the US threatened to deny
credit from the United States Export-Import Bank, and
have the American Federal Reserve sell off large
quantities of sterling (which would give way to the
devaluation of the pound sterlin).
 Faced with a looming monetary crisis, the British gave in.
High politics (security, foreign policy, defense etc.) and low
politics (economics, cultural affairs, social issues etc.) can
become inreasingly blurred in a complex and
interdependent world.
-Even the world’s most militarily powerful state and the
largest economy of the world, the United States and its
security is affected by trade and monetary issues. The US
economy clearly depends on foreign capital because the
country consumes much more than it produces and has to
borrow money from the rest of the world to finance that
vast amount of consumption.
-In 2005, the US was owing $11 trillion to foreign creditors.
Economic globalization places all states in a delicate
position, offering opportunities for growth that promise
to improve their welfare while creating new risks that
threaten to affect their security.
• This chapter will examine
- how trade and currency
exchanges affect human welfare and national
security.
• What practices should governments embrace to
regulate commercial and monetary activities within
their borders?
• What should they do to influence economic
exchanges with other states? These issues form the
principal concerns within the field of International
Political Economy (IPE).
• IPE is the study of the intersection of politics and
economics that deals with the reasons why changes
occur in the distribution of states’ wealth and power.
Contending Economic Strategies for an
Interdependent World
 In 2006, world trade reached 41,5% of global domestic
product, up from 20 percent in 1990. (We will then look
at how trade was effected as a result of the recent global
crisis).
 Though trade is the most visible symbol of globalization,
the dynamics of the international monetary system are
equally important.
 To comprehend the debates that are currently raging
over trade and monetary issues, we first need to
understand the contending economic philosophies of
liberalism and mercantilism, which underpin the
strategies different states have adopted in their pursuit of
power and wealth.
The Shadow of the Great Depression
 44 states allied against the Axis powers met in Bretton
Woods in 1944. Their purpose was to devise new rules
and institutions to govern international trade and
monetary relations after the fighting ended. The US
played the leading role. Its proposals shaped by the
perception that the Great Depression of the 1930s
created the conditions that gave rise to political
extremists in Germany, Italy and Japan.
 Operating under the philosophy of commercial
liberalism, the US sought free trade, open markets and
monetary stability in the hope that they would foster
economic growth. Worldwide prosperity, US leaders
believed, was the best antidote to political extremism.
The Rules of Bretton Woods
 The rules established at Bretton Woods, which governed
international economic relations for the next twenty-five
years, rested on three political bases:
 First, power was concentrated in the rich Western
European and North American countries, which reduced
the number of states whose agreement was necessary
for effective management of economic relations.
 Second, the system’s operation was faciliated by the
dominant states’ shared preference for an open
international economy with limited government
intervention.
 Third, Bretton Woods worked because the United States
assumed the burdens of leadership and others willingly
accepted that leadership.
 The political bases of the Bretton Woods system
crumbled in 1972 when the United States suspended the
convertibility of the dollar into gold and abandoned the
system of fixed currency exchange rates.
 Since then, as floating exchange rates and growing
capital mobility have made monetary mechanisms
unstable, more chaotic processes of international
economic relations have materialized.
Fixed Rate
 A fixed rate is a rate the government (central
bank) sets and maintains as the official
exchange rate. A set price will be determined
against a major world currency (usually the U.S.
dollar, but also other major currencies such as
the euro, the yen or a basket of currencies). In
order to maintain the local exchange rate, the
central bank buys and sells its own currency on
the foreign exchange market in return for the
currency
to
which
it
is
pegged.
Floating Exchange Rate
 Unlike the fixed rate, a floating exchange rate is
determined by the private market through supply
and demand. If demand for a currency is low, its
value will decrease. A floating exchange rate is
constantly
changing.
LIEO
• Today’s modern international economic
system can be labelled as Liberal
İnternational Economic Order (LIEO).
• LIEO is based on free market principles
and reducing barriers to the free flow of
trade and capital.
A Bit of Theoretical Background to Understand
International Economy:
The Clash Between Liberalism and Mercantilism
• Liberalism and mercantilism represent fundamentally
different conceptions of the relationships among society,
state and market.
• Mercantilism: The 17th century theory arguing that
trading states should increase their wealth and power by
expanding exports and protecting their domestic economy
from imports.
• For the mercantilist perspective, government regulation of
economic life, such as through protectionism or quotas, is
important to increase state power and security.
Mercantilism
• Mercantilism and political realism have
much in common. They both see the
state as the principal world actor and
view the international system as
anarchical. For them, conflict is
something inevitable.
• Mercantilists are more concerned about
their country’s relative gains than both
parties’ absolute gains.
