From Traditional to Group Hegemony

The G7, the Liberal Economic Order and the Core-Periphery Gap

Alison Bailin

• Publisher: Routledge
• Year: 2017
• Print ISBN:
  9780815389118
• eBook ISBN:
  9781351157865
• Topic: Politics & International Relations
• Subtopic: International Relations
• Index: Politics & International Relations

Developing a new theory of hegemony, called group hegemony, the author explains how a few wealthy countries maintain the liberal economic order and how this helps to sustain the economic disparity between the core and the periphery in the post-World War II era. The theory proposes that the G7 acts as a global government of last resort - a crisis manager - when other institutions prove inadequate to sustain the world order. The G7 also supplies resources, such as large markets, foreign investment, and funding for international institutions. These goods serve to entice the majority of countries to participate in and abide by the rules governing the world economic order without changing the systemic distribution of power. The volume develops a theoretical analysis of the G7's significance in international relations. It explains how the G7 countries collaborate to perpetuate the economic order and impart an institutional stability to an inequitable system.

Chapter 1
Introduction: Group Hegemony

International crises have plagued the capitalist world-economy throughout the post-World War II era. Currency volatility, stock market crashes, and the growing gap between rich and poor foster instability. Yet, the world economic order persists. How is a global economic order maintained that works to the advantage of a few countries? The main theories associated with economic order—hegemonic stability and institutionalism—do not adequately address this question.

Hegemonic stability theory holds that the most powerful country provides the necessary goods to create and maintain a liberal order complete with monetary, trade, and foreign investment systems (Kindleberger, 1973; 1981; Gilpin, 1975; 1987; Krasner, 1976; Keohane, 1980; Lake, 1988; 1993; Pahre, 1999; Ikenberry, 2001; Nye, 2002).¹ The U.S. performed this function after World War DL It established the gold-dollar standard, encouraged trade by accepting asymmetrical trade relations with Western Europe and Japan, and supplied much needed foreign investment and aid. The U.S. also established international institutions to govern monetary and trade relations and to reduce economic nationalism. These institutions included the International Monetary Fund (IMF), World Bank, and General Agreement on Tariffs and Trade (GATT).

Hegemonic stability theory, however, fails to explain the perseverance of the liberal economic order since the 1970s. By 1971, the U.S. could not afford to maintain the gold-dollar standard. That same year, the U.S. experienced a trade deficit and eventually became the world’s largest debtor nation. By 1982, the U.S. had relinquished its position as the world’s largest provider of foreign investment. The U.S. appears to have reemerged as a powerful hegemon with the Bush administration’s semi-unilateral action in Iraq. There is no doubt that the U.S. reigns supreme as a military power. The issue is whether the U.S. needs help securing order and funding economic development.

In contrast to hegemonic stability theory, neoliberal institutionalism argues that countries cooperate through international institutions and regimes to govern various aspects of the world-economy (Krasner, 1983; Keohane, 1984, 1998; Ikenberry 1998/1999; 2001). Institutions such as the IMF and World Trade Organization (WTO) guide transnational monetary and trade transactions, but these multilateral arrangements do not have the organizational flexibility and resources to manage global crises. For example, the IMF needed and received an infusion of resources from the great powers to quell the 1997/1998 Asian financial crisis. The Group of Seven (G7) industrialized nations buttressed the IMF. The G7 authorized a 45 percent increase in IMF quota shares and the expansion of the IMF’s role in financial sector reform. The announcement that the G7 countries would provide additional resources to contain the crisis brought greater stability to the region. Kirton (1999a, pp. 623–624) concludes, “In the end, it was concerted G-7 governance, and not the heavily bureaucratized, long established, rules-bound multilateralism that beat the mania of the marketplace.”

