Globalization- What is it?

o Friedman (2005), Keohane and Nye (1977, 1998), Held and McGrew (1998, 2000)- What is the big debate? Globalization and its effect on national autonomy

o Garrett (1988)- One side: globalization erodes national sovereignty and the ability of governments to effectively

manage (“race to the bottom”)o Ohmae (1993), Sabel (1989), Keohane and Milner (1996), Strange (1996), Rodrik (1997)

- Another side: globalization does NOT erode national sovereignty and the ability of governments to effectively manage

o Ruggie (1982), Vogel and Kagan (2002), Garrett (1998)- Either way, globalization does not follow neoclassical economy theory – it actually helps and

hurts national economies differentlyo Wallerstein (1974), Williamson (1997), Hall and Soskice (2001), Scott (2001)

- Globalization can mean many things, but it might be informative to look at one aspect of economic globalization more closely: financial globalization

o Overview Frieden (1991), Cohen (1996)

o Convergence (cause/effect) Helleiner (1994), Kurzer (1993)

o Divergence (cause/effect) Sobel (1994), Kapstein (1994)

o Somewhere in between Goodman (1992)

- These debates focus so much on national autonomy that we get stuck in a world of international institutions or markets v. states. Other actors may also be important, like transnational actors:

o Risse-Kappen (1996), Finnemore and Sikkink (1998), Keck and Sikkink (1998), Price (1998), Acharya (2004)

Regionalization- Clearly, there is an overwhelming literature on globalization, but some question whether this is

a useful construct. Might regionalization be better?o Zysman (1996), Weiss (1998), Hirst and Thompson (2000), Castells (1993)

- What is regionalism?o Mansfield and Milner (1999), Fishlow and Haggard (1992)

- PTAs -- what are they and what do they do?o Viner (1950), Summers (1991), Krugman (1993), Bond and Syropoulos (1996), Bagwell

and Staiger (1997)- Domestic politics and regionalism (society, institutions)

o Grossman and Helpman (1995), Eichengreen and Frankel (1995)- International politics and regionalism (power/conflict, institutions/strategic interaction)

o HST, Gilpin (1975), Gowa (1994), regime theory scholars, Haggard (1997)- Variations (depth of integration/institutional density, economic/political/cultural heterogeneity)

o Downs, et al. (1998), Katzenstein (1997)- Linking regionalism and globalism (EU, East Asia)

o East Asia: Pempel (2000), Aggarwal and Koo (2005), Pempel (2010)o EU: Garrett (1992), Pierson (1996), Aggarwal and Fogarty (2004)

- Globalization overview in context of IR theories and history: Nau (2007)o Friedman (2005)

Three versions of globalization: (1) 1492-1800, age of mercantilism and colonialism which “shrank the world from a size large to a size medium,” with the driving force being power/capabilities, (2) 1800-2000, interrupted by the Great Depression and the World Wars, age of Pax Britannica and Pax Americana which “shrank the world from a size medium to a size small, with the driving force being MNCs or institutions, (3) beginning of 21st century, age of the internet which is “shrinking the world from a size small to a size tiny and flattening the playing field at the same time,” with the driving force being the newfound power of individuals to collaborate and compete globally

Version one = realist, version two = liberalist, version three = constructivist

o Realism – power struggles continue to shape globalization and determine the evolution of technology, institutions, and ideas; America’s preeminence (especially following the rebound from 1970s oil shock and victory in Cold War) opened up the world for technology, the internet, open markets, and democracy; version three of globalization is different because America now has global predominance (version one = British, version two = American, but only in the west); but, hegemony often doesn’t last and we see counterforces developing, like terrorists and populist leaders

Collapse of Bretton Woods: in 1960s, France challenged US leadership (de Gaulle withdrew France from NATO, launched policy of détente with USSR); US supplied necessary dollars to finance external accounts, but this led to foreign countries holding these dollars; because US couldn’t change the price of gold, the only way it could lower the value of the dollar was for Europe and Japan to raise price of their currencies, but they liked undervaluing because exports were cheaper national prosperity; trade rules discriminated against US (example: European Common Market – tariffs were zero within it, but excluded US; Common Agricultural Policy reduced imports from US); US lost role as dominant lender to banks based in Europe because MNCs wanted to exploit the zero-tariffs borrowing from European banks (US couldn’t send dollars because Bretton Woods controlled capital flows) unregulated Eurodollar market late 1960s, US switched to aggressive Keynesian policies with large budget deficits, loose money, and domestic wage and price controls tripled inflation suspended convertibility of dollars into gold devalued in 1971, 1973 dollar sank floating exchange rate (before first oil crisis in October 1973)

Oil: crises of the 1970s saw balance of oil power shift decisively from the western oil companies (“seven sisters”) to the Organization of Petroleum Exporting Countries (OPEC – originally composed of Saudi Arabia, Kuwait, Iraq, Iran, and Venezuela); inflationary pressures in world economy plus the Arab-Israeli war of October 1973 OPEC officials announced 70% increase in price of crude oil (first time “seven sisters” did not set world price) and embargo, cutting production by five percent each month higher prices “stagflation” (slow growth accompanied by high inflation) and volatile exchange rates/capital movements that discouraged trade and foreign investment ISI in most developing countries (building up domestic industries to substitute for imports) private banks “recycled” the petrodollars which oil exporters deposited with

them by making loans to oil importing countries (realists say an alliance formed with OPEC and developing countries to challenge industrial nations)

developing countries organized “Group of 77” to champion cartels and regulation of other world resource markets proposals for the “New International Economic Order” (NIEO) to set prices and supplies of raw materials other than oil (Commodity Important Program) and provide special and differential treatment for developing countries’ manufacturing exports, codes of conduct to expedite the transfer of technology, MNC regulation, and generous programs of aid/subsidized loans to promote development (Generalized System of Preferences)

Group of 7 (G-7, 1976) advanced countries created new institutional mechanisms – preserved open trading system, established International Energy Agency (IEA) to coordinate importing country policies toward OPEC and initiated a Conference on International Economic Cooperation (CIEC) with OPEC countries to counter the proposals under NIEO

1979 – second oil crisis hits (Iranian Revolution as proximate cause, plus inflation, protectionism, and rapid financial expansion of world markets in 1970s) and disruptions cut oil supplies and caused another price panic