Liberalism
•
•
•
•
•
For the liberal perspective, open markets and free trade are
the engines of progress.
Liberals argue that enhanced individual liberties and
minimal state intervention both in the political and
economic spheres bring more welfare and prosperity.
Adam Smith and David Ricardo are two prominent names of
liberalism (especially see Smith’s well-known work ‘The
Wealth of Nations’ published in 1776).
The concepts of comparative advantage, invisible hand and
‘laissez-faire, laissez-passer’ (let them do, let them pass)
are significant in liberal theory.
Smith and Ricardo believed that economic cooperation,
free exchange of goods and services across the countries
eventually lead to peaceful resolution of the disputes
between the states. They argued that trade makes conflict
resolution easier by increasing international
communication and mutual confidence.
Hegemony and the Management of
Global Economy
• Hegemony is the ability to shape the rules under which
international political and economic relations are
conducted.
• In his explanation of the 1930s Great Depression, Charles
Kindleberger, an international economist, first argued
about the need for a liberal hegemon to open and manage
the global economy. In the 19th century until the First
World War, that hegemonic power was Britain and after the
Second World War, that is the United States.
• For Kindleberger, there was the lack of a hegemonic
country between the two world wars (inter-war period) and
that was the main reason for the emergence of the Great
Depression of 1930s.
Discussion Questions
 Which of the two approaches, i.e liberalism and
mercantilism do you align yourself with?
 Do we really need hegemonic countries or
superpowers for order in the international
system?
 Do you support the hegemonic stability theory?
Or is it possible to have a liberal economic
order without hegemonic leadership?
The Changing Free Trade Regime
 In the post-war era, the General Agreement on Tariffs and
Trade (GATT, signed in 1947) became the principal
international organization designed to promote and protect
free trade.
 In fact, GATT was never thought to be a formal institution
with enforcement powers. It was rather intended to be a
platform for negotiations and reaching consensus to settle
trade disputes among countries.
 However, in the post-Cold War period, by 1995, GATT was
replaced by World Trade Organization (WTO) with more of
an institutional framework and today has more than 150
countries as its members.
 The creation of WTO reflected a higher level of multilateralism and with its roles and responsibilities, WTO
stands as a driving force of international economic relations.
The Elements of Monetary Policy
 Money Supply: The total amount of currency in
circulation in a state.
 Exchange Rate: The rate at which one state’s
currency is exchanged for another state’s currency in the
global financial marketplace.
 Balance of payments: A calculation summarizing a
country’s financial transactions with the external world,
determined by the level of credits minus the country’s
total international debts.
 Balance of trade: A calculation based on the value of
merchandise goods and services imported and exported.
A deficit occurs when a country buys more from abroad
than it sells and a surplus occurs in the opposite case.
Global Economic Concerns in the 21st Century
 Most-favoured nation (MFN) principle:
Tariff preferences granted to one state
must be granted to all others exporting the
same product.
 Non-discrimination: Goods produced at
home and abroad are to be treated the
same for import and export agreements.
 Regional trade agreements (RTAs) such
as NAFTA (North American Free Trade
Agreement) signed by Canada, Mexico
and the United States are consistent with
GATT’s rules.
 Such regional regimes are seen as vital pieces in the
step toward a free trade agreement for the entire global
economy.
 On the other hand, a counter-argument holds that the
division of the globe into competing trade blocs is a
danger and the existing regional free trade zones
actually violate the WTO’s non-discrimination principle
by moving away from a free trade toward an inter-bloc
competition.
2007 Global Crisis
 The financial crisis from 2007 to the
present is considered by many economists
to be the worst financial crisis since the
Great Depression of the 1930s. It was
triggered by a liquidity shortfall in the
United States banking system, and has
resulted in the collapse of large financial
institutions, the bailout of banks by
national governments.
The global crisis
 The financial crisis is not peculiar to U.S
and shook the UK, the Eurozone, East
Asia, and the economies referred as the
‘emerging market economies’.
 The financial crisis had destructive
impacts on the ‘real economy’. The crisis
started in the construction, -auto and –
electronics sectors and it quickly spread to
all manufacturing industries and spilled
across the service-sector.
The Global Crisis
 World trade fell dramatically contracting for
the first time since 1982. US merchandisetrade declined by 30 per cent in December
2008, while China’s imports dropped 43
per cent a month later. In January 2009,
exports from Japan and Taiwan declined
by a shocking 45 per cent.
How to Reform the International Financial
Architecture and
Crises are acting as reminders and signals
for a reform.
 However, there is not yet a consensus on
what to do.
 It seems that floating exchange rates
system,
with
all
its
costs
and
uncertainities, is likely to continue for
longer.