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-1971 2) Interdependence
1971-1989 3) 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. 2nd World were no challenge. 3rd
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 2nd 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 2nd 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
 19th and early 20th 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. 1947-1958 the US
encouraged an outflow of dollars. Bilateral and multilateral aid programs
played a role: Truman Doctrine, Marshall Plan. Between 1948 and 1952
16 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 1961. 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 1968.
 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 1-2.25%.
 March 1973, fully floating international monetary system.
TWO
 Petrodollar recycling
 The Oil Crisis of 1973-74 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 1975. They formed the G-6 group
(US, UK, France, WG, Japan, Italy) formally, in January 1976. Floating
exchange rate system was legitimated.
 Economic summits on page 28.
TWO
 INTEDEPENDENCE
 1971-1989 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 1986.
 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). 1989 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) 1986. 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 1997-1998, Russian 1998,
Argentine 1999-2002.
 2007-2008 Subprime Mortgage Crisis
 Crisis Prevention: IMF, New Arrangement to Borrow (NAB) principal.
 Monetary Governance in the 21st Century: complicated by conflicts
between globalization and national sovereignty.
THREE
 INTERNATIONAL TRADE AND DOMESTIC POLITICS
 Trade policy is indivisible from domestic politics. The TPP deliberations
are illustrative of that point.
 In the US, the Constitution provides a recipe for political conflict over
trade policy just as it does for nearly everything else by giving Congress
the power of the purse, including, levying tariffs and regulating foreign
commerce. At the same time, the president is the chief foreign policy
officer. Congress has to respond to constituent wishes as much, if not
more, than to the imperatives of national interest.
 While Congress often links trade policy with domestic interests, the
executive prioritizes the national interest more.
THREE
 Presidents have tried to resolve this tension by asking Congress to
delegate authority. Since 1934, Congress has often complied. Trade Act
of 1974 formalized this as fast-track authority.
 Bretton Woods
 The creation of the international trade regime was motivated by the
same imperatives underlying Bretton Woods in general. Protectionism
and the subsequent disintegration of world trade during the interwar
years contributed to prewar tensions. Secretary of State Cordell Hull
was a major proponent of liberal trade theory and very influential.
THREE
 The Havana Charter. It was to create the International Trade
Organization (ITO) to accompany IMF. 1947 it was signed.
 Agreement was elusive. For Havana the LDCs demanded a greater role
than they were accorded for the IMF
 It did not survive US domestic politics. Liberals and protectionists in the
US opposed its ratification. In 1950 the Truman Administration decided
not to submit the Havana Charter to Congress for ratification.
 General Agreements on Tariffs and Trade (GATT)
 It was agreed to in 1947 at the Havana Conference.
THREE
 Open trade system, comparative advantage, most-favored-nation (MFN).
Nondiscrimination. Reciprocity
 There were departures from the open standard. P. 75, principally,
subsidies. Gaps included the absence of a definitive disputes settlement
mechanism, enabling parties to block and delay actions.
 US Leadership. The US was able to lead because of steps taken to
insulate trade from the domestic policy process. Fast-track was
instrumental in this process.
 In the two decades following WWII the US helped Europe and Japan
particularly. Regionalism in trade was a significant element in this.
THREE
 The US also provided leadership in multilateral trade negotiations. US
initiatives were responsible for the nine major rounds from Geneva
1947 to Doha 2001.
 The US accepted limited benefits. The benefits were asymmetrical.
 P. 78 Multilateral Trade Negotiations
 INTERDEPENDENCE
 Structural Change and Protectionism. By 1967 there were
developments that undermined GATT system. Protectionist pressures
were at the heart, along with interdependence. P. 79.
THREE
 Both volume of trade and, trade as a percentage of GDP grew greatly as




interdependence deepened.
Convergence of national economies was also a factor. Early successes
relied on comparative advantage. FACTOR ENDOWMENTS put the US
and Western Europe at a disadvantage, to compound matters.
Newly Industrialized Countries (NICs) emerged.
Also disruptions had an adverse effect. The economic downturns of the
70s and 80s were instrumental. Stagflation typified the economics of the
period.
The early 80s put a brake on trade. Late 80s improvements marked a
partial restoration.
THREE
 Interdependence: Europe
 The EEC-EC-EU. Common external tariff and Common Agricultural




Policy were features. Trade grew among the Europeans
Interdependence: Japan
Japan rose over the post-war decades quickly. Export expansion and
import restrictions were central to Japanese government policy.