Rebound came from Reagan and Thatcher policies – rebuilt military defenses and strengthened free markets in Cold War struggle; introduced policies to reduce inflation, stimulate savings and investment, deregulate labor and capital markets, and liberalize trade once USSR was gone, US clearly dominant

Debt crisis of 1980s (North-South relations strained) IMF increased lending again and banks rescheduled developing country loans, reducing interest rates, increasing the number of years to repay, and promoting structural reforms away from ISI

Key question: who gains most? Two realist perspectives: Power transitions school – hegemons endure because moves toward

balance are dangerous and bring war Balance of power school – expects other states to rise and

counterbalance the hegemono Liberalism – technology and institutions drive shifts in power and ideas; third version is

the “information revolution,” which moved jobs from manufacturing into services, just as version one moved jobs from farms to cottage industries and version two moved from rural industries to urban factories; trade relations entered a new era with Uruguay Round extending free trade rules to cover services, agriculture, investment, and intellectual property (GATT WTO); capital markets liberalized; transnational and non-state actors – like independent central banks, MNCs, financial houses – moved money around the globe in the flash of an electronic transaction, constrained domestic economic policies, and exacerbated trade accounts; NIEO had international institutions proliferating and becoming more flexible; dense web of international economic interactions put an increasing stranglehold on national sovereignty and made the use of military force increasingly less likely (“complex interdependence”)

Friedman (2005): it is the density, speed, and cost of globalization that are new, not the fact; information technologies flattened, furrowed, and fertilized the earth

Flattening made it possible for poor countries as well as rich ones to participate in global production; the flattened earth emphasizes brain

power because individuals anywhere with an education can participate in the world economy; information technologies make human resources count more than natural resources, factories, or MNCs

Furrowing means tying the world together with broadband fiber-optic cable and satellite transmissions; it magnifies exponentially the capacity to transmit information simultaneously

Fertilizing means fostering the emergence of all sorts of new international organizations, particularly transnational or NGOs

So, technologies like the internet create a new world to which powerful groups and conventional ideas must adapt

Emphasize interactions, path dependence, and spillover – once momentum starts down a certain path of interactions, there is no going back to the starting point (example: high volumes of trade spilled over into high volumes of finance)

Global finance: Bretton Woods was stingy on finance, so US dollar accumulated in unregulated offshore Eurodollar markets in 1960s, first oil crisis popped cork that liberated financial markets because the quadrupling of price in early 1973 (OPEC) wreaked havoc on domestic economies as well as trade higher prices, slower growth “stagflation” instability in exchange rates explosion of Eurodollar markets petrodollar recycling liberalization of financial markets by reducing Bretton Woods’ restrictions on capital flows

See multilateral trade (WTO) and regional/bilateral agreements, like NAFTA, APEC, ASEAN, and EC ( EU)

Complex interdependence – financial crises marred the 1990s (Mexico Russia Asian developing countries Argentina)

o Identity – emphasized battle of economic ideas and social reconstruction of international norms and values; by the mid-1980s, more conservative free market-oriented policies made a comeback with Reagan and Thatcher that reduced government spending, lower taxes, sound money and low inflation, deregulated labor and capital markets, and freer trade these ideas ( Washington Consensus – free-market/neo-liberal view that embraced anti-inflationary measures, tax and spending cuts, privatization, and deregulation – cite Williamson (1990)) created the favorable climate that ignited the information revolution and globalization version three, just as laissez-faire ideas ignited the second industrial revolution and globalization version two

Thatcher and Reagan: tax cut and deregulation movement G-7 summit in 1983 produced conservative policies EU deregulated under

Single Market Act in 1987 and passed Pact on Stability and Growth to keep budget deficits within certain limits

This policy movement toward market-oriented ideas was crucial and received a big boost with the collapse of the USSR

Showed triumph of Hayekian conservative policies over Keynesian interventionist policies in the 1990s

spread of sustainable development ideas at the systemic level

- Fleshing out some of these overview ideas: Is globalization “complex interdependence”?o Keohane and Nye (1977)

Complex interdependence is a relationship characterized by costly effects, which may reduce costs, impose costs, or provide benefits, caused by rapid technological change and continued importance of state interests/power (liberalism + realism)

States fall on a continuum from realism complex interdependence Interdependence does not imply cooperation

Three characteristics: Multiple channels of contact among society – interstate, trans-

governmental, and transnational relations (MNCs) Lack of clear hierarchies of issues – as new actors are incorporated into

the system, it is unclear which issues are most important Irrelevance of military force – increasingly costly for major states due to

risks of nuclear escalation, resistance by people in poor or weak countries, uncertain and possibly negative effects on the achievement of economic goals, and domestic opinion opposed to the human cost of the use of force

Sensitivity and vulnerability – if OPEC decides to produce less oil, thereby raising prices, US consumers will be sensitive to this change because they are dependent on oil; but, in the end, OPEC may also be vulnerable to this decision because the US could develop alternative fuels (“an actor’s liability to suffer costs imposed by external events even after policies have been altered”)

Interdependence v. globalization: interdependence can be increasing or decreasing, but globalization implies something is constantly increasing

o Keohane and Nye (1998) Revisiting “interdependence” in the context of the information revolution: what

is new is the virtual erasing of costs of communicating over distance; actual transmission costs have become negligible

This has dramatically changed the “multiple channels of contact among society,” but not the other two characteristics

Types of information: free, commercial (send at a price), and strategic (confers great advantage on actors only if competitors do not possess it)

Altered patterns of complex interdependence by increasing channels, but exists in context of existing political structure free information flows faster without regulation, strategic will be protected, commercial will depend on property rights

Information revolution often thought to have a leveling effect – reduces costs, economies of scale, barriers of entry to markets – but maybe not:

Soft power strongly affected by cultural component (example: US dominant in market share of films)

Even if cheap to disseminate existing information, production of new information requires costly investments (example: US has capability for collecting intelligence that dwarfs those of other nations)

First movers often the creator of standards/architecture of information systems (example: use of English language on the Internet)

Off-the-shelf commercial availability of what used to be costly military technologies benefits small states and non-state actors, while increasing the vulnerability of large states (example: terrorism)

