The problem of ‘globalization”: international economic relations,national ecnomic management and the formation of trading blocs

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The problem of 'globalization': international economic relations, national economic management and the formation of trading blocs

Paul Hirst and Grahame Thompson

Abstract

How can we characterize the present state of the world economy? Is there such a thing as a globalized economy? These are the questions considered in this paper. The paper attempts to define exactly what the term 'globalization of economic relations' means and then examines how far the present tendencies in the international economv meet this definition. The conclusion is that such a globalized economy does not ye;exist. In contrast we highlight the formation of tra$mg blocs, and the continued salience of 'national economic management' as structuring the international economy. As the most pertinent example of the formation of a trahmg bloc the paper considers the attempts to integrate the European Community into a cohesive economic management and regulatory entity. The political problems and obstacles to this are highlighted. Finally the paper looks at the impact of the present tendencies in the international economy for a range of secondary parties in that economy, like the LDCs, the 'Cairns Group' economies, the ex-Soviet type economies, and China.

Introduction

How can we characterize the present state of the world economy? Is there such a thing as a globalized economy? These are the questions considered in this paper. A good deal of intellectual activity has been devoted to this issue in recent years and the term 'globalization' has become almost a by-word for heterodox analyses of the international economy and polity (Holland 1987; Gill and Law 1988; McGrew and Lewis (1992). It has also been used as a key concept in the discussion of cultural identity and difference (King 1991). And it is even to be found in the more avant-garde management literature

Economy and Society Volume 21 Number 4 November 1992 @ Routledge 1992 0308-5147/92/2104-0357 $3.00/1

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358 Paul Hint and Grahame Thompson

(Ohmae 1990). In much of this literature the assumption is that a process of globalization is well under way in the contemporary world and that this represents a qualitatively new stage in the development of international capitalism. '

We interrogate the notion of 'globalization' as a new stage in international economic and political relationships. Our aims are to establish the present configuration of international economic tendencies, to highlight some of the policy implications that follow from such tendencies and, finally, to speculate on the future direction for the international economy.

In the first section we try to define by means of two ideal types what the term 'globalization of economic relations' means. On the basis of this definition we elaborate the nature of the present tendencies within the international economy. In particular the importance of the development of major trading blocs within the international economy is highlighted. As the most salient example of such a bloc we examine the attempt to develop an integrated European Community (EC) economy and the dilemmas of its political regulation. The relationships between the three main trading blocs are considered and we ask how these blocs might affect the management or co-ordination of the 'world' economy overall. In addition we briefly analyse the effects this emergent system of blocs might have on a number of other parties in the international economy such as Eastern Europe/the ex-Soviet Union, the 'Cairns Group' economies, and the Less Developed Countries (LDCs). Finally, the political problems and prospects facing an increasingly internationalized economy are considered in conclusion. Our overall theme in this analysis is the need to construct adequate political mechanisms to regulate and control international economic processes rather than for further economic integration per se.

A globalized economy: what would it look like?

In this section we construct the notion of a globalized economy almost from first principles. This will act as a framework in terms ofwhich we discuss and measure the trends in the actual international economy. It is intended to provide some conceptual clarification. The term globalized economy is used as an 'ideal type' - as a means of accentuating and thereby clarifying actual trends. In the discussion that follows this ideal type is contrasted to another, that of the world-wide economy, and the analysis begins by elaborating this.

A world-wide international economy

The world-wide international economy is one in which the principal entities are nation states, and involves the process of the growing interconnection between national economies. It involves the increasing integration of more

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The problem of 'globalization' 359

and more nations and economic actors into market relationships. Trade relations, as a result, take on the form of national specialization and the division of labour. The importance of trade is however progressively replaced by the centrality of investment relations between nations, which increasingly acts as the organizing principle of the system. The form of interdependence between nations remains, however, of the 'strategic' kind. That is, it implies the continued relative separation of the domestic and the international framewarks for policy making and the management of economic affairs, and also a relative separation in terms of economic effects. Interactions are of the 'billiard ball' type; international events do not directly penetrate or permeate the domestic economy but are refracted through national policies and processes. The international and the domestic policy fields either remain separated as distinct levels of governance or they work 'automatically'. In the latter case adjustments are not thought to be the subject of policy by public bodies or authorities, but are a consequence of 'unorganized' or 'spontaneous' market forces.

Perhaps the classic case of such an 'automatic' adjustment mechanism remains the Gold Standard (GS), which operated at the height of the Pax Britannita system from mid-century to 1914. Automatic is put in inverted commas here to signal the fact that this is a popular caricature. The actual system af adjustment took place very much in terms of overt domestic policy interventions. The flexibility in wages and prices that the GS system demanded (the international value of currencies could not be adjusted since these were fixed in terms of gold) had to be engendered by governments through domestic expenditure reducing policies to influence the current account and interest rate policy to influence the capital account.

Great Britain acted as the undisputed political and economic hegemon and guarantor of this system. It organized the international economy, and particularly the financial system under its leadership and policed it. Until 1914 Great Britain could virtually dictate policy to the other countries in the system, who had to follow its lead as a consequence, because there was no equivalent centre of financial and commercial power in the world. The GS was under undisputed British hegemony.

But this was a mixed blessing for the British economy. The GS involved a trade-off for British manufacturers. It tended to promote foreign demand in certain sectors but to depress domestic demand in others. One consequence was that after 1870 Britain became a financial and commercial power even more than a manufacturing one. By then it had lost its undisputed primacy as 'workshop of the world', though it remained the lynchpin of an open international economy: the City providing the financial and commercial services for world trade, British ships carrying that trade and the British navy policing the sea routes. This was part of the swing from manufacturing to finance and investment as the central aspect of Britain's relation to the world-wide economy. Britain by its policy of free trade underpinned this system, though at an increasing cost to its domestic manufacturers. As the

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major exporter of capital and the main creditor nation Britain had a distinct interest in monetary stability but also underwrote the expansion of the world manufacturing and trading system. In this respect Britain, as hegemon, carried the burden of the open international economy, much as the US was to do during the Bretton-Woods era.

Thus it is important to recognize that the GS and the Pax Britannica system were merely two of the structures of the international economy in this century. Such structures were highly conditional upon major socio-political conjunctures. Thus the First World War wrecked the British hegemony, accelerating a process that would have occurred far more slowly merely as a consequence of British industrial decline. It resulted in a period ofprotection- ism and national autarkic competition in the 1930s, followed by the estab- lishment of American hegemony after the Second World War and the reopened international economy of the Bretton-Woods system. This indicates the danger of assuming that current major changes in the international economy are unprecedented and that they are inevitable or irreversible. The life- time of a prevailing system of international economic relations in this century has been no more that 30-40 years. Indeed, given that most European currencies did not become fully convertible until the late 1950s, the full post- Second World War Bretton Woods system only lasted upwards of thirteen to fourteen years. Such systems have been transformed by major changes in the politico-economic balance of power and the conjunctures that have effected these shifts have been large-scale conflicts between the major powers. In that sense, the world-wide international economy has been determined in its structure and the distribution of power within it by the major nation states.

The period of this world-wide international economic system is also typified by the rise and maturity of the multinational corporation (MNC), as a transformation of the large merchant trading companies of a past era. From our point of view, however, the important aspect of these MNCs is that they retain a clear national home base; they are subject to the national regulations of the mother country, and by and large they are effectively policed by that home country.

A globalized international economy

A globalized international economy is a distinct ideal type from that of the world-wide economy and can be developed by contrast with it. In such a global system distinct national economies are subsumed and rearticulated into the system by essentially international processes and transactions. The world- wide economy, on the contrary, is one in which processes that are determined at the level of national economies still dominate and international phenomena are outcomes that emerge from the distinct and differential performance of the national economies. The world-wide economy is an aggregate of nationally-located functions. Thus while there are in such an economy a wide and

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increasing range of international interactions (financial markets and trade in manufactured goods, for example) these tend to function as opportunities or constraints for nationally-located economic actors and their public regulators.

The global economy raises these nationally-based interactions to a new power. The international system becomes autonomized, as markets and production become truly global. Domestic policies, whether of private corporations or public regulators, now have routinely to take account of the international determinants of their sphere of operations. As systemic interdependence grows, the national level is permeated by and transformed by the international. In such a globalized economy the problem this poses for public authorities is how to construct policies that co-ordinate and integrate their regulatory efforts in order to cope with the systematic interdependence between their economic actors.

The first major consequence of a globalized economy would thus be the fundamental problematicity of its governance. Global markets are difficult to regulate, even supposing effective co-operation by the regulators and a coincidence of their interests. The difficulty is to construct both effective and integrated patterns of public policy to cope with global market forces, since to work such policies would need to be co-ordinated from the level of international regulatory agencies down to key regional governments. The interdependence of states and markets would by no means necessarily result in a harmonious world integration in which world consumers benefit from truly independent allocative mechanisms. On the contrary, it is more than plausible that the populations of even successful and advanced states and regions would be at the mercy of autonomized and uncontrollable, because global, market forces. Interdependence would then readily promote dis- integration - i.e. competition and conflict - between regulatory agencies at different levels. Such conflict would further weaken effective public governance at the global level. Enthusiasts for the efficiency of free markets and the superiority of corporate control of public agencies would see this as a rational world freed from the shackles of obsolete and ineffective national public interventions. Others, less sanguine but convinced globalization is occurring, may see it as a world system in which there can be no generalized or sustained public reinsurance against the costs imposed by market distributions or market failures on localities.

Even if one does not endorse the concept of globalization, this ideal type can help to highlight some of the importance of greater economic integration within the major regional trade blocs. Both the EC and NAFTA (North American Free Trade Area -comprising the USA, Canada and Mexico) will soon be highly integrated markets of continental scale. Already in the case of the EC it is clear that there are fundamental problems of the integration and co-ordination of regulatory policies between the different public authorities of Community, national and regional level.

It is also clear that this ideal type highlights the problem of weak public governance for the major corporations. Even if such companies were truly

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362 Paul Hirst and Grahame Thompson

global, they will not be able to operate in all markets equally effectively and like governments will lack the capacity for reinsurance against unexpected shocks from their own resources alone. Governments would no longer be available to assist as they have been for 'national champions'. Firms would, therefore, seek to share the risks and opportunities through intercorporate investments, partnerships, joint ventures, etc. Even in the current internationalized economy we can recognize such processes emerging.