Japan began to liberalize some in the 70s under pressure but, still, it
accumulated large surpluses. Also there is/was a lot more private/public
partnership than in the US and elsewhere in the industrialized West.
Japan was accused of unfair practices Voluntary Restraint Agreements
(VRAs) were made.
THREE
 Interdependence: US
 US dominance eroded and support for openness diminished. Domestic
support for openness suffered.
 Issue: Agriculture. Too sensitive to be easily subsumed under GATT
 Issue: New Protectionism. Non-Tariff barriers (NTBs), VERs, Trigger-
Price Mechanism (TPM) anti-dumping.
 Tokyo Round (1973-1979) dealt with subsidies, procurement, trade
management regimes.
THREE
 GLOBALIZATION
 New Forms of Trade. 1) Services or Invisibles (white collar, tertiary).
 In 1998 65% US GDP, more than 50% GDP in other AICs. Difficult to
regulate. Organizing regimes to cover services has been elusive.
 2)Intellectual Property. Knockoffs, copyrights, piracy. Trade Related
Investment Measures (TRIMs) detailed requirement regarding domestic
sourcing (licensing)
 New Regionalism
 NAFTA (1992). Environmental groups became concerned.
 Mercosur. P. 101
THREE
 In the 1994 Summit of the Americas. Free Trade Area of the Americas.
 ASEAN 1992, APEC 1994.
 Bilateralism also.
 Uruguay Round
 NTBs were featured prominently. 1986 Punta del Este launched it. Began
formally in 1987.
 Services, intellectual property. N-S.
 1994 completed with the assistance of Fast-Track. January 1, 1995 new.
 Marrakesh Agreement established the World Trade Organization
(WTO)
THREE
 Marrakesh created the WTO and dealt with a lot of NTBs, including on
subsidies, services, intellectual property, e-commerce.
 New Challenges. The flow of capital, people and ideas is much easier and
less expensive, which is the good news for proponents of a free trade
regime. Agriculture protection, antidumping legislation, dispute
settlements are still vexing. Cartels are still unsettled. E-commerce.
 Environmental issues like Dolphin/Tuna cases continue. Climate change
as well.
 Also NGOs want more opportunities to participate in IGO
deliberations.
THREE
 Power Relations Shift. The US has been resurgent, Japan has declined.
The European idea has expanded its membership but not necessarily its
power.
 Doha
 Doha Round commenced with the November 8-14, 2001 Summit. Doha
Development Round reflected an effort to devote particular attention
to the developing world. Agricultural trade liberalization and nonag
market access (NAMA) have been among the emphases.
 Cancun September 2003 brought some progress that was built upon
later. Pessimism exists regarding its ultimate denouement.
FOUR
 MNCs and GLOBAL GOVERNANCE
 MNC “foreign direct investment” p. 128. Home/Host
 Not new. Foreign direct investment goes back to pre-Westphalian times.
It was principally financial prior to the 19thc then, it went commercial,
first in agriculture, later, in manufacturing.
 After WWII FDI changed dramatically. The balance-of-power was in
favor of the MNC.
 In the 1970s a wave a nationalization ensued, primarily, in the developing
world, during the period of interdependence.
 Numbers increased dramatically p. 129.
FOUR
 During the period of globalization, the controversy was more
philosophical, regarding MNCs as agents of globalization and, whether
or not that was a good thing.
 Common Characteristics of MNCs. P. 131 list.
 They do not simply market abroad, they carry with them capital, tech,
talent and marketing. Looking for a global market share.
 Joint ventures are objectives absent FDI, eg., licensing, patents,
trademarks, strategic alliances.
 Division of labor is a concern. Home/Home, Home/Host, Host/Host
relations are impacted. Jurisdictional problems arise.
FOUR
 Trends in FDI p. 135 Fluctuations. The US is an ongoing focus. Banks and
securities firms are a particular preoccupation.
 Explaining MNC Activity Growth. Is it MNCs directing government or,
vice-versa?
 Horizontal or Vertical FDI? Where should the emphasis be?
 Consequences of MNC Activity. Proponents say that FDI is a mechanism
for increasing productivity and stimulating growth. Critics believe the
opposite.
 Possible Negative Effects. Neocolonialism, Dependency Theory.
 Home Government Controls. P. 153. National politics (Home and Host).
FOUR
 REGIMES FOR FOREIGN DIRECT INVESTMENT