Issue of credibility: low cost of transmitting data means the ability to transmit it is much less important than it used to be, but the ability to filter information is more so increasing importance to transnational networks of like-minded experts

Democratic advantage: societies familiar with free exchange of information, more transparency

- This doesn’t really give us a definition of globalization though, so what is it?o Held and McGrew (1998, 2000)

Globalization denotes the expanding scale, growing magnitude, speeding up, and deepening impact of interregional flows and patterns of social interaction

Definitions differ based material, spatio-temporal, and cognitive aspects Material: increasing material flows of people, capital, trade Spatio-temporal: shift in spatial reach of social action and organizations

toward the inter-regional/continental scale Cognitive: changing public perceptions of shrinking time and space

Contemporary globalization does share much in common with past phases, but it is distinguished by unique spatio-temporal and organizational attributes and its unique challenge to the Westphalian principle of state sovereignty

There are multiple types of globalization: economic, political, and military Some scholars are “hyper-globalizers” and others are “skeptics” – both of these

positions are too extreme – while regional and global interaction networks are strengthening, they have multiple and variable impacts across different locales

Globalization is NOT a homogenizing force – the impact of globalization is mediated by a state’s position in global, political, military, and economic hierarchies, as well as its domestic economy and politics

But, there are “overlapping communities of fate” – a state of affairs in which the fortune and prospects of individual political communities are increasingly bound together (growth in trans-border issues like terrorism or financial crises erodes clear-cut distinctions between domestic and foreign affairs)

- Setting up the big debate: globalization and national policy autonomy/convergence v. divergenceo Garrett (1998): market integration is thought to affect national policy autonomy through

three basic mechanisms: Trade competitiveness pressures – big government is by definition

uncompetitive; government spending crowds out private investment, is less efficient than market allocations, and cushions market disciplines on prices and wages; in turn, spending must be funded either by borrowing or by higher taxes; taxes cut into firms’ profits and depress entrepreneurial activity; government borrowing increases interest rates; as a result of these effects, output and employment suffer from public sector expansion; since no government can afford these consequences, trade competition must result in a rolling back of the public economy

Multinationalization of production – focus on costs to business of interventionist government; firms with production facilities in more than one country can evade these costs by exiting the national economy; governments must thus embrace the free market if they are to compete for the investment and jobs provided by multinational firms

Integration of financial markets – traders operating twenty-four hours a day can move mind-boggling amounts of money around the globe more or less instantaneously; governments are held ransom by the markets, the price is high, and punishment for noncompliance is swift

Liberalism – core proposition is that liberalization of trade is good for all segments of society

“Embedded liberalism” (Ruggie (1982)) – short-run political dynamics of exposure are different; openness can increase social dislocation and inequality and thus increase political pressure to dampen these effects (Bretton Woods did this by combining fixed exchange rates, promoting trade, with capital controls, giving governments autonomy, which turned into welfare provision – “Keynesian welfare state” – in order to support those adversely affected by market risk)

o Distinctive feature: short-run political dynamics of exposure to trade are very different than long-run (assumption that in long run, liberalization good for all society)

This compromise is no longer viable due to the heightened mobility of productive and financial capital and decline on restrictions on international flow – essentially, the ability of government to deliver on its side of the embedded liberalism compromise has been drastically reduced

This view is essentially that a huge leap in exit threats has tilted the balance of power strongly in favor of the market over politics at national level

- What is this argument? Globalization erodes national sovereignty and the ability of governments to effectively manage (“race to the bottom”)

o Ohmae (1993) “Borderless world” – differences between countries matter less Economic activity has become global less susceptible to state intervention Logic of market competition has caused economic processes to transcend

national circumstances (TNCs)o Sabel (1989)

Globalization has forced the contracting out of production and labor to specialized local networks based on trust and mutual dependence, rather than contract

“Flexible specialization” – increases importance of local networks that can hyper-specialize, which weakens the importance of national governments or entities (example: Silicon Valley)

o Keohane and Milner (1996) Uses “internationalization” construct — underlying changes in transactions costs

that produce observable flows of goods, services, and capital Propositions about internationalization and domestic politics:

As internationalization progresses, the tradeables sector will grow relative to non-tradeables, so the economy will become more sensitive to international price signals; external shocks make economy more vulnerable, so should expect major domestic policy reforms

But, internationalization will undermine autonomy and efficacy of governmental macroeconomic policy (will be more constraining for left-wing than right-wing governments)

o Sees capital mobility as gaining more political power than labor Domestic institutions can try to resist internationalization:

Block relative price signals from international economy from entering domestic economy

Freeze coalitions/policies by making costs of changing them very higho Strange (1996)

Globalization and technological change are diminishing state autonomy because states have trouble controlling the highly mobile assets in the new economy like capital, information, and energy

This means that states are losing authority in part to non-state actors like TNCs, but also to impersonal markets (some fundamental responsibilities of the state are not being exercised by anyone – “ungovernance”)

Territoriality is neither the sole source of political power and authority nor a critical factor determining the prosperity of a national society; there has been a shift from competition over territory to competition over global markets

o Rodrik (1997) Argues that globalization is incompatible with domestic stability. Tensions:

Among groups: group asymmetries exacerbated by reduced barriers to trade and investment; workers bargaining power erodes

Among/within nations: domestic norms/institutions are questioned since the nations are trying to compete for the same thing; different development models make this difficult

Within nations: difficult for governments to provide social insurance “race to the bottom” (declining tax revenues are a result of governments having to lower taxes to retain MNCs within their borders)

Need: systemic-level social insurance Governments can no longer maintain welfare state-progressive taxation

mix; future of welfare state can only be secured by shifting tax burden from mobile to immobile asset holders (which stunts redistributive effects)

- Is this argument correct? Another option: globalization does NOT erode national sovereignty and the ability of governments to effectively manage (there isn’t a “race to the bottom”)

o Ruggie (1982) (follows Polanyi’s “double movement” of economic liberalism and social protection)

“embedded liberalism” – power is necessary to establish regimes, but the content of the regimes are determined also by social purpose/norms – this fusion “plays a mediating role, by providing a permissive environment for the emergence of specific international economic transactions”

After WWII, compromise characterized by multilateralism, predicted upon domestic interventionism

The industrial world shared set of social objectives – namely preserving domestic stability (full employment and social stability) – and this combined with US power accounts for the formation of embedded liberal institutions

o These institutions were made at the expense of the third or non-industrial world