A second major consequence of the notion of a globalizing international economy would be the transformation of MNCs into Transnational Corpor- ations (TNCs) as the major players in the world economy. The TNC would be genuine footloose capital, without specific national identification and with an internalized management, and at least potentially willing to locate and relocate anywhere in the globe to obtain either the most secure or the highest returns. In the financial sector this could be secured at the touch of a button and in a truly globalized economy would be wholly dictated by market forces, without reference to national monetary policies. In the case of primarily manufacturing companies they would source, produce and market at the global level as strategy and opportunities dictated. ?he company would no longer be based on one predominant national location (as with the MNC) but would service global markets through global operations. Thus the TNC, unlike the MNC, could no longer be controlled or even constrained by the policies of particular national states. Rather it could escape all but the commonly agreed and enforced international regulatory standards. National governments could not thus effectively adopt particular regulatory policies that diverged from these standards to the detriment of TNCs operating within their borders. The TNC would be the main manifestation of a truly globalized economy.

Julius (1990) and Ohmae (1990) both consider this trend toward true TNCs to be well established. Ohmae argues that such 'stateless' corporations are now the prime movers in an Inter-linked Economy (ILE) centred on North America, Europe and Japan. He contends that macro-economic and industrial policy intervention by national governments can only distort and impede the rational process of resource allocation by corporate decisions and consumer choices on a global scale. Like Akio Morita of Sony, Ohmae argues that such corporations will pursue strategies of 'global localization' in responding on a world-wide scale to specific regionalized markets and locating effectively to meet the varying demands of distinct localized groups of consumers. The assumption here is that TNCs will rely primarily on foreign direct investment and the full domestication of production to meet such specific market demands. This is in contrast to the strategy of flexibly specialized core production in the company's main location and the building of branch assembly plants where needed or dictated by national public policies. The latter strategy is compatible with nationally-based companies. (To anticipate later discussion, the evidence from Japanese corporations, which are the most effective operators in world markets, favours the view that the latter strategy is predominant. Japanese companies appear to have been

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reluctant to locate core functions like R&D or high valued-added portions of the production process abroad. Thus national companies with an international scope of operations currently and for the foreseeable future seem more likely than the true TNCs.)

A third consequence of globalization would be the further decline in the political influence and economic bargaining power of labour. Globalized markets and TNCs would not be mirrored by an open world labour market. Thus while advanced companies might well continue to locate in the advanced countries, with all their advantages, rather than merely seek low wages, the trend of the global mobility of capital and the national fixity of labour would favour those advanced countries with the most tractable labour forces and the lowest social overheads relative to the benefits of labour competence and motivation. 'Social democratic' strategies of enhancement of working conditions would thus only be viable if they assured the competitive advantage of the labour force, without constraining management prerogatives, and at no more overall cost in taxation than the average for the advanced world. Such strategies would clearly be a tall order and the tendency of globalization would be to favour management at the expense of even moderately organized labour, and, therefore policies sympathetic to the former rather than the latter. This would be the 'disorganized capitalism' of Lash and Urry (1987) with a vengeance, or rather it could be seen as placing a premium on moderate and defensive strategies where organized labour remains strong (Scharpf 1991).

A final and inevitable consequence of globalization is the growth in fundamental multi-polarity in the international political system. The hitherto hegemonic national power could no longer impose its own distinct regulatory objectives in either its own territories or elsewhere, and lesser agencies (whether public or private) would thus enjoy enhanced powers of denial and evasion vis a vis any aspirant 'hegemon'. A variety of bodies from international voluntary agencies to TNCs would thus gain in relative power at the expense of national governments and, using global markets and media, could appeal to and obtain legitimacy from consumers/citizens across national boundaries. Thus the distinct disciplinary powers of national states would decline, even though the bulk of their citizens remained nationally bound. In such a world, national military power would become less effective as the rationality of the objectives of 'national' state control in respect of the economy evaporated. The use of military force would be increasingly tied to non-economic issues, such as nationality and religion. A variety of more specific powers of sanction and veto in the economic sphere by different kinds of bodies (both public and private) would thus begin to compete with national states and begin to change the nature of international politics. As economics and nationhood pulled apart the international economy would become even more 'industrial' and less 'militant' than it is today. War would be increasingly localized and ir- rationalized, anywhere it threatened powerful global economic interests it would be subject to devastating economic sanction.

We have spent a great deal of time elaborating this idea of a globalized

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international economy and contrasting it to that of a world-wide one. This is to try to clarify exactly what would be involved in making the strong claim that we are either firmly within a globalizing economy, or that the present era is one in which there are strong globalizing tendencies. T o answer these questions is a rather difficult task. It is made doubly so, and the answer quite uncertain, because of a number of changes in the international economy in the post-First World War period. Chief amongst these have been first the change in hegemonic leadership during the inter-war period and then the decline and possible collapse of the Pax-Americana in the post-1970s period.

The Pax-Americana as it established and consolidated itselfin the immediate post-1945 period heralded the beginning of the liberal multilateral market system that supported the international economy during the long-boom. Com- prising a number of innovative institutional mechanisms for managing the international economy - the Bretton Woods semi-fixed paper dollar standard for exchange rates; the World Bank and IMF (International Monetary Fund) for monetary discipline and liquidity; and the General Agreement on Tariffs and Trade (GATT) mechanism for multilateral trade negotiation - this international economic regime is sometimes thought to have straddled the transition from the world-wide economy to the 'global' one of today. It did this first under American hegemony and then in the context of the break-up of this hegemony and the emergence of the totally floating exchange rate period after 1973.

This analysis is made doubly difficult by the fact that hegemony displays a number of dimensions. Militarily it is arguable that the US is still hegemonic. This was clearly displayed in the context of the Gulf War. What other country could have organized such a military adventure? In addition the US still serves as the power house of world demand, and acts as the guardian of the world open trading economy. But it no longer displays monetary hegemony. It would seem no other power or combination of powers can yet challenge this residual hegemonic power that the US displays. It may not be able to command the tight loyalty of the other western powers that it did during the period of the Cold War, but it still retains considerable genuinely hegemonic strengths.

Both of these developments - the change and then the undermining (though not total destruction) of the hegemonic order, accompanied by the totally floating rate regime - provided the conditions in which the previous logic of the 'world-wide economy' might be thought to have been undermined. They led first to the abandonment of exchange controls, and the liberalization and then deregulation of international financial markets. The floating exchange rate regime then began to exhibit quite perverse 'overshoot- ing'. It was accompanied by the supply-side shock of the oil price hikes, with consequent massive increases of both the liquidity of the OPEC countries and the desire to borrow (given negative real interest rates) by the Third World countries to finance their current account deficits, leading to the so-called 'Third World Debt' problem. These features also initiated a serious recession in the international economy more generally, with a concomitant increase in government indebtedness. A chronic structural problem of the balance of

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Theproblem of 'globalization' 365

payments between the US and Japan in particular also emerged as the US became a massive capital importer to finance its deteriorating trade balance.

The totally floating rate period did not last for long. In 1979, for instance, the EC set up the European Monetary System (EMS) to provide a zone of stability for the main European currencies (except the UK pound) against the vagaries of the US dollar. In addition, the Louvre and Plaza accords between the Group of Seven (G7) countries in the 1980s set in motion an attempt to monitor and 'manage' fundamental disequilibrium in the exchange rates between its members. Thus explicit policy co-ordination at the world level was initiated in this case. This has not reversed the main trend which has been to further undermine the old post-war multilateral order. The latest manifestation of this continuing trend being the virtual collapse of the Uruguay Round of GATT talks aimed at multilateral liberalization of trade in agricultural products, financial services and intellectual property rights.

All this is well known, we reiterate it here to register the purely contingent nature of a lot of these events which have often been used to argue for a structural transformation in the international economy. As we shall argue in a moment, many of these trends could be reversed or interrupted as the international economy evolves, though not all of them are likely to be. This goes to make the point, then, that we should be cautious in ascribing too much significance to what might be temporary changes, dramatic though some of them have been.

The strong concept of a globalized economy that we have been describing here acts as an ideal type against which we can measure the actual trends within the international economy. This globalized economy has been contrasted to the notion of a world-wide economy in the above analysis in order to distinguish its particular and novel features. The opposition of these two types for conceptual clarity conceals a potential messy combination, in fact, which would make sifting the available evidence very difficult to determine trends. These two types of economies are not necessarily mutually exclusive, rather in certain conditions the globalized economy would encompass and subsume the world-wide economy. The globalized economy rearticulates many of the features of the world-wide economy; it transforms them as it reinforces them. There would thus be a complex combination of features of both types of economy present within the present conjuncture if this combined phenomenon were to occur. The problem in determining what is happening is to identify the dominant trends: that is the growth of globalization or the continuation of the existing world-wide patterns. We now try to summarize and assess the main current trends.

The present international economy

Here we examine the main trends in the international economy and comment on them in terms of how they fit with the globalization thesis. We identifl five main trends that are discussed in turn.

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(1) Within the contemporary international economy the important relationships remain those between the more developed economies, the members of the Organisation of Economic Cooperation and Development (OECD). Indeed, these economies have increased in their relative importance over recent years in terms of their share ofworld trade and investment. In 1989 over 80 per cent ofworld trade was conducted between the OECD economies, and this rose to 85 per cent if the ex-Eastern European and Soviet economies were included. The Group of Five (G5) main economies accounted for 75 per cent offoreign direct investment. Thus for all practical intents and purposes it is the advanced industrial economies that constitute the membership of the 'global' economy, if that entity can be said to exist. The LDCs, and even the NICs, still constitute a very small part of the international economy, however regrettable or disappointing that may be. The primary producers are more or less totally dependent upon the MDCs for markets and investment, which is a position that has not significantly changed for many decades.

(2) There is little doubt that there has been progressive internationalization of money and capital markets since the 1970s, and this was a marked change in relation to the post-1945 period. As suggested above many have seized upon this as a sign of the radical change towards a globalizing economy in the post-1970s period. It has led to the argument that national economies are no longer governable because they have become increasingly penetrated by 'international financial capital'. This inability to control capital flows is claimed to undermine any remaining credibility of policies of national macro-economic management.