The great powers advance their own self-interests, including that of global stability, through the rules that govern international regimes. For instance, tariffs on goods of export interest to developed countries are lower than tariffs imposed on products of particular export concern to developing countries. This is not to suggest that developed countries intentionally perpetuate disparity; they pursue policies that enhance their economic well-being. Many developing countries have also experienced impressive growth rates due to export-oriented strategies, yet the majority of countries need more favorable and effective global governance to fully take advantage of globalization. The rules that govern the global economic order are often biased in favor of the wealthy few. The majority of countries still benefit from participating in the world-economy, but not as much as the wealthy few. The inequitable system is thus sustained and stable.

This book proposes a new theory of world politics called group hegemony (Bailin, 1997). It explains how a few wealthy countries maintain the capitalist world-economy, commonly referred to as the liberal economic order, and how this order perpetuates the economic disparity between rich and poor countries. This world-system functions much like the classic company town of the early 20th century. In a company town, the inhabitants depend on one company for employment, housing, and supplies. In the global company town, the role of proprietor is held by the most powerful country, called the hegemon. The hegemon provides open markets and capital much as a proprietor supplies jobs and stores to integrate workers into the system. The hegemon also acts as a government of last resort—a global crisis manager. In addition to funding institutions, such as the IMF and World Bank, the hegemon provides additional resources to quell crises. Sustaining the global order is a costly undertaking. If no country can unilaterally bear the hegemonic burden, a few powerful countries can and may act collectively as a group hegemon to preserve their privileged positions and to sustain the status quo (Snidal, 1985a). In addition to possessing a preponderance of power, the group hegemon members should display a basis for collaboration, such as interdependency and institutional features, which facilitate cooperation among powerful, sovereign countries.

The liberal economic order is a construct designed to facilitate international economic transactions, namely relatively free flows of trade and capital. Countries depend on trade and financial flows for their economic well-being, just as workers rely on the company town for their economic survival. They comply with the rules or risk being barred from trade and monetary regimes.

In short, the group hegemon provides enough goods to integrate a majority of states into the capitalist world-economy, but not enough to change the global distribution of power. The economically less developed countries remain dependent on and indebted to the wealthy states. This book examines the global hierarchy of power, explains how the powerful few sustain the liberal economic order, and shows why the order contributes to the global economic gap.

Global Power

The U.S. emerged from World War II as the dominant world economy with its strong currency and vast resources. It acted as a hegemon by using its preponderance of world power to create and maintain a global economic order. The U.S. furnished the world’s main supply of liquidity, the largest open markets, and the vast majority of foreign investment. The superior power of the U.S. enabled it to create and enforce norms of behavior and rules to regulate monetary and trade transactions among countries. After World War II, the U.S. used its vast resources to entice states to join its liberal monetary and trade regimes. The U.S. funded the IMF to oversee international monetary relations. With respect to the trade regime, the U.S. offered to reduce American trade barriers as long as countries acted within boundaries specified under the General Agreement of Tariffs and Trade (GATT). This offer induced countries to participate in GATT. Countries reduced tariffs and limited discrimination. In essence, the U.S. exchanged goods for compliance with the Western order, which furthered U.S. interests and preferred global architecture.

Hegemonic stability theory in its various forms explains the persistence of a global economic order in terms of a single state’s preponderance of power (see Kindleberger, 1973; 1981; Gilpin, 1975; 1987; Krasner, 1976; Keohane, 1980; Lake, 1988; 1993; Pahre, 1999; Ikenberry, 2001; 2002; Nye, 2002). The hegemon provides the necessary public goods, such as a widely accepted means of payment, large open markets, and foreign investment, to sustain a liberal order. It also creates and maintains institutions and regimes to govern interactions among states and maintain stability. Accordingly, hegemonic stability theory predicts that a decline in hegemonic power will presage the breakdown of the liberal economic order. The hegemon’s power eventually declines as it disseminates goods to potential competitors. Britain, for instance, was the only industrial economy in the early 1800s. By the late 1800s, industrial development spread rapidly to European powers and the U.S. as they improved on the technology pioneered in Britain.

Modelski’s (1978; 1987) theory of long cycles proposes that a single state with a preponderance of power emerges from a major global war.² For example, the War of Dutch Independence at the end of the 16th century resulted in the rise of the Netherlands as the world leader. The Wars of Louis XIV at the end of the 17th century gave way to British leadership. The French Revolutionary and Napoleonic Wars at the end of the 18th century renewed the world power of Britain, and the two World Wars of the 20th century marked the rise to world power status of the United States. The dominant state legitimizes its power with postwar peace treaties (Ikenberry, 2001). The new world leader uses its monopoly control of military and economic power to set up a structure of property rights, provide for peace and security, and regulate the global economy. Eventually the leader loses legitimacy as its relative power declines. Another global war ensues and the cycle begins anew. The cycle repeats itself approximately every one hundred years. According to Modelski’s theory, the U.S. began to decline in the early 1970s. The theory predicts that conditions should be ripe for a global war around 2025–2030. This is a prediction not a future inevitability. Modelski (1987) acknowledges that power transitions may occur peacefully.

A noticeable change in U.S. hegemony occurred in the early 1970s when the U.S. abandoned the gold-dollar standard. The U.S. could no longer unilaterally sustain the global monetary order known as the Bretton Woods system. The soon to be victorious Western powers had met in Bretton Woods, New Hampshire in 1944 to establish rales for financial and commercial relations among countries. The Bretton Woods agreement created the IMF and the International Bank for Reconstruction and Development, known as the World Bank, to manage exchange rates, mitigate balance-of-payment problems, and provide loans for development. Both institutions operate on a weighted voting scheme. The percentage of total votes delegated to each country was, and is, proportional to the country’s contribution to the IMF. The more votes a country has, the more power it has to govern global economic relations. The primary financier of the IMF and Bank was, and is, the United States. Its IMF subscription of 17 percent continues to overpower both institutions.³

The Western powers also devised a monetary system of pegged exchange rates based on the dollar. The U.S. pledged to redeem dollars for gold at $35 per ounce. This pledge was the linchpin of the Bretton Woods system (Gilpin, 1987, p. 134). The dollar was as good as gold. However, by the 1970s, the U.S. could not keep its pledge. Two major wars in Asia and the permanent posting of troops overseas had placed a heavy economic burden on the U.S. Other countries could adjust their currencies to changing conditions, but the U.S. was constrained by the fixed gold-dollar standard. The U.S. ran budget deficits throughout the 1960s as the overvalued dollar contributed to large investment outflows, declining U.S. exports, and increasing imports (Spero and Hart, 2003, pp. 22–24). The U.S. showed a trade deficit in 1971 for the first time in the twentieth century. On August 15, 1971, President Nixon announced that the dollar would no longer be convertible into gold.⁴ By the 1980s, the U.S. had regressed from the position of the world’s largest creditor to that of the world’s largest net debtor. Yet, the U.S. remains a heavyweight in international monetary and financial matters.

While the U.S. has retained a prominent global position, its relative economic power declined in the 1970s and 1980s. This suggests that the composition of global governance has metamorphosed from a single to a group hegemony. As Snidal (1985, p. 603) notes, “the decline in the importance of the United States in the global economy has been balanced by the rising importance of Japan and West Germany.” The move to group hegemony may have helped the U.S. to maintain its prominent global position rather than suffer the fate of past hegemons. The question of concern, therefore, is not whether the U.S. remains the sole hegemon, but how trade and monetary regimes and thus economic stability are maintained.

Both Keohane (1984) and Snidal (1985a), in standard liberal institutionalist fashion, provide functional explanations of why regimes persist beyond American hegemony: they facilitate much needed cooperation among countries. The institutional framework for cooperation is already in place and therefore it is less expensive to maintain regimes than to begin anew. This notion of cooperation is premised on the concept of “power size” and collective action. The power size refers to a country’s interest in and capacity for providing goods (Snidal, 1985a, p. 597). As the hegemon declines, other states increase in size. In this situation, the hegemon will not be willing, nor able, to provide goods by itself. Secondary powers realize their cooperation is essential in order to maintain regimes. Collective action is increasingly likely to occur as the hegemon declines