After 1971, the US declined, but the normative framework of embedded liberalism remained

Examples: shift from fixed to floating rates of exchange; lower tariffs combined with domestic safeguards and negotiated export restraints

o So, national politics and global markets can actually reinforce one another

o Vogel and Kagan (2002) “race to the top” (toward stringency) Under certain circumstances, integration can lead to the strengthening of

consumer and environmental standards Example: “California effect” of the diffusion of higher regulatory

standards and practices Market mechanisms for “trading up”:

Firms that want access to aid markets must meet standards of those markets

Once these firms adjust to meet these higher production costs, they lobby for domestic reform or use these as competitive advantage in their home market

o There are thus institutional pressures from international community and trans-national advocacy groups that can lead to changes in and diffusion of norms

o Garrett (1998) Markets may not be completely global, but have “globalized” Globalization constraints on policy choice are not pervasive

OECD countries (up to mid-1990s) – industrial countries are NOT similarly integrated into most international markets (pace of globalization varies); fiscal policies (government spending or changes in government spending) have NOT converged; NOT a race to the bottom

Market integration is more constraining than trade or multinationalization of production – but still, it has not only increased the exit options of producers and investors, it has also heightened feelings of economic insecurity among broader segments of society, which has given politicians incentives for wealth redistribution

Although there are costs for an interventionist government, numerous government programs generate economic benefits attractive to mobile finance and production; this has the effect of reducing inequality, which leads to an increase in social stability, thus stimulating growth

- An addition to option two: helps/hurts national economies differentiallyo Marx/Lenin: colonial expansion of great European powers in the late 19th and early 20th

centuries led to exploitation of underdeveloped regionso Wallerstein (1974)

Traces the development of the European world-economy, a global capitalist system centered in Western Europe and divided into the core, semi-periphery, and periphery; begins in the “long 16th century” and expands to cover the globe; the three “zones” are connected by “world market trade” in bulk commodities

A country’s ability to modernize depends on its role in the world economy; whereas the core countries are typically on a trajectory toward democracy and

increased prosperity (strong states), those in the periphery tend toward authoritarian governments and economic stagnation (weak states)

The world-economy rewards zones differently – surplus flows disproportionately to the core areas

o Once empire proved unsustainable and groundwork laid for modern world-economy, it became inevitable that someone would fill each of the system’s various roles

o This is because the world-economy operates as a coherent system; in the global division of labor, the periphery produces lower-ranking goods, for which labor is less well rewarded than for the higher-ranking goods in the core; the goods produced in the periphery tend to be daily-need goods, making the core dependent on periphery for its existence

o Williamson (1997) Effects of globalization across time are the same: a rise in inequality in rich

countries and a fall in inequality in poor countries Mexico and the US: unskilled workers from poor countries emigrate to wealthy

countries, thus flooding the rich country’s labor market at the bottom US: unskilled wages lowered relative to skilled wages and white collar

incomes, thus increasing labor inequality Mexico: unskilled labor, once superfluous and flooding the market, is

fleeing, thus decreasing labor inequality These inequality trends were in part responsible for rich industrialized

countries’ interwar retreat from globalizationo Hall and Soskice (2001)

National differences persist and are even reinforced by globalization “varieties of capitalism”

Liberal market economies -- solve the problem of production coordination through market or hierarchy solutions

Coordinated market economies – solve the problem of production coordination through non-market means

o These economies have different institutional comparative advantages, which means firms will locate different types of production in each economy ( international specialization)

o Scott (2001) “Washington Consensus” clearly wrong – free markets do not bring about

economic convergence, so one-size-fits-all policy doesn’t work Neoclassical theory reminder: poor countries grow faster than rich ones

in free global market; capital from rich in search of cheap labor flows to poorer economies and labor migrates from low-income areas toward those with higher wages labor and capital costs, and eventually income, converge

This might work with US and EU – both enjoy labor and capital mobility and free internal trade – but the rest of the world doesn’t fit pattern

Income gap between rich and poor has been growing for more than 200 years, but improved global communications have led to an increased awareness among the poor of income inequalities and heightened the pressure to

immigrate to richer countries; in response, industrialized nations have erected higher barriers against immigration; this immobility eliminates a potential source of domestic pressure on ineffectual governments, facilitating their survival; this makes the world economy more like a “gated community” than a “global village”

Causes: Rich countries insist on barriers to immigration and agricultural imports Poor nations unable to attract much foreign capital due to their own

government failings; primary commodities are traditional advantages “one country, two systems”: uses US traditional divide of North/South as a

model for understanding developing countries; Italy’s North/South divide (while overall Italian incomes converging toward EU, Mezzogiorno incomes diverging, despite decades of subsides from Rome and the EU high public-sector employment, patronage, corruption)

Point: have to get institutions right and need country-by-country approach- Specific types of globalization? Economic – trade globalization

o Basic theories/models: Mundell-Fleming (“unholy trinity”) – a country cannot simultaneously have (1)

fixed exchange rates (price stability), (2) capital mobility (openness to global capital), and (3) autonomous monetary policy (ability to fix domestic interest rates to control inflation); the idea is that, under fixed exchange rates, increases in capital mobility render monetary policy less and less useful as a domestic tool; rather, it simply becomes a tool for maintaining the exchange rate

Heckscher-Ohlin Theory (factor proportions) – assumes perfect competition and factor mobility within trading countries, but immobility between countries; equal demand conditions, zero transport costs, constant returns to scale, fixed technology, and that every product can be unambiguously defined in terms of factor intensity; given these conditions, trade patterns are determined by the fact that countries have different relative factor inputs; each country will export those products that require a great deal of its relatively abundant factor of production, and import those that require inputs scarce in that country

Stolper-Samuelson Theorem -- in a two factor world with complete mobility of factors within a country, trade liberalization will lower the real income of one factor of production (the scarce factor) and increase the real income of the other (the abundant factor); under demanding assumptions, wage rates and returns to capital will each equalize across trading countries (known as “factor price equalization”)

Ricardo-Viner Model – factors of production are industry-specific even in the long run, so trade liberalization will benefit all factors in the export industry but hurt all factors in the import-competing industry

“Specific-factors approach” – economy is organized into sectors to which factors are specific, along with factors that can move freely from activity to activity; the result is that changes in the prices of goods have their principal effects on the specific factors, with collateral (ambiguous) effects on the mobile factors

- Specific types of globalization? Economic – financial globalization/internationalizationo Frieden (1991)

Framework for analyzing international capital mobility – this mobility is often seen as a fundamental change in the international economy

There is greater international mobility of financial assets (capital), more modest international mobility of other assets (equity, for example, is more geographically specific), and markets for firm- and sector-specific capital are quite nationally segmented, showing the continued importance of unexpected exchange rate movements

Financial capital mobility has little effect on most sector-specific policies, but integration of financial markets has significant effects on the effectiveness and differential distributional impact of national macro-economic policies

World has changed from one in which national macroeconomic policy operated primarily via interest rates to one in which policy operates primarily via exchange rates

“Specific-factors approach” Over the long run, international financial integration tends to favor

capital over labor, especially in developed countries; in the shorter run, which is more relevant to politics and policies, the issue is more complex: in the developed world, financial integration favors capitalists with mobile or diversified assets and disfavors those with assets tied to specific locations and activities such as manufacturing or farming.

Useful for analysis of international finance:o Emphasizes political relevance of short-term fluctuations in the

returns to different sorts of economic activityo Assumes most people and investments are “caught” (or stuck,

meaning without high job mobility) in their current activity to one degree or another

o Some factors may be mobile (unskilled labor), while others are specific (skilled labor)

Note: sectoral approach as contrasted to class (Marx); here there is competition among various sectors of the economy, not competition among classes

o Cohen (1996) Financial globalization started in the late 1950s when private lending and

investment again gathered momentum Possible explanations:

Realist model: Determining role of policy rivalry among governments in an insecure world, each calculating how best to use its influence and capabilities to promote state interest

o Critique : reversibility appears to be logical corollary – does this make sense? Which “face” (James and Lake 1989) of hegemony is at work here?

Liberal model: Powerful impacts of competition and innovation in financial marketplace; advances in communication/information technologies decreased barriers to market integration/free flow of capital (neoclassical economics)

o Critique : approach often links globalization outcome with its defining characteristics tautology

Pluralist model: Role of domestic politics and institutions in driving international developments

Cognitive model: Role of belief systems and epistemic communities as catalysts for change

Consequences of globalization Macro-level – implications for aggregate economic performance and

effectiveness of national stabilization policieso “unholy trinity” (Mundell-Fleming)o Financial globalization places a constraint on sovereign states

Micro-level – implications for domestic distribution and the role of public policy in structuring private activity

o Financial globalization enhances the leverage of investor interests by reducing barriers to exit

o States are assumed to have a key role in financial globalization, but scholars posit different policy explanations and causes – autonomy debate within one aspect of economic globalization:

Convergence/lack of autonomy Helleiner (1994): at the systemic level, "competitive deregulation" by

governments maneuvering unilaterally to attract the business of mobile financial traders was reinforced as early as the 1960s by policy initiatives from the two leading financial powers of the day, the United States and Britain, both with a strong interest in promoting a more open international order; at the cognitive level, an ideological shift from postwar Keynesianism to a neoclassical or neoliberal policy framework gained strength from the preexistence of a sophisticated epistemic community of central bankers based around the Bank for International Settlements

Divergence/autonomy Sobel (1994): process is best explained by purely domestic considerations--

competition between organized interests within national political economies has spilled over to affect the international environment; focusing specifically on recent developments in the securities markets of Britain, Japan, and the United States, rejects structural or ideational interpretations of globalization, which he labels "outside-in" explanations: "In these explanations, the primary stimulus motivating change arises outside the domestic political economy, but compels changes that impact the domestic political economy"; prefers instead an alternative "inside-out" explanation, which he defends with extensive evidence of persistent national distinctions and "home bias" in bond and equity markets; this incomplete convergence shows the importance of domestic policy

o Financial globalization has put governments on the defensive, but scholars posit different consequences of this defensive view – autonomy debate again:

Convergence/lack of autonomy Kurzer (1993): sees rather little scope for effective state responses to global

finance; comparative study examines the fate in the 1980s of tripartite distributive arrangements between business, labor, and government in four small European democracies: Austria, Belgium, the Netherlands, and Sweden; in all four countries, traditional policies of "social concertation" have recently been abandoned. The timing of these changes varied across the countries, which may be explained by differences in such factors as business preferences, administrative rulings, and the historical stance of foreign economic policies, but

the overall outcome ultimately was the same and may be attributed to financial globalization: "As business and finance became more mobile, their power resources increased, and those of labor decreased. . . . [T]he greater mobility of capital and deepening financial integration corroded social concertation"; "governments have lost the ability to carve out national economic strategies and to sustain social accords"

Divergence/autonomy Kapstein (1994): surveys regulatory responses to the internationalization of

commercial banking over the postwar period (prudential and supervisory agreements negotiated by major central banks); identifies the formula "international cooperation based on home country control," which has enabled governments to mount an effective response to the challenges of financial globalization; though imperfections remain, a workable framework for governing global financial markets has been created and may suggest a "generic policy solution" to the conflicting demands of systemic and societal forces in other issue-areas as well: "International cooperation based on home country control provides a way for states to enjoy the benefits of interdependence while maintaining national responsibility for the sector in question"

Somewhere in between Goodman (1992): comparative analysis of central banking practices in three big

West European economies: France, Germany, and Italy; primary concern is with the role played by institutional differences, particularly differences in the degree of central-bank independence that "govern the extent to which domestic political pressures influence national monetary policy"; assumes context of deepening financial interdependence; the globalization of finance drives states voluntarily to limit their own monetary autonomy by means of cooperation (in Europe, up to and including the possible creation of a full monetary union); authority may be lost at the national level but might be regained through a convergence of policies at a higher level

- What about non-market, non-state actors as facilitators of globalization? Transnational actors (TNAs) – do they impinge on state authority and how?

o [Notes on these in constructivism outline] Risse-Kappen (1996) – NATO emergence, liberal states form pacific federations Finnemore and Sikkink (1998) – “life cycle of norms” Keck and Sikkink (1998) – transnational advocacy networks, human

rights/environment, Brazil/Malaysia Price (1998) – TNAs and land mines Acharya (2004) – norm localization in Asian regionalism

- Is it even useful to think about globalization? Is regionalization a better concept? o Zysman (1996)

“global economy is a myth” – process of regionalization, not globalizationo Weiss (1998)

More appropriate label for the phenomenon is “inter-nation-alization”

o Hirst and Thompson (2000) Genuinely transnational companies rare – most are nationally based and trade

multinationally, but there seems to be no major tendency toward the growth of truly international companies

FDI highly concentrated among AICs and Third World remains marginal in both investment and trade (minus a few NICs)

World economy is not global – trade, investment, and financial flows concentrated in Triad of Europe, Japan, and North America

These major powers have the capacity, especially if they coordinate policy, to exert governance pressures over financial markets

So, global markets are NOT beyond regulation and control – we haven’t seen true globalization

o Castells (1993) There is a new division of labor in the global economy stemming from the

information-based production characterized by interdependence, regionalization, increasing diversification within regions, selective inclusiveness, exclusionary segmentation

But there are limits to the globalization thesis: The global economy is actually organized around three regions: North

America, European Union, and Asia-Pacific; around this “triangle of wealth, power, and technology,” the rest of the world is organized hierarchically and asymmetrically, in an interdependent web

o Regionalization is thus an attribute of the global economy o Mansfield and Milner (1999)

Four waves of regionalism Progressive bilateralism – starting second half of 19th century, Europe –

intra-European trade rose dramatically; functioned as a single market by 20th century – customs union in various states (1850s/1860s); first decade 20th century, UK had bilateral arrangements with 46 states

Highly preferential arrangements – soon after WWI ended, second wave with highly preferential regional arrangements, discriminatory, protectionist, “beggar-thy-neighbor” policies, typically among sovereign states; examples: Hungary, Romania, Yugoslavia, and Bulgaria each negotiated tariff preferences on their agricultural trade with various European countries, US with Latin American countries

Regional concentration waves – regional concentration of trade flows generally has increased since the end of WWII (due much to EC); has particularly increased among members of a PTA (not merely in same geographic region), but in two waves:

o 1950s-1970s (wave one): establishment of EEC, EFTA, CMEA, regional trade blocs among developing countries (backdrop of Cold War)

o 1990s (wave two): post-Cold War, US actively promoting and participating in process, high levels of economic interdependence, willingness by major players to mediate trade disputes, and multilateral framework (GATT/WTO)

Definition of regionalism:

Region often defined as a group of countries located in the same geographically specified area and/or sharing cultural, economic, linguistic, or political ties

o Problems: is Asia-Pacific one region or two? How big is the European region?

Fishlow and Haggard (1992): regionalization v. regionalismo Regionalization – economic process whereby economic flows

grow more rapidly among a given group of states in the same region than between these states and those located elsewhere

o Regionalism – political process characterized by economic policy cooperation and coordination among countries (so commercial regionalism driven largely by spread of preferential trading arrangements (PTAs))

PTAs Liberalize commerce among members while discriminating against third

parties Viner (1950): trade-creating v. trade-diverting

o Trade-creating – one member of customs union newly imports from another something that it formerly did not import at all (high-cost low-cost)

o Trade-diverting – one member of customs union newly imports from another something it formerly imported from third country, because that was the cheapest possible source (low-cost high-cost)

A custom union’s static welfare effects on members and the world as a whole depends on whether it creates more trade than it diverts (though effects debatable)

Regional trade agreements can influence welfare of members by allowing firms to realize economies of scale, but static welfare implications uncertain

Regional economic arrangements might bolster multilateral openness Can induce members to undertake/consolidate economic reforms Summers (1991), Krugman (1993): regional institutions reduce the

number of actors engaged in multilateral negotiations, thereby muting problems of bargaining and collective action

Then again, it might not Bond and Syropoulos (1996): formation of customs unions may render

multilateral trade liberalization more difficult by undercutting multilateral enforcement

Or, it can be qualified Bagwell and Staiger (1997): when the multilateral system is working

poorly, preferential agreements can have their most desirable effects on the multilateral system

Domestic politics and regionalism Societal factors

o Grossman and Helpman (1995): whether a country chooses to enter a regional trade agreement is determined by how much influence different interest groups exert and how much the

government is concerned about voters’ welfare; political viability of PTA often depends on the amount of discrimination it yields; agreements that divert trade will benefit certain interest groups while creating costs borne by the populace at large; if these groups have more political clout than other segments of society, then a PTA that is trade diverting stands a better chance of being established than one that is trade creating; by excluding some sectors from a PTA, governments can increase domestic support for it, thus helping to explain why many PTAs do not cover politically sensitive industries (example: EEC’s exclusion of agriculture)

Domestic institutionso PTAs can be commitment devices

Eichengreen and Frankel (1995): PTAs can be made by policymakers who prefer liberalized trade, but face domestic obstacles; Columbia and Venezuela (1991) turned the previously dead Andean Pact into a successful FTA; this was a politically easy way to dismantle protectionist barriers to an extent that their domestic legislatures would never have allowed had the policy not be pursued in a regional context

Other example: if governments expect domestic opposition to liberal economic reforms, can enter a PTA to bind themselves to these changes (Mexico entering NAFTA)

International politics and regionalism – power and conflict Hegemonic stability theory (Kindleberger 1973, Gilpin 1975, Krasner

1976) – discriminatory trade arrangements are outgrowths of the economic instability fostered by the lack or decline of a hegemon (which can provide economic stability); current wave of regionalism triggered or accelerated by US decision to pursue regional arrangement in early 1980s when its economic power waned and multilateral trade negotiations stalled; erosion of US hegemony over past 50 years has stimulated rise in number of PTAs and states entering them

o Gilpin (1975): benevolent and malign strains of regionalism; on the one hand, regionalism can promote international economic stability, multilateral liberalization, and peace; on the other, it can have a mercantilist tenor, degrading economic welfare, and fostering interstate conflict

Since WWII, regionalism has been relatively benigno Gowa (1994): “security externalities” imply that since PTAs

liberalize trade among members, arrangements are especially likely to form among allies (bolsters political-military capacity)

Regime theory (Keohane 1984, Snidal 1985) – global openness can be maintained in the face of declining or absence of hegemony if a small group of leading countries collaborates to support the trading system; erosion of US hegemony may have stimulated creation/expansion of

PTAs because leading economic powers felt these arrangements would help them manage international economy

International politics and regionalism – institutions and strategic interaction Most contemporary PTAs established under auspices of the GATT/WTO,

which has attempted to dampen trade diversion by limiting members’ ability to discriminate against third parties; limited success because many arrangements by less-developed members have been highly protectionist

GATT attempts to regulate formation of PTAso Article XXIV of the GATT: PTAs must eliminate internal trade

barriers and must not increase the average level of members’ external tariffs (but can have trade diversion)

GATT made efforts to manage strategic interdependence among PTAso Preferential agreements have formed in reaction to one another

(EFTA in response to EEC), but not to obtain MFN treatment or as the product of mercantilist policies

Why? rival blocs want to bolster competitiveness and give more bargaining power than constituent members alone

Haggard (1997): CEFTA hoped formation would bolster ability to negotiate entrance into EC/EU

Variations among regional institutions Downs, et al. (1998): depth of integration varies; deeper integration

more easily attained if states share interest in economic liberalization and easier with fewer states due to collective action problems; more effective to create smaller PTA composed of states with preference for liberalizing economic relations and then take on additional members incrementally, just as the EC/EU did

Katzenstein (1997): economic, political, cultural heterogeneity varies; Asia’s commitment to “open regionalism,” implying a desire for non-discriminatory trade practices and a willingness to accept new members)

- Empirical examples: East Asia and EU- These studies relate to the importance of the presence of a hegemon/East Asian regionalism.

o Pempel (2000) Most national economies of Asia have become increasingly tied together

through economic integration involving primarily FDI, trade, bank loans, and other capital movements, but regional closeness was only partially paralleled by closer political integration

Two stages of growing economic integration in Asia: First three decades following WWII: trade and aid; bilateral linkages

between US and/or Japan and other economies; this was tied to military strategic alliances (not economic) and government-led

o Didn’t enhance intra-Asian trade (“regionalism” only in the sense that a number of countries had similar bilateral economic links to Japan and the US)

o Little institutionalization (though ASEAN formed in 1967)

Following breakdown of Bretton Woods in 1971: FDI, portfolio purchases, and bank loans; multilateral (including South Korea, Taiwan, Hong Kong, and China)

o Japanese capital initially became most important – yen appreciated, costs of land/labor elsewhere fell outflow of Japanese capital ( investment expansion + financial institutions’ expansion)

There has been some slight increase in institutionalization (non-official institutions like PECC, for example), but any Asian economic success has relied heavily on exports to markets of North America – highly dependent on a regionalism that is open

- Can we link globalization/regionalization at an even lower level? Sub-multilateral levelo Aggarwal and Koo (2005)

East Asian international economic integration: many countries, including Japan, China, South Korea, ASEAN members, and Taiwan are in WTO (formerly GATT)

East Asian regional economic integration: lacks significant formal institutionalization (even ASEAN avoids commitment to the elimination of tariffs and other trade barriers), but impressive in a practical sense – there is soaring intra-regional trade and investment flows

It is just an informal, network-style integration instead Because this has come under stress, though, a growing number of East Asian

countries have begun the pursuit of greater institutionalization at the sub-multilateral level, actively weaving a web of preferential arrangements with countries both within and outside the region

Examples: Japan-Singapore Economic Partnership Agreement (2002), China signed framework free trade agreement with neighbors in Southeast Asia (2003)

Use institutional-bargaining game approach – there are many types of trade governance measures: unilateral, bilateral, minilateral, multilateral

Following the crisis in the late 1990s, one option was to secure preferential access and create a more diversified export market; tighter institutionalization (wanted to pursue club goods, not public goods) – rather than loosely-structured production markets – might be a better commitment mechanism for providing economic security PTAs

Many wanted China as FTA partner; crisis changed domestic pressures (challenges to regime legitimacy/political turnover); many East Asian trade experts are now part of an “epistemic community” which shares the view that preferential arrangements can be trade-enhancing and serve a similar purpose as multilateral trade liberalization; growing need for an “insurance policy” to realize free trade sub-multilaterally when multilateral trade liberalization is stalled or proceeding slowly (and this often goes beyond trade in goods to include things like services and investment)

Note: some arrangements potentially incompatible with WTO because they deliberately exclude some sensitive sectors

o Pempel (2010) Since turn of century, substantial increase in formal linkages among East Asian

governments

Not neo-realist prediction of anarchy following end of Cold War Not neo-liberal idea that institutions automatically reduce national

competition in favor of coordination Not constructivist idea that there is a march toward a shared vision of

East Asian community The large number of new institutional ties reflects a sequence of disjointed East

Asian efforts to deal with discrete changes in the global and regional balance of power (especially as response to financial crisis in late 1990s); institutional responses typically ad hoc, often contradictory, but largely pragmatic; collectively, created a set of regional institutions that allow East Asian states to deal with commonly perceived threats, but many are distinctive and states identify interests/challenges differently; regional bodies reflect the preeminence and driving force of individual state strategies rather than any collective predisposition toward regionalism/multilateralism

Common “enemy” against which economic institutions are directed is exogenous force of global capitalism

Offered soft balancing against worst excesses of unmediated globalization even as individual governments took steps to self-insure by accumulating large war chests of currency reserves

o ASEAN+3 (APT, extra three are South Korea, Japan, China) – began in mid-1995; in 2000, initiated Chiang Mai Initiative, expanded currency swaps, initiated regional surveillance mechanism; idea to reduce Asian dependence on US dollar for financial reserves, currency baskets, international transactions (example: through regional bond markets)

Regional, but not anti-global; no longer pan-Pacific (no US influence), focused on finance, not trade

Security bodies directed at regionally endogenous security problems of a much more particularistic character (no common enemy; example: Six Party Talks – no comprehensive membership, directed against intraregional not exogenous threats, and particularistic in the security problem – DPRK’s nuclear activities)

- EU – the following two studies of member-state constraints in the EU link nicely to the debate about globalization effects – they suggest that member-states have to give up some of their national autonomy in these regional agreements

o Garrett (1992) By focusing on the functional aspects of the evolution of cooperation and

arguing that arrangements are generated to solve common problems, analysts downplay the distributional conflicts between states and the impact of power asymmetries in conflict resolution

EC shared common goal of increasing competitiveness of European goods and services in global markets, but substantial differences in national preferences (Thatcher wanted laissez-faire trade regime, France and Germany were similar in that they wanted mutual recognition of standards/products but not sweeping deregulation of national political economic regimes within Europe, poorer Southern Europe wanted more interventionist market with developmental assistance)

Institutions supporting internal market are not just apolitical providers of information – while national vetoes obtain in most international regimes, a

qualified majority (QMV) of states in the Council of Ministers may impose its will on other members of the EC (this decision favored France/Germany initially)

Commission has agenda-setting power; EP has ability to veto directives that as many as all but one of the council members approve because it’s done unanimously or ability to amend

So, Commission and Parliament should be able to pass internal market directives that accord closely with its own preferences (though not much evidence it has done this)

EC law considered to have supremacy over national laws and to have “direct effect” in domestic jurisdictions

Chose political and economic institutions to govern internal market (not national states)

EC laws have effectively constrained the behavior of members even in areas that impinge directly on the traditional authority of national governments

o Pierson (1996) IR, “intergovernmentalist perspective” of European integration – centrality of

member-state sovereignty; instrumentality of institutions (reduce transaction costs); centrality of intergovernmental bargains

Ordinary diplomacy under conditions creating unusual opportunities for providing collective goods through highly institutionalized exchange (forum for interstate bargaining)

But, focus only on Single European Act and Maastricht Treaty, ignoring smaller bargains

IR, “neofunctionalist perspective”– spillover processes and the autonomous actions of supranational actors like the Commission contribute to European policy making (example: Commission and EP set agenda)

But, this attributes greater autonomy to supranational actors than they actually have and fails to account for why member-state threats are not always credible

Comparative, see EC as a quasi-federal, multilevel, or multi-tiered political system, but this view tends to describe the system rather than explain it

Comparative, better alternative: historical institutionalism Temporal gaps argument: Long-term institutional consequences are

often the by-products of actions taken for short-term reasons (policy-makers have high discount rates; focus on short-term outcomes)

Unintended consequences likely to be widespread, especially because of high issue density in the EU problem of (1) overload, which gives time constraints, scarcities of information, and the need to delegate decisions to experts, which in turn leads to gaps in member-state control; problem of (2) spillover – tendency of tasks adopted to have importance consequences for realms outside those originally intended

Member-state preferences shift over time (because national governments come and go), but the EC focuses on core concerns of traditional domestic politics gaps in member-state control

IR response: competition and learning over time will fix these gaps, but the question is, once gaps appear and are identified, how easy is it for the principals (member-states) to gain control? Not easy – member-states are constrained!

Resistance of EC institutional actors Institutional obstacles to reform within the EC (example: a Treaty

revision requires unanimous member-state agreement, plus ratification by national parliaments and (in some cases) electorates)

Sunk costs associated with previous actions (locked in to acquis communautaire)

Examples: gender equality extensive national reforms of social security law and corporate employment practices; workplace health and safety higher standards than any member-state had on its own

- This links regionalism and globalism – EU trans-regional and inter-regional tradingo Aggarwal and Fogarty (2004)

“regionalism” typically seen as geographically-concentrated minilateral accords “interregionalism” – pursuit of formalized intergovernmental relations with

respect to commercial relationships across distinct regions Types: pure (links two free trade areas or customs unions, EU-

Mercosur), hybrid (customs union negotiates with group of countries from another region, but not part of customs union or FTA – Lome Agreement), trans-regionalism (two regions where neither is a grouping – APEC)

o These arrangements can be treated as international regimeso Look at strength, nature (liberal/protectionist, issue scope,

development emphasis), and EU’s commercial treatment of the counterpart region (uniform or different rules for different countries)

What affects EU trade strategies? Possibilities: Interest groups (relative influence) Bureaucracies (European institutions like the Commission, EP, Council

try to maximize their own influence) International systemic constraints and opportunities (constraints can be

from a need to respond to external threats, namely US hegemony, or need to nest within broader institutions, the broader economic system and then the even broader security system)

Need to forge a common European identity and interests (and by formalizing transactions between Europe as a whole and other recognizable regions would serve this purpose)

Some examples (not including EU-North America, since these are mainly bilateral):

EU-Africa, the Caribbean, and the Pacific (1975) Lome Convention – govern commercial relations between European

countries and many former colonies; strongly institutionalized European support for and preferential treatment of these countries’ industries and exports

o Attempt at institutionalized interregionalism (Lome provisions were “contractual” in nature)

EU-CEE (1990) Dynamics of regionalism and interregionalism most intertwined;

initially, interregional – poor, fragile new democracies could not be immediately brought into the Union, but EU members encouraged CEE

to pursue own sub-regional groupings to promote stability (minus the Balkans): Visegrad group (Poland, Czechoslovakia, Hungary), Baltic trio (Lithuania, Latvia, Estonia), and Commonwealth of Independent States (former Soviet republics, CIS)

o Initial interregionalism bilateralism in Visegrad and Baltic trio; for CIS, futures were less directed toward gaining EU membership, so maintained a stronger tendency toward interregionalism

EU-Southern Mediterranean (1995) Barcelona Declaration – established 2010 as goal for establishing a free-

trade area with the Med12 countries (mainly MENA); objectives were to accelerate sustainable socioeconomic development, improve living conditions, and encourage regional cooperation/integration (with increased financial assistance)

o EuroMed Group – EU’s treatment has been mostly nonuniform (EU members/hopefuls = Malta, Cyprus, and Turkey have followed Copenhagen Criteria, but not others)

Weakest interregional regime of these cases EU-South America (1995)

EU-Mercosur Interregional Framework Cooperation Agreement – interregional free trade area was primary goal, but fairly weakly institutionalized

o Pure-interregionalism EU-East Asia (1996)

Asia-Europe Meeting (ASEM) – ASEAN + Japan, China, South Korea (APT); broad agenda to pursue plural approach to relations (from business to development to cultural exchanges)

o Hybrid-interregionalism Overall: trade within these regions has grown relative to their overall trade with

the rest of the world- [Other potentially useful literature to incorporate that is in other outlines (depending on

question): further dependency theory, development (Gerschenkron, Gourevitch)]