But the implications of this internationalization of financial markets are not unambiguous. For instance Tornlinson (1988) presents data showing that the international financial penetration of the UK and other economies (in terms of openness to capital flows) was greater between 1905 and 1914 than it was between 1982 and 1986 (and similar results emerge for foreign trade as a percentage of GDP). Thus it is important to remember that the international economy was hardly less integrated before 1914 than it is today. Financial and other major markets were closely integrated once the system of international submarine telegraph cables was in place and in a way not fundamentally different from the satellite-linked and computer-controlled markets of today. Indeed, the difference between an international economy in which market information travelled by sailing ship and one in which it is transmitted by electricity is really one of kind. Commentators sometimes forget that today's open world economy is not unique.

Moreover we must be careful to elaborate the reasons for the admittedly phenomenal recent growth of international financial flows and liquidity. Here we need to emphasize: (a) the floating of exchange rates; (b) the oil price hike and consequent Third World Debt problem; (c) the unexpected emergence of vast and mobile OPEC funds; (d) the international recession and the growth in government debt through the 1970s; (e) the emergent structural imbalances in the balance of payments for a number of large economies; and finally (f) the

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Theproblem of 'globalization ' 367

Figure 1 Foreign trade, seasonally adjusted Source: OECD, Main Economic Indicators (April) 1991 :24

liberalization and deregulation of financial markets by national governments. All these features went to increase the extent of international capital flows. If we were to single out one central feature it would surely be the floating of exchaage rates. Many of the other features followed as a consequence of this (e.g. the integration of trading on currency and equity markets which is a new feature of the present period).

This demonstrates how many of these changes may be temporary. They are not irreversible. Volatility on the international currency markets could diminish (indeed has diminished) as the EMS and the G7 monitoring system was installed. All the major international currencies are now more or less 'managed' currencies, which has seriously cut speculative activity (a factor that promoted volatility and exchange rate uncertainty). Secondly, after an initial enthusiastic embrace of market liberalization and deregulation the authorities are recognizing that there are undesirable consequences of this and the trend now is for reregulation. Thirdly, there are signs that the structural imbalances on the payments accounts are at last beginning to ease. Figure 1 indicates that since 1987/8 the trade imbalances of the chronic deficit countries (the US and to a lesser extent the UK) and those of the large surplus countries (Germany and Japan) are beginning to converge towards a more balanced outcome; similarly with the rate of growth of government fiscal imbalances. The trends here are that, while the steady fall in general government financial deficits seen throughout the 1980s came to an end in 1989 (as the UK, and in

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particular Germany, increased their deficits once again), these are small increases compared to the recent past and they are expected to stabilize by 1992. Overall the fiscal stance of the important economies has moved into a position of 'structural improvement' (OECD, Economic Outlook 50 (Decem- ber) 1991: 32-7). All these trends will help to 'cool the Casino' more or less automatically, without further major structural changes in international governance.

(3) There has been an increasing volume of trade in semi-manufactured and manufactured goods between the industrialized economies. Most markets for major industrial products are now international and major economies both import and export significant volumes of such goods, whereas before the 1960s home sourcing was dominant and export markets were more specialized. This has had an inevitable impact on the ability of individual economies to exercise national macro-management strategies. But it is important to recognize that apart from the European Community countries, the other large economies still only export or import between 10 and 15 per cent of their GDP (see below, Fig. 3). For the main individual European economies this is higher, between 25 and 30 per cent, but for the Community as a whole it is similar to the US and Japan, at around the 10-15 per cent mark.

(4) One of the main concomitants of the growth in interdependent trade relations, restricted though these may still be, is the progressive development of internationalized companies. This also involves foreign direct investment. The potential role of the TNCs in undermining national government's conduct of an independent economic policy has already been raised. But again the extent of these developments is questionable (Ostry 1992). Most international companies still only operate in a small number of countries, or at most regionally. In other words there are few truly TNCs. The MNC form continues to dominate. The few exceptions to this do not yet make the rule. In addition, most MNCs adapt passively to governmental policy rather than continually trying to undermine it. The real question to ask of MNCs is not why they are always threatening to up and leave a country if things seem to go bad for them there, but why the vast majority of them fail to leave and continue to stay put in their home base and major centres of investment? MNCs are very reluctant to uproot themselves because they get entrenched in specific national markets, and with local suppliers and dealers. This makes it both difficult and expensive to leave given national markets unless there are fundamental structural disincentives, rather than conjunctural difficulties or specific policy constraints imposed by national governments.

Nor is direct investment as important as is often believed. Take the case of Japan for instance, which is often thought to be heralding a new global assault on both the industrial and undeveloped world with its investment strategies. A recent study tries to examine the character of Japanese direct foreign manufacturing investment (Williams et al. 1992); it is fairly small scale compared to the total volume of Japanese capital abroad, it is mainly aimed at providing transplants that have a high import content from Japan. In relation

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to Japanese trade growth the aggregate growth of direct investment is small. Moreover, it is no more efficient or profitable than indigenous manufacturing. (Some of these conclusions might be altered, however, if a more disaggre- gated view were taken of Japanese FDI.) In general the most successful industrial nations (e.g. Germany and Japan) have shown a great reluctance to invest and develop core manufacturing activity abroad; they keep the bulk of their ualue-adding capacity at home. In both cases this is for a variety of reasons not all of which can be summed up in market efficiency or balance- sheet terms. German and Japanese financial capital remains 'nationalistic', committed to its domestic manufacturing sector in a way Anglo-American capital is not. German and Japanese firms have a strong commitment to highly skilled and motivated labour forces, and a national 'deal' between labour and capital to sustain prosperity is a core part of their post-1945 politico-economic settlements. In both countries there would be a massive political price to pay were a major part of manufacturing to be shipped abroad and the prosperity of recent decades to falter.

(5) Perhaps the most significant post-1970s development, and the most enduring, is the formation of supra-national trading and economic blocs. It is with these that we are mainly concerned in the rest of this paper. One initial question, however, is exactly how to specifl these blocs. Clearly the EC and the NAFTA can be considered genuine blocs, or proto-blocs, without too much controversy. But are there any others? One obvious candidate is Japan, but this hardly constitutes a bloc. Usually Japan is seen as the centre of a proto-bloc encompassing much of the SE Asian Pacific rim countries. But examination of trade and investment data show this to be premature. Initially therefore it may be better to consider Japan as a single country bloc. Lots of ad hoc combinations of countries that might form (limited) trading and economic blocs around the Pacific rim and in the rest of Asia have been suggested but at the present time these remain largely speculative. However it is reasonable to consider other country groupings in connection with the development of explicit bloc formation, and this we do below. As we shall see a lot of these countay groupings are rather traditional in form.

The major problem the development of a more regionalized international economy presents is the protectionist sentiments that it may engender. If such sentiments were to emerge strongly they could undermine some of the other trends towards internationalization identified above, like the increase in interdependent world trade flows in particular, but also the further integration of financial markets. This issue needs closer examination, which we undertake in a moment. The general issue however is the form of the global economy as the liberal multilateralism of the post-1945 period is forced onto the defensive. Clearly this is the dominant trend of the present period, and it allows us to sum up with the main question of this paper. Will 'globalization' replace the existing emphasis on liberal multilateralism? Our suggestion is not. A more likely outcome is the further development of a newly regionalized international economy, possibly dominated by a trilateralism of the US/NAFTA,

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370 Pnul Hint and Grahame Thompson

the (expanded) EC, and Japan (with or without possible Pacific rim allies). This itself will also involve an increase in bilateral negotiation between these major players and other lesser parties. If one calls this outcome 'globalization' so be it, but it does not conform to the ideal type elaborated above.

Consequences and implications: managing the new international economy?

In this section we look to the future in the light of the analysis presented so far. We are particularly interested in the prospects for the general management of the 'regionalized' world economy as indicated above, and on a more limited scale, the future for the EC as an entity capable of regional economic governance. What are the prospects for national state regulation in a rapidly internationalizing economy? How is European political and economic integration (further bloc formation) likely to evolve in its post-Maastricht form? Indicating the emergence of blocs does not of itself say anything about theforms of governance they will develop and adopt, or the likely relationships between those blocs. These are the issues we explore in this section. It should be noted here, however, that the outcome of the Danish referendum on ratif)ing the Maastricht Treaty in June 1992 may have thrown some of these issues into even greater confusion and uncertainty. As will become clear below we are sceptical about the emerging EC bloc formation anyway, so our analysis already mirrors some of the concerns thrown up in the wake of the Danish 'no' vote.

Economic management, the nation state and 'globalization'

The upshot of internationalization and the accompanying volatility of markets has been to limit the effectiveness of the strategies of national economic management developed since the 1930s. Both the traditional 'Keynesian' and newer 'national monetarist' strategies which succeeded it in the late 1970s have become less and less effective. Traditional Keynesian policies of stabilizing economic activity by stimulating domestic demand in periods of down-turn by means of fiscal and monetary policy have become severely constrained by the effects of such policies in producing inflation rates that diverge from those of dominant competitors, by the effect of sucking in foreign imports of manufactured goods when domestic demand has been stimulated, and by the consequent balance of payments constraint and exchange rate constraints generated by such boosting of domestic demand. The policies of the French socialist government in the early 1980s and their subsequent abandonment have demonstrated the difficulties of 'national Keynesianism'; as has the experience of the US during the Reagan administration in following expansionary policy, producing the current budget and trade deficits of the

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USA. International Keynesianism advocated by the French Regulation School is inherently unlikely, given the divergent interests of the major players in the international economy and the absence of a single hegemonic power able to underwrite the expansion of the international economy as the US did between the end of the Second World War and 1972.

At the same time 'national monetarist' policies have also failed. The rest of the advanced industrial countries are forced to follow the lead in monetary policy of the two most successful countries, Germany and Japan. The ERM has limited the scope for monetary policy for all members of the EC, who are tied to the monetary regime of the Bundesbank. Controlling the money supply is inherently difficult given the internationalization of financial markets, the abolition of exchange controls, and the dominant role of credit money generated by the loans policy of financial institutions. The UK abandoned strict monetarism in the early 1980s. Its effects were severely deflationary. By the late 1980s the UK government had returned to a (rather traditional 'quasi-Keynesian') tight interest rate policy in its attempt to control the money supply and inflation; interest rates affect the demand for money in the first instance not its supply. We can see this too was deflationary. Monetarism was intended as an expansionary policy, allied as it was with positive supply side measures. But these twin policy advances failed as an alternative to Keynesianism, because they have had severe deflationary rather than expansionary effects.

The result of this argument is that there is now no doctrinally grounded and technically effective regime of macro-economic management that can produce sustained expansionary effects. It might appear, therefore, that national macro-economic management has ceased to provide a viable means of steering national economies in an internationalized system and that the nation state has lost its salience in the face of 'globalization' and supra- national economic blocs.

This conclusion would, however, be superficial. The mechanisms of national economic regulation have changed but governmental policies to sustain national economic performance retain much of their relevance, even if their nature, level and function have changed. In the EC, for example, a system of fixed exchange rates with the prospect of monetary union to follow, with the free movement of capital, labour, goods and services as envisaged after 1992, along with a common regulatory framework imposed by Brussels, obviously restrict some hitherto important areas of national management. But they make others more important - giving a new significance to non- monetarist fiscal and supply-side policies for instance.

Whik national governments may no longer be 'sovereign' economic regulators in the traditional sense, they remain political communities with extensive powers to influence and sustain economic actors within their territories. Technical macro-economic management is less important, but the role of government as a facilitator and orchestrator of private economic actors remains strong. The political role of government is central in the new forms of

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economic management. Neither the financial markets nor the Brussels bureaucracy, to take the case of the most coherent trade bloc, can impose or secure the forms of social cohesion and the policies that follow from them that national governments can. National governments can still compensate for the effects of internationalization and for the continued volatility of the financial markets.

Before going into more detail on these continuing, indeed reinforced, key political orchestrational features let us look at the more overtly economic character of (non-monetarist) fiscal policy. Fiscal policy has been in the shadow of monetary policy ever since the demise of Keynesianism, as broadly sketched above. During the late 1970s and 1980s it became very difficult to argue for an 'independent' fiscal policy; both nationally independent and one independent of monetary policy. However, things may be now about to change.

One thing the advent of a possibly closer economic and monetary union within Europe (and more generally, the relative 'cooling of the casino' internationally) could do is to help 'disengage' fiscal from monetary policy once again. Take the case of the EC. The closer monetary union becomes the more individual countries could engage in independent fiscal policies. This does not mean that they will be totally free to do as they wish on the fiscal front. The post-Maastricht guidelines for government fiscal balances are quite tight (around 3 per cent of GDP). But these are only meant to be guidelines and in practice they may be quite flexible (more flexible than monetary guidelines for instance, which are to be under the direction of an 'independent' European Central Bank). Thus, as decisions on monetary policy are increasingly taken elsewhere, i.e. centrally, individual governments will be able to decide their own fiscal policies relatively independently of monetary policy. This could enable some quite innovative fiscal responses as a result. Any new fiscal regime will also be operating in an environment of increasing financial and labour market integration, and this would need to be taken into account by policy makers.

The problem this will pose is how to develop tax systems that minimize both the incentives to avoid individual national taxes and the ability to do so. Broadly speaking we need to think in terms of factor mobility in relationship to taxation. Capital and money markets will probably integrate most rapidly and thoroughly, so there may be little scope for differential corporation taxes or taxes on savings (via taxes on savings institutions). Differential taxes on consumption may also be difficult (they are already very high in the EC), but here it depends upon how internationally mobile purchasers are in the face of tax rates. Will they be prepared to travel long distances just to save tax differences? Thus there may be more scope here. In the case of income taxes again this all depends upon how integrated the labour market becomes. Clearly there are likely to be degrees of integration. A lot of work overseas is temporary. But in general the highest paid and the lowest paid tend to be the most internationally mobile. In the case of indigenous EC workers, cultural and linguistic barriers may still be high in terms of labour mobility, and a lot

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will depend upon how quickly and efficiently mutual recognition of pro- fessional qualification and standards develops. In general there may still be quite a lot of scope for differential income taxes before (dis)incentive effects become rife and undermine the effectiveness of these. Finally, the most immobile factor is likely to remain property of one kind or another. People cannot just up and away with their houses for instance. Thus there may be some innovative scope for new forms of property taxes as this becomes an increasingly attractive source of tax revenues for governments.

Returning to the general role of the nation state in regulating the economy, there are three key functions which stem from its role as orchestrator of an economic consensus within a given community. States are not like markets, they are communities of fate which tie together actors who share certain common interests in the success or failure of their national economies. Markets may be international, but wealth and economic prosperity are national phenomena. They depend upon how well national economic actors can work together to secure certain key supply-side outcomes. National policy provides certain key inputs that cannot be bought or traded on the market. The market is embedded in society and governments remain a crucial element in the success of their societies - providing cohesion, solidarity and certain crucial services that markets of themselves cannot.

The three key functions are:

(1) The state if it is to influence the economy must construct a distributional coalition, that is it wins the acceptance of key economic actors and the organized social interests representing them for a sustainable distribution of national income and expenditure which promotes competitive manufacturing performance (amongst other things). The major components of such a coalition are: the balance of national income devoted respectively to consumption and investment; a broad agreement on the level of taxation necessary to sustain state investment in infrastructure, training and collective services for industry; and a framework for controlling wage settlements, the growth of credit and levels of dividends such that inflation is kept within internationally tolerable limits. (2) Such a distributional coalition is only possible if the state performs another function, that is the orchestration of social consensus. Such coalitions only work when they emerge from a collaborative political culture in which the major organized interests are accustomed to bargain over national economic goals, to make lasting commitments to determine policy by such bargaining and to police their members' compliance with such bargains. Industry, organized labour and the state achieve a successful balance between co-operation and competition; such a system is not devoid of conflict, nor are interests wholly coincident, but there are mechanisms for resolving such differences. Such an overall consensus only works if it is also keyed-in with the effective operation of more specific resource allocation mechanisms, such as the system ofwage determination and the operation of capital markets.

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(3) The state achieves an adequate balance in the distribution of its fiscal resources and its regulatory activities between the national, regional and municipal levels of government. The centralization of EC policy is promoting the increasing importance of effective regional government. The regional provision of education and training, industrial finance, collective services for industry and social services is gaining in importance. Regional governments are more able to assess the needs of industry because they possess more localized, and therefore accurate, information and because they are of a scale where the key actors can interact successfu~y. Regional government cannot be seen as something inherently opposed to national economic management, but as a crucial component of it. It is the national state which determines the constitutional position, powers and fiscal resources of lower tiers of government. Those national states which allow a considerable measure of autonomy to regional governments tend to have the best and most effective supply-side regulation at the regional level. Germany and Italy offer obvious examples. The most prosperous Lander, like Baden-Wiirttemburg and Bavaria, or most successful Italian regions, like Emilia-Romagna, have achieved a high level of devolution of the tasks of economic management (Sabel 1989).

The main problem about the way that nation states continue to have a salience as a locus of economic management is that such activities now depend on social attitudes and institutions that are not equally available to all states. The new mechanisms of economic co-ordination and regulation give primacy to the high level of social cohesion and co-operation that the state can both call upon and develop. The new methods of national economic regulation in a more internationalized economy are not like, for example, Keynesianism, that is, a technique of macro-economic management that was in principle available to every substantial and competently administered modem state if it chose to adopt such a strategy. Rather the new methods rest on specific ensembles of social institutions and these are more difficult to adopt or transfer by deliberate choice. States are thus in considerable measure trapped by the legacies of social cohesion that they inherit. Countries like the USA cannot just decide to adopt the more solidaristic and co-ordinative relations between industry, labour and the state characteristic of Germany and Japan.

This means that between blocs and within blocs there will be fundamental differences in the ability to respond to competitive pressures and changing international conjunctures. Those societies that emphasize short-term market performance, like the UK and the USA, are threatened by the competitive pressures of societies that have concentrated on enhancing long-term manufacturing competitiveness and have had the social cohesion to achieve it, like Germany and Japan. The political process and the interest group culture in societies like the UK and the USA does not favour rapid adaptation in a more co-operative direction, rather it emphasizes competition and the dumping of social costs on those who are both least organized or

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influential and least able to bear them. This also pushes such societies away from effective international or bloc co-operation. The USA, unlike its role between 1945 and 1972, will refuse to bear any substantial level of cost for a more stable and secure international environment - it will pursue narrow and short-term considerations of national advantage. The UK will seek to minimize European integration and to trade down standards of social welfare and occupational protection to a lowest common denominator.

The problem, then, is how the more favourable conditions for effective national economic management are to be found either in the existing national economies of the EC or as component parts of the evolving EC supra-national economic management structure itself. This issue we return to in a moment. First we deal with the emergent management system, such that it is, at the international level.

A regulakd international economic environment?

What are the prospects for a more regulated international economic environment if a more orderly pattern returns to the relationships between markets, countries and blocs? As indicated above, there is still a great deal of volatility here and increased uncertainty relative to the very stable position before 1972, but nevertheless the indications are that not all the adverse trends giving rise to these uncertainties are set and robust. The inauguration of the EMS, and particularly its ERM component, in 1979 has decreased the volatility of the member's exchange rates. It has also led to some convergence of underlying monetary conditions. In addition the G5/G7 summit system of policy co-ordination has seen some successes, particularly in its early days and in 1991 (Artis and Ostry 1986; Pumam and Bayne 1987; Thompson 1990: Chapter 7).

These instances of policy co-ordination have only been of limited scope. They have involved monetary issues almost exclusively, though in recent years the monitoring of real variables like growth rates have been added to the agendas of such bodies. But 'monitoring' is far from an active co-operation to change policy. By and large the G5/G7 countries have gone their own way on most domestic economic policy issues, and the divergence of basic philosophy and approach has been evident in the last ten to fifteen years. We should not dismiss outright the attempts at limited exchange rate and monetary co-ordination, but nor should we over exaggerate their importance or success.

The problem is the divergent interests that still characterize an international economy where, despite the claims of the 'globalization' enthusiasts, the nation state and increasingly trading blocs remain the dominant players. If nothing else the underlying economic conditions of the Japanese economy and the American economy should testify to a divergence of interests that will limit active and positive co-operation between them. Similar remarks can be made in the context of Germany and the rest of Europe.

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As percentage of total trade 80 1 1

" U S Japan EC countries trade with trade with trade within America Asia Europe

Figure 2 Intra-continental trade 1990 (i.e. sum of total imports and exports) Source: OECD

This is not to suggest that complete non-co-operation will ensue between the major players in the international economy, only that co-operation will be of a minimalist form, or that it will be co-operation by default as policies in the stronger economies dictate those in the weaker ones. Added to this are the very obvious differences in economic policy frameworks and outlooks that typify the main international trading countries that will inhibit coincidental agreements on more developed co-operative ventures. In many cases there are just not the domestic frameworks available to implement policies agreed within an international negotiating structure, even if they were more actively canvassed there. Fiscal policy initiatives are an obvious example here. It is unlikely that a properly functioning fiscal federalism could be rapidly constructed within the EC for instance.

But these caveats should not blind us to the way the international economy may have become so integrated that an outright return to overt protectionism between the blocs, while still a possibility, remains unlikely. The case of the financial balances between the major blocs illustrates this point (Thompson 1992a: 147, Figure 2). These show that the EC has been in rough balance on its savings and investments over the period 1960-90. Such was also the case for the USA and Japan up until the early 1980s, but then the US went into a dramatic international 'deficit' as its savings collapsed while investment remained high D

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(to finance its balance of paymentshudget deficits). This twin deficit was financed by the Japanese, and to a lesser extent by the EC in the mid-1980s. Thus despite some volatility in the overall trends, which show large swings in overall proportionate totals, the three main bloc powers appear to be locked together in a certain way. In particular, Japan could hardly continue to exist in its present form without the US markets for its manufactured goods (though see below), while the US needs Japan as a source of international finance.

These points are reinforced if we look at the structure of trade within the blocs. Figure 2 shows the percentage of total trade that each bloc leader conducts with its immediate client countries in 1990. Clearly the most integrated bloc on the trade front is the EC, with nearly 74 per cent of its traded activity being conducted with other European countries. But the US and Japan do not trade to such an extent with their natural 'bloc associates'. Indeed, at 33 and 30 per cent respectively, intra-bloc trade is small. Rather the US and Japan must still look to the wider international environment for their trading partners (see also Schott 1991: 9, Table 1A). This should reinforce their mutual commitment to a more 'open' trading environment. The US may have much to fear from Japanese import penetration in its manufacturing sector, but it remains both a major exporter of manufactured goods and primary products and relies upon a liberal regime of world trade to do so. Japan may be a virtual trade policy captive of the US, but the US is still committed to free trade and will remain so, up to and until Japanese competition threatens a catastrophic collapse of its domestic manufacturing base.

Figure 3 gives an indication of the importance of trade to the three main economies/blocs between 1960 and 1991 (expressed as a percentage of GDP). What is remarkable is the way the proportion of both exports and imports for all three sets of economies moved closer together in the late 1980s. Though since then there has been a slight movement apart, over the entire period the importance of trade has been relatively stable and relatively similar. This similarity in levels of trade to GDP ratios for the three main players as a whole indicates a symmetry that could once again lead to a rather more accommodating outlook. The most vulnerable economy, however, remains the Japanese one. This is signalled by the consistently greater importance of its exports to GDP ratio, and the recent rapid increase in its import penetration ratio. The Japanese economy still relies upon trade for its prosperity to a greater extent than do the other two main players, even though they all share a generally similar combined aggregated total of trade of GDP ratios (Thompson 1992a: 146, Figure 1). Japanese export trade in particular is concentrated in a small number of sectors (motor vehicles and consumer electronics for example), which make it very vulnerable to US trade policy. We pursue this point below.

Finally, the three country groupings also display a growing similarity in the ratio of externally held assets - denominated in their respective 'domestic' currency unit (the US dollar, the Japanese yen, and the EC ECU) -to GNP. Between 1981 and 1988 the ratio of the share in currency portfolio of world

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Exports of goods and services at current prices: 1960-91 (as percentage of GDP)

3546 % Japan EEC(12)

C - USA 20%

Imports of goods and services at current prices: 1960-91 (as percentage of GDP)

- - Japan 25% --- EEC(12) - USA

0 1960 1970 1980 1990

Figure 3 The importance of trade for different economies 1960-91 Source: Compiled from European Money: Annual Economic Review, 29, 19867 Uuly 1986), updated 1991

financial wealth to GNP fell from 1.94 to 1.59 for the US, while it rose from 0.21 to 0.34 and from 0.44 to 0.71 for Japan and the EC respectively (Commission of the European Communities 1990: 187, Table 7.5).

The point of this analysis is to indicate the emergence of three dominant players in the international economy. They are all roughly of the same economic size and standing, or the aggregate diversity between them is decreasing. Thus potentially at least this encourages a better prospect for management of the international economy. It is easier to generate agreement

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between three players than the G5/G7 for instance, if for no other reason than the smaller numbers involved. But that does not mean new agreements will necessarily be easily forged. That depends upon the issues and circumstances that arise, and, as we have seen, the immediate prospects for this are not that auspicious. There are still significant policy differences on the form and style of economic management between the three main players, for instance, which could inhibit a more serious attempt at co-ordinating or co-operating on international economic management issues. In addition, a more active management style presumes that the blocs will form up into coherent manageriavregulatory entities themselves. Again, the way developments here are progressing does not altogether lend itself to this expectation. In part this is an issue of a political will and momentum, which seems lacking at present. In a moment we discuss the specific European dimension to this, where, in fact, we reach quite pessimistic conclusions. In the final section we broaden the discussion to review the prospects in this respect for the rest of the international economic community.

At this stage the analysis suggests a modified multilateralism will prevail in the immediate future. It will be modified in the form of a dominant trilaterdism between the three main players, but with additionally emergent bilateral negotiations between these three on important issues, and between them and other minor parties as well. Quite what the full consequences of this configuration for the management of international economic affairs might be remains an open question. We pursue this in the final main section. But on this analysis alone it does not seem that overt and widespread inward looking protectionism is immediately likely. A minimal level of modified multilateral co-operation, as described above, would seem enough to ensure the continued 'openness' of the international economic system, even as it moves further @way from the traditional post-war type of full liberal multilateralism. (Thus aur conclusion here very much resembles that of Gilpin 1987.) That is unless existing trends are reversed and quite a different set of economic and political circumstances prevail as a result. The possibilities of this scenario we explore in the following section.

T h e future of Europe in the new internationalism

One way of interpreting the trilateral structure outlined above would be as a new hegemonic system, but now the 'hegemon' would comprise a complex combination of relationships between the 'big-three' economies. For this interpretation to work all three paties would have to remain roughly on a par, and would have to demonstrate unprecedented co-ordinational capacities between themselves. At present this does not look likely. Indeed the reverse could just as easily emerge; non-co-ordinated outcomes within the blocs and growing antagonism between them. So much depends upon the nature of each bloc formation. The process of European integration might stand as a model,

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being the most developed and internally co-ordinated of the blocs. However, the signs that the EC will make rapid progress in economic and political union are not encouraging.

The shape of the development of the European Community is, surprisingly, difficult to gage after the 1991 Maastricht summit, at which limited progress was made toward economic and political union. This was so even before the Danish vote on the treaty threw the whole process into further confusion in June 1992. Until the Maastricht Treaty it appeared the Community was making real progress toward becoming an integrated and effectively regulated trade bloc. The twelve governments had all passed the Single European Act, a measure designed to create an integrated internal market in goods and services, capital and labour by the beginning of 1993. If this measure succeeds in removing institutional barriers to trade between member states, then there will be a more integrated economic space in the EC than in the USA. In 1990 Britain joined the ERM, creating the possibility of eventual monetary union.

However, the problem is that the EC needed to make rapid progress toward integration in the early 1990s, or it would tend to go backward under pressure of emerging centrifugal forces. Before this pro-Europeans tended naively to assume that the process of economic integration was irreversible and that it would inevitably draw political integration in its wake. By the time of Maastricht, it became clear that major political and institutional changes in the structure of governance of the Community were essential if economic integration were to be pursued beyond the level of the Single Market, and there were fundamental barriers to such developments.

The Community is currently poised between powerful centrifugal and centripetal forces, and is in large measure paralysed in its responses by the divergent politics and commitments of the different national leaderships. The centrifugal forces are new and powerful. They are a decline of political homogeneity, the faltering of prosperity and the collapse of a unifying adversary. The last is the most obvious, for the European Community was created in the shadow of the Soviet threat and the co-operation on the part of the major European powers, France and Germany, was facilitated by that threat. Now that the Soviet satellite regimes in east-central Europe and the USSR itself have collapsed, the EC is faced with a potentially fateful choice between those who seek to 'widen' the Community, to include as rapidly as possible as many east European countries as possible, and those who seek to 'deepen' the Community, to further integrate its mechanisms of economic regulation and to promote political union. The wideners know that the EC cannot at present integrate such eastern economies unless it regresses to a loosely governed free-trade zone, and expansion has therefore become the gospel of the 'anti-federalist' forces in the UK, for example. The upshot of this conflict is likely to be that rapid progress toward political union does not take place, but that the economies of the east are not integrated into the EC quickly either de jure as full members or de facto, as part of the new economic space. Most of these countries simply cannot meet the current conditions of

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The problem of 'globalization' 3 8 1

EC membership, and the most advanced of them, even given favourable o u t c o ~ s for marketization and privatization, will not be able to do so for a decade.

Paradoxically, only rapid political union and the creation of strong citizen legitimacy for a centrally-directed policy could allow the EC rapidly to reconstruct and integrate the eastern states. Such a cohesive trade bloc could follow policies of large-scale aid and reconstruction that would simul- taneously promote development in the east and create full employment in the west by utilizing the east as a new source of effective demand through trade credits. Such a 'Euro-Keynesian' policy is conceivable, and the continental scale of the EC economy makes it possible in the way national Keynesian reflations are not, but it is inherently unlikely. Most European politicians are too risk-averse and too concerned with emergent nationalistic and regionalist forces to contemplate this policy. Moreover, it inevitably empowers Brussels at the expense of the national governments and will be resisted by the majority of the national leaders for that reason.

The second of the centrifugal forces is the collapse of political homogeneity. Since its inception in 1957 the Community has been dominated by a political spectrum from centre-right to centre-left. This is now breaking-up, not toward the far left, but toward the ultra-right, and more important, toward populist, nationalist and regionalist parties. There are clear signs of political revolt against the established parties in several European countries and dissatisfiaction with the nation-state itself. This is most obvious in the 1992 Italian elections with an across the board loss of support for the established parties and a strong showing by populist and federalist regional parties like the Lega Lombardu. As the established national parties are challenged by right-wing nationalism, like Le Pen's National Front, or by regional secessionism, like the Italian leagues, they will tend to retrench politically, to defend the state, and not, therefore, accept the ceding of power to the EC.

The third of the centrifugal forces is the prospect that European economic growth will falter, that there will be a widespread and prolonged economic depression in continental Europe. That has not occurred since the Treaty of Rome was signed. The integration of Europe has been achieved without serious costs and all states have experienced rising output and real incomes. Were growth to falter, and this depends very much on the international environment and whether the US recovers quickly from its recession, the pressures toward national protective measures would grow. These would not be for new tariff barriers within Europe, but toward reversing EC competition policy, which is to reduce state aids to industry, and toward greater independence in fiscal and monetary policy than the current EMS or the convergence criteria of the process of monetary union would allow. The EC could begin to dis-integrate as national states sought to protect their own economic bases, and this would be carried out by established politicians attempting to direct the threat of political competition from the far right.

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Europe is still at the point where a great deal of institutional work needs to be done to ensure that its effective economic integration is irreversible. At a primitive level - as single market - integration is probably irreversible. The same does not hold for the development of the extended economic governance of this single economic space. One must hope that there is no serious depression in the 1990s, that centrist politicians can contain the worst of the rightist pressures, that the issue of immigration does not become explosive and a gift to the right, and, therefore, that the space is left for the centripetal forces to exert countervailing pressures toward integration.

There are indeed strong centripetal forces in Europe, as well as sources of strain and divergence. Crudely put, the Community's national states have lost the effective capacity to serve as regulators over certain vital dimensions of economic activity, for which regional governments are even less effective, and yet the central institutions of the Community have not acquired the political capacity to exercise those economic functions. This functional imbalance will put continuing pressure on both national policies and Community institutions. How such an imbalance can be resolved is another matter.

The issue is not just integration or the transfer of national regulatory functions to Community institutions, but the creation of new mechanisms, objectives and policies of economic governance appropriate to the Com- munity level. The Community is not a nation state writ large and so national economic and regulatory policies cannot simply be transferred and per- formed on a larger scale. The EC is a trade bloc of continental dimensions, therefore it can potentially do things European nation states cannot and also it cannot perform certain functions that nation states have done. The question is one of a balance between Community, national and regional economic regulation; this is something to which we will return later in this discussion.

Monetary policy provides a striking example of this contradiction between the need for integration and the impossibility of merely scaling-up national policies and institutions. The Maastricht Treaty supposes that the outcome of EMU will be a 'Euro-Fed', a politically independent central bank that would direct monetary policy and operate without direct accountability to other economic policy makers. It would be the ideal image of the Bundesbank writ large. It would also pursue the same economic priorities as the Bun- desbank, exchange rate stability and an anti-inflationary policy. The problem is that a Community central bank and a single currency can only exist after a period of 'convergence'. In the mid- 1990s the last thing Europe will need is a deflationary dose of Euro-monetarism in order to create a single currency.

The Bundesbank acquired full autonomy in monetary policy in 1972, when the US abandoned the convertibility of the dollar. Germany's economy sur- vived the policy objectives of the Bundesbank after 1972 because its export- oriented manufacturing sector was strongly competitive by international standards and because its unions tended to practise wage restraint and thus put less inflationary pressure on the central bank's anti-inflationary policy.

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The problem of 'globalization ' 383

Even so, and especially in the 1980s, Germany has traded lower growth and higher unemployment as the tariff for price stability.

These conditions do not apply in Europe as a whole. Manufacturing has grown, in the 1980s in particular, under boom conditions, but it is doubtful if much of French or Italian, let alone British, industry could be competitive under a combined regime of Euro-monetarism and relatively open trade with the world outside the EC. Other countries' unions have not been so effective as Germany's at controlling wage inflation. Italy, for example, traded higher growth for higher inflation in the 1980s. To see what could happen one only has to look at the effects of monetarism in a country that had a large manufacturing sector - the UK in 1979-81. An overvalued pound and high interest rates led to devastating losses in manufacturing capacity (about 25 per cent). It is foolish to say that much of British industry was 'uncompetitive' tout court; firms are only competitive in definite macro-economic conditions and if these are sufficiently unfavourable then firms - good, bad and indifferent - will go to the wall.

The implications of this are twofold. Firstly, the process of 'convergence' must be slower and its criteria looser if it is to be less painful. Rapid monetary integration as envisaged in the framework of the Maastricht treaty is, therefare, likely to be an unworkable policy for all twelve states and, in fact, may damage European integration. The alternative is, either, a slower process with looser targets and wider objectives, or, a two-stage process with a fast and slow stream. The danger with the latter process is that it will derail convergence and create complex monetary obstacles to full economic integration - creating a first and second 'tier' of European countries. Secondly, that the idea of an 'independent' central bank at the European Community level is dangerous for the process of integration. Such a bank will lack legitimacy and that lack will be reinforced by its divorce from wider economic policy-making and by its tendency to set constraining conditions for the latter. The effect of 'independence' would be to allow unaccountable officials to dictate economic policy, at a time when the central organs of the Community will still lack legitimacy and citizen identification. The result could all too easily be a disaster for the process of building support for EC economic and political integration.

The wider policy dimensions of the regulation of the new European single economic space and of Community-level economic and social policy also raise serious questions about both the need for such common programmes and the difficulty of attaining them within existing institutions. How, for example, can Europe have a 'single market' unless it also has effective mechanisms to regulate that market's workings? Mrs Thatcher's vision of the single market was simple, a continent set free for economic liberalism. Goods and capital could move without being limited by national economic regulation. Such a market would put firms and capital markets beyond effective control, and thus able to impose social costs and to avoid paying for them by allocating resources as they wished. Such a view is quite alien to most Community politicians.

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They operate on good Christian Democratic or Social Democratic principles and seek the highest measure of market liberalism consistent with long-run social efficiency. That means common European standards and regulation where they are necessary - in environmental protection, in company law and regulation of capital markets, in social and health and safety legislation. In such areas existing Community institutions can probably perform such regulatory functions and enjoy legitimacy in doing so. The Community creates a common 'framework' legislation - a common structure of rights and regulations that enables all economic actors to operate with a measure of certainty throughout Europe.

The problems begin to occur at the point where programmes of harmonization involve major spending, for example, on common standards of environmental protection or compatible social benefits. Not all nations and regions can afford to comply with the emerging 'first tier' conceptions of a healthy environment, nor can there really be a single labour market until there are common basic social benefits. The current 'Social Charter' is a minimalist document for this very reason. A more ambitious social programme would imply serious redistribution of revenue within the EC, to bring economically weaker states and regions up to common higher standards without a crippling fiscal burden. The Community's current approach is, on the contrary, to dilute common standards down to a minimum.

Similar difficulties will occur in other areas of policy: in particular there will be great resistance to any European regional policy that seeks to improve the efficiency of weaker regions by investment in infrastructure and in crucial supply-side factors like education and training. Policies to promote economic revitalization are essential on narrow economic grounds that are ultimately of benefit to the richer regions too. Widespread success and growth are needed to maintain a base of effective demand and social efficiency to sustain an extensive growing and productive advanced industrial sector. The idea of a Europe of 'tiers' where capital can profit by exploiting low-wage zones is ultimately self-defeating. Such zones will be low-demand peripheral areas too and thus limit the scope and competitiveness of the 'first-tier' core of regions by restricting the growth of these markets. Moreover, no European Com- munity region can compete in this respect with the vast low-wage 'third tier' of countries that has opened up in Eastern Europe.

The drive to regional harmonization and social homogeneity makes sense in the long run and from the perspective of the whole Community. The problem is that richer regions and states, like wealthier social groups within a nation state, will not be willing to spend on fiscal redistribution and social harmonization if they can avoid it. The question is one of both the legitimacy and the coherence of a European-scale policy. Europe can act differently from a nation-state. It is a large enough economic entity to be able to maintain 'Keynesian' policies of maintenance of effective demand in the face of the international financial markets had it the political coherence to do so.

The scale of the European economy makes possible policy options no

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single member national government can contemplate. The problem is that such options cannot be realized within the existing structures of governance of the EC. At the moment, for example, the national governments of the member states are strongly resisting Commission proposals greatly to expand the central EC budget and to spend a sizeable chunk of that revenue on a large-scale aid programme for Eastern Europe. The EC is thus currently paralysed between the interests of the national governments and the central apparatus. The member states lack the scope for effective concerted action. They must in major matters proceed at the pace of the slowest, as Maastricht shows. The central apparatus lacks the capacity to substitute itself for the state governments, it is a small bureaucracy capable only of 'framework' legislation and decision making and requiring the co-operation of the national bureaucracies for implementation. It also lacks an independent source of legitimqcy to reach over the heads of national governments to citizens in the member states.

Maastricht has resolved none of these issues of the balance of power between Community, national and regional levels of governance. The EC will never be a continent-wide federal state like the USA. It will always be a European 'public power', its capacities derived from treaties between the member states and from processes of decision making in which those states will have the major part. The EC is inescapably confederal. In matters of both revenue and military power, the nation states will retain the power of decision, but they will make community-level policy by majority vote. The Community can never be a political entity exactly like the old national states.

It must develop, however, some mechanisms of securing citizen identification with and political legitimacy for Community institutions if it is not to forgo some of the main benefits of a continental scale of organization. The construction of such an identity can in part only come with processes of integration, as indeed will legitimacy follow from the strengthening of central political institutions. That is why Maastricht was such a dismal failure at a time when Europe needed radical change. Most members of European elites accept &at a single market requires a unit of regulation to match it. The main limits of possible policy in Europe are political and concern the capacity of Brussels to mobilize citizen support for continental-scale policies involving major fiscal commitments and political risks.

The odds against rapid progress toward the 'federalist' objectives are high, particularly in the post-Danish referendum world of mid-1992. But even if such prqgress was made, the Community as a political entity would still be a complex amalgam of overlapping powers and responsibilities. For the most ambitious economic policy goals to be realized there would have to be a substantial measure of policy co-ordination at the Community, national and regional levels. Even if the central institutions of the Community were to gain considerably in citizen support and political legitimacy they could not substitute central social co-ordination for the more complex processes of the orchestration of consensus and consent at national and regional levels.

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Nations and regions are the sites of social solidarity, and some of these entities have a far stronger capacity to co-ordinate the social interests than do others.

If one considers the sort of policies that could become possible given the continental scale of the Community, the necessity and the difficulty of achiev- ing this complex division of labour becomes obvious. Thus the Commission - even with an expanded budget - is not in itself a large enough fiscal actor to provide the stimulus for 'Euro-Keynesian' policies without coincident fiscal and monetary policies in at least the majority of the member states. Assuming that the Community could orchestrate such a policy on the demand side, then it is even more the case that its central institutions could not create the compli- mentary policies to contain money wage growth and prevent inflation. Such income restraint would fall to national governments: some like Germany could deliver because of corporatist structures and a relatively disciplined union movement, others like France would probably be able to comply because unions are weak, and some are manifestly incapable of constraining wage growth without highly restrictive macro-economic policies like Britain. A European expansionary policy would, therefore, lead to patchy results, those states most able to restrain wages growth would benefit, those unable to do so would loose out through accelerating unemployment or nationally imposed deflations.

It is difficult to see how this discrepancy between national experiences and institutional legacies can be eliminated. There is no prospect, for example, of a strong 'Euro-Corporatism' that brings the social partners together to make binding agreements at Community level. Business will not present itself at this level as a single 'social partner'. It is too divided by national and sectoral interests, and it would prefer to lobby for those interests with the Directorates of the Commission on an issue-by-issue basis. Its national collective bodies are divergent in their degree of organization, in their objectives and their willing- ness to enter into partnership with labour. German industry is highly organized on the employers' side, with strong sectoral and peak employers' associations, the member firms of which follow collective policy in a disciplined manner. German employers retain strong commitments both to industry-wide bargaining on wages and working hours and to the codetermination system of consultation with labour at enterprise level. British employers' associations are, by contrast, almost exclusively concerned with representing the most general perceived interests of their members to government, and have few powers to discipline their members or get them to take part in co-ordinated consultation with labour. Wage bargaining has undergone massive decentralization in Britain since the 1970s, with very few industry- wide agreements. British employers are actively hostile to the idea of an extended dialogue with organized labour to build consent for national policies - that is 'corporatism' and has no place in the modern British manager's lexicon. This stark contrast shows that Europe will find it difficult to create insti- tutionalized means of orchestrating consensus for macro-economic policy at Community level. European labour, through its federal-level organizations,

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may well wish to try to enter into a dialogue with the Commission about policy co-ordination and the orchestration of consent across the Community. It will have problems if it alone is interested and the employers refuse to play ball, but even greater problems on its own side too - for European level consultations will not be able to deliver disciplined commitments by member unions in the nation states in such key areas as wage policy and wage restraint.

This tells us that some nation states will remain the crucial actors in constructing apolitical basis of consent for the macro-economic policies of the Community and for their own fiscal, regulatory and industrial policies. Only at the national level can effective distributional coalitions be built, that is, framework agreements between the major parties and social actors about the conditions for and the necessary costs of economic success. Social Democrats and Christian Democrats in Germany both agree on a wide range of policies and institutions which sustain the economy, for example, but also enter into intense and open political competition. Such coalitions may be tacit or more orchestrated - what matters is that co-operation and competition between the major interests are in balance. In either case it involves the commitment of social actors and the organized social interests representing them to a sustainable distribution of national income between consumption and investment, and to a pattern of expenditure that promotes manufacturing performance. For example, a critical mass of the German financial community accept the priority of investing in German firms at terms and conditions that protect their competitiveness. Parties, organized labour and employers accept the need for public and private investments in education and training. In other countries such commitments and their orchestration would require explicit government action - the UK is the prime example and Conservative governments over the last thirteen years have seen this as no part of their task. It will be more difficult to extend such national coalitions to cover the costs of ensuring competitiveness at C~rnmunity level. In future social actors and their interest organizations will also have to take account of a 'European slice' of revenue, redistribution and policy commitments to further working of pro-Community programmes.

Nation states will also remain crucial in that it is they who provide the domestic constitutional framework and policy support for effective regional government. States differ massively in size and the categories 'nation state' and 'region' have no ultimate coherence - Bavaria is a 'region' but could easily be a 'state'. Some nation states will remain strong political entities - France and Germany are obvious examples. Others could well face strong disinte- grating pressures. Regional governments are now key economic regulators, in that they are more able to assess the needs of industry because they possess more localized and, therefore, more accurate information and because they are of a size that enables the key public and private actors to interact and co-operate successfully. Regions are small enough to possess 'intimate knowledge' and yet sufficiently large to aid and regulate local economies through a significant revenue base. The regional provision of education and

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training, industrial finance and collective services for industry is gaining in importance; it is a vital component of the new 'supply side' policies that promote industrial efficiency.

The most successful economies are those that have allowed the measure of local autonomy necessary to regional regulation and have developed strong industrial districts. The UK has failed most conspicuously in this regard and Government has centralized relentlessly since the 1960s, has reduced local government to client status (and UK authorities are too small to be regional governments) and, since 1979 has denied the need for local industrial policies or public-private partnerships to provide collective services. Business has also concentrated massively; through mergers and acquisitions turning local firms into subsidiaries of remote headquarters and severing regional cross-linkages between firms. The UK will thus loose out most in any move toward the regional regulation of economic activity - it will suffer both from the competitive pressures of the single market and from those competitive pressures which stem from the enhanced efficiency available to foreign firms through their use of regional economic co-operation and collective services. In other states regional governments have compensated for ineffective national policies. Italy is the obvious example, with the more successful industrial districts and regions in the north and the 'Third Italy' providing effective economic regulation. One should note that the very weakness and paralysis of the Italian state aided this process in the 1980s. Italy did not fall prey to fashionable monetarist doctrines and lax government allowed a strongly expansionist (and inflationary) policy. This benefited the more 'Post-Fordist' enterprises and industrial districts, at the expense of Italy's large firms, big cities and the South. Italian growth in the 1980s thus benefited those areas and social groups who are in favour of greater autonomy and look on the central state as a liability. The question is if they would fare better under a 'Europe of the regions' in which they would be subject to a federal monetary and macro-economic policy. As we have noted above, this is likely, if present conceptions were followed, to be 'Euro-monetarist'.

A 'Europe of the regions' has at present no precise shape. Europe's nation states may accept the need to facilitate regional government. France has at least partially decentralized for example, but they will not accept their own dissolution - even if they are strongly federal like Germany. The Community cannot create central institutions fast enough and with enough legitimacy to achieve an effective federal-regional split in most economic regulatory functions in the near future. Major nation states will retain the control of nationally distinct military, cultural and legal institutions that, of necessity, give those states extensive economic regulatory powers. The danger is that a 'Europe of the regions' will not emerge because of an equitable balance of power between federal, national and regional levels, but because of the reverse. It will be obvious that there are numerous gaps and lacunae in the economic governance the European Community will be able to offer in the next decade and beyond. The Community will lack collective powers in

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certain areas or, perhaps, gain too much power, as would be the case with a monetarist Euro-Fed. National states will differ in the capacities for economic management and for effective co-operation with sufficiently autonomous regional governments. The weakest, that is, the most centralized and least socially co-ordinated states, like the UK, will lose out. But so also will weak regions, especially in weak states. The regions that will benefit most are strong regions in effective national states like Baden-Wiirttemberg or Rhone-Alpes or regians in less integrated states that are strong in their own right like Catalonia or Lombardy. These regions are linked in the 'Four Motors' consortium across national boundaries. Those are the 'winners' but there will be 'losers' in regional terms, and plenty of them, and they will have the electoral power to challenge this result. They may not be able to overturn it, but strife between rich and poor regions, violent divergences over redistribution and the direction of the Community's economic governance, will help to ensure the unsettled character of European institutions and prevent a generous policy toward the East. Europe's future may be decided by differences within the Community that prevent it from acting to unite the Continent.

Super-blocs and sub-blocs: the overall position

Here we consider the development of the international economy as a whole in the contlext of the relationships between the super-blocs/countries we have been concentrating on so far and a range of other country groupings that make up the main subsidiary players in the international economy. This analysis is conducted with reference to Table 1 where the main actors as we see them are outlined. T o some extent this is an arbitrary list, but will serve to underline the comple~ities of the rapidly internationalizing and integrationist tendencies operating at a world level.

Table 1

Countty groupings Impacts

European Community/EFTA NAFTA/USA CIS (ex-USSR) Japan & SE Asia (NICs) LDCs Cairns Group (+ Argentina & SA) China Eastern Europe

Neutral NeutraVNegative Positive Negative Negative Negative Positive? Neutral/Positive

Positive/Neutral Neutralmegative Negative Positive NeutraVNegative NeutraVNegative NeutraVNegative Negative

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Two scenarios are used in Table 1 to organize the discussion. The first of these is protectionism/~ilateralism. This scenario sums up one of the possible forms of development for the main economic players and the international system as sketched above. In terms of the impact effects this is designated A in Table 1. The other scenario is multilateralism/deregulation. This is meant to sum up a broad continuation of present policies, which have been designated as a modified multilateralism in the above discussion. This particular scenario is designated as B in the effects impact column.

Taking the European Community/EFTA first, so much here depends upon how this formation develops in the medium term, but assuming a continuation of its present trajectory there is little reason to think an enlarged EC would suffer unduly from a protectionist turn in th? international order. Nor would it gain much however. Thus this scenario is likely to be broadly neutral from the EC's point ofview. The EC could divert its attention inwards to the further development of the internal market/economic union and towards reconstruction in the east (the 'Euro-Keynesianism' analysed above). Spare-capacity released by the shrinking of its external markets could thus be readily redirected. On the other hand, with scenario B - continued multilateralism/further deregulation - the EC might gain something since it is a big and powerful player in the international economy. At the worst its position would remain neutral here. Thus the EC is unlikely to be that affected by either scenario. It could weather either scenario without dramatic positive or negative effects.

For the NAFTNUSA, however, the likely impacts are a little different. Again this depends upon exactly what happens to the internal development of the NAFTA - whether it completely integrates Mexico, and in what form, whether it develops further than a large customs union, as it is at present - but here we assume the present trajectory, with US as bloc leader and dominant partner. Under these circumstances the problem for the US is whether the strategy of moving toward a NAFTA will be sufficient to turn the US economy around. For various reasons we suspect not - the real issue is its productive structure and institutional framework at the level of domestic manufacturing, and there is little reason to be optimistic that this will change simply as a result of the construction of a large customs union with its near neighbours. Indeed the link with Mexico in particular could make things a great deal worse by encouraging the US to go down a low productivity, low value added route, based upon the low wage and low skilled economies of the South.

But because the US is still such an important economy in the international order, with considerable political and economic resources at its disposal, either of the scenarios might just as well produce neutral results. Thus in this case we suggest a neutral to negative outcome as the most likely.

The ex-Soviet Union economies remain in a poor position. So they begin from a very low base in this analysis. Supposing the main economic blocs took a protectionist route (scenario A), then why could this have a positive impact as suggested in the Table? The reasoning here is that the main western countries

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would then be looking for somewhere to off-load their spare capacity, created as a result of the shrinkage in world trade. The ex-Soviet Union (SU) economies look a good destination for this, aided as they would need to be by large loans, trade credits and direct aid from the advanced industrial countries who would provide that capacity. Thus there would be an incentive for the western economies to finance the purchase of their own output, whether that be in the form of capital goods or consumer goods. The upshot of this analysis is that the only way the ex-SU economies are likely to receive adequate restructuring loans from the West is if the West has some self-interested incentive to provide these. That incentive could arise in the case of scenario A.

As far as scenario B is concerned, the outcome is more ambiguous. So much here depends upon the reaction in the EC. If the EC itself matures and embarks upon a 'Euro-Keynesian' policy as mentioned above, a co-ordinated effort to reflate in conjunction with eastern Europe and the ex-SU countries, the outcome could be positive for all concerned, despite any continued general recession in multilateral international trade. As suggested above, although this could produce faster growth in the EC, lower unemployment, and a higher utilization of manufacturing capacity, it involves both a big political risk within the EC and more power and political legitimacy for the bloc's leadership than exists at present.

However, given the pessimistic result of the analysis in the previous section, the opposite is perhaps the more likely outcome. Without these positive developments within the EC there is little incentive to provide widespread soft loans, trade credits and direct aid on the part ofthe Western economies/blocs. Thus as a result of continued policies of multilateralism and deregulation, the ex-SU economies could just stagnate or continue their precipitate decline.

When we move on to the case of Japan we get the very opposite set of reactions. For the purposes of this discussion we include the SE Asian NICs with Japan since in broad terms they are in a similar position. The problem for these countries is that they are highly reliant upon international trade for their prosperity - which still includes Japan despite the maturity of its economy. Thus any down-turn in world trade is likely to affect these economies very significantly, rapidly undermining their prosperity. They also have no obvious ready alternative destination for all their output and capacity (though see below for a caveat on this). The resultant domestic collapse could be very significant. The post-war settlement in Japan, for instance, was built on the expectation of rapidly growing living standards, and there is no national welfare system to cushion consequences of a serious recession.

The anly thing Japan might be able to do under these circumstances is to play its card of heavy financial investment abroad. The buoyancy of a lot of the international equity and property markets have been built on Japanese investment in recent years, and if the Japanese government were able to pull the plug on this it could precipitate a collapse in these markets internationally. Thus the Japanese have a potential lever over the course of the international economy, in the form of a threat, if they were either prepared or able to use it.

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But at the same time, of course, the value of these assets and their earning capacity for Japan would be undermined. Thus Japan has only a weak bargaining chip here.

For this set of countries the best outcome would be a continuation of existing trends, i.e. scenario B. They have built their prosperity on this in the post-war period, so its deepening and development would only enhance their competitive strengths. In general terms it is the US and the EC that could more easily weather any international depressionary storm. They still have the potential to develop more 'autarkic' policies than do the Japanese. The latter still remain a trade policy captive of the US.

If we now turn our attention to the LDCc the picture is equally depressing on both scenario cases. At best the LDCs are likely to continue as marginal to the international economy, and experience neutral impacts with scenario B. Even under these circumstances their position is most likely to continue to deteriorate. But what could hasten this deterioration is a move into scenario A circumstances. The interests of the LDCs would be even further off the agenda if the world slipped into overt protectionism.

A similar outcome on both counts could befall the Cairns group of advanced agricultural and primary product producers, and for similar reasons. Here we include in this group countries like Argentina and South Africa, which is about to enter the international economic arena in a similar position. This group are those with an advanced 'industrial' set of expectations but who still effectively specialize in primary products. They have little comparative advantage in any other commodities. They suffer from the 'tyranny of distance' - being remote from large centres of population. They are subject to large cyclical swings in their terms of trade because of being very dependent upon the prosperity of the major manufacturing countries. These character- istics make them particularly vulnerable to the vagaries of the international market in a way similar to the LDCs. Thus they would likely experience similar impacts as the LDCs in each of the cases.

The long-run destiny for these countries is generally problematical since they tend not to meet the criteria for effective national economic management as outlined above. Perhaps the model here is that of Argentina itself, which at the end of the 1920s was one of the wealthiest countries in the world on a per capita basis (in 1989 it being 42nd in the world league of GNP per capita), that wealth being based upon the boom in primary commodity production during and just after the First World War. Argentina points the way to what could happen to countries like Australia, New Zealand and South Africa, which all continue with first world expectations as they inherit increasingly 'third worldish' economies.

Australia and South Africa are a special case, however, since they have significant mineral wealth. This makes them different from most poor countries. Although, of course, they do suffer a 'boom and bust' cycle with world demand, with knock-on effects for their populations. These populations might be described as 'mineral rights pensioners', living off the rents

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skimmed from the exports of minerals as the boom in world demand develops, but then waiting out the recessionary down-turn in anticipation ofbetter times to come.

In Table 1 we have included a special category for China. This is to encourage a comparison with the position in the ex-Soviet Union. In a similar way to the analysis conducted for the ex-SU economies above, China might also benefit (relatively) from a protectionist turn in international economic affairs, and for the same reasons. In particular, the relationship to Japan would be particularly important here. With the existing level of development in China, although the Japanese could not sell too many sophisticated cars and consumer electronics in China, they could certainly divert some of their capacity to this market in the circumstances of a generalized down-turn in internaeional trade. The Japanese have a proven capacity to readjust their output to the opportunities at hand, and there is plenty of scope for small motor-bike sales in China for instance. Thus China might gain under this scenario, and Japan find an insurance policy for some of its potentially lost capacity.

On the other hand, with a continuation of existing policies and China's continuing poverty and lack of economic muscle, the effects of scenario B are likely to be more of the same. At the worst this would imply a relative decline, but it is possible that with scenario B China might act as a new NIC in the medium term, and thus a 'neutral' element is included in Table 1 to express this possibility.

Finally we come to the situation in the Eastern European countries. In many ways the analysis here must mirror a lot ofwhat has been said above in the case of the ex-SU and China. This group stands to gain in the case of scenario A, but this is tempered by the uncertainties of its relationships to the EC as these evolve in the near future. This relationship is likely to be closer than that of the ex-SU and the EC, so we add a neutral element into the equation with A in this case, mirroring the general EC outcome discussed above. On the other hand the negative impact of B is fairly unambiguous. The Eastern European countries are not strong enough to weather positively an increase in multilateralism/deregulation with just their own resources, which would more likely increase the pressures on them to adjust too quickly and with too q c h domestic disruption, hence the negative overall assessment with this case.

Conclusion

We have tried to define the concept of a globalized economy and assess whether current trends in the international economy justif) the use of this concept. The answer seems to be that globalization has not taken place and is unlikely to do so. The international economy is imperfectly governed through the limited co-operation of the major trade blocs and nation states, but it is governed none the less and in a way that limits the power of the main financial

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markets. Nation states can secure high levels of international economic activity and satisfactory external balances through appropriate mixtures of policy. Such policies increasingly tend to diverge from the Keynesian macro-economic instruments of the 1945-73 period and they depend on governments' capacities to co-ordinate and mobilize social actors. The result is that not all states are effective at meeting and mediating international competitive pressures through national policy resources. National success rests increasingly on specific distributional contexts and on sources of social solidarity that are unevenly distributed between states, the USA and the UK lacking such capacities to a considerable degree and Japan and Germany continuing to benefit from them. However, in both the latter cases continued success in economic management depends on their maintaining their present forms of social cohesion and keeping the post-1945 settlements in being. Should that falter through labour dissatisfaction, or other causes, then the capacity of Germany and Japan to manage their relation to the international economy to their own competitive advantage could decline.

Trade blocs are at an initial stage of formation. Even the most advanced, the EC, is unlikely to become a super state capable of exploiting the potential of a continental scale of organization. Whether blocs will come into conflict and radically weaken the current liberal regime of trade between the advanced industrial economies is still an open question, but that outcome seems unlikely too. If the concept of 'globalization' has had any merit it is as a negative ideal-type that enables us to assess the shifting balance between international economic pressures and international governmental regulation and national and bloc level economic management. We do not have a fully globalized economy, we do have an international economy and national policy responses to it.

Birkbeck College University ofLondon

and The Open University

Milton Kqnes

Note

The authors wish to thank Jonathan Zeitlin for his invaluable help in preparing this paper.

1 The literature on 'globalization' is now enormous and the content of this literature is extremely heterogeneous. Rather than examine the concept through a critical discussion of this literature (which would double the size of an already lengthy paper) we have chosen to work through an ideal type of a globalized economy and examine evidence for economic trends against this. However, it is important to note at least the major contributions. Thus Gordon (1988) examines the international economy in terms of an opposition between cyclical phenomena, i.e, decay or stagnation, versus

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possible structural change, and concludes on balance in favour of a cyclical account. Chase-Dunn (1989) approaches globalization using the World Systems Approach associated with Immanuel Wallerstein. Rosenau (1990) examines the structures of the new turbulent world order within an international relations perspective on globalization. This approach is partly an inheritor and partly a critique of the international regimedrational co-operation literature (Krasner 1983, 1985; Keohane 1984). The question of the relation between the notion of a (realist) national interest and the possibilities and necessities of international democratic control has been much debated (Held 1991; Gilbert 1992; Krasner 1992).

More specific analyses centre on the global financial system (Friedan 1991; O'Brien 1992) and on the role of trading blocs and their consequences for the global economy (Schott 1989, 1991; Frankel 1991; and Lawrence 1991). Specific blocs are discussed in the context of globalization by Bressand (1990) for the EC and Vega et al. (1991) in the case of NAFTA.

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Documents

The problem of ‘globalization”: international economic relations,national ecnomic management and the formation of trading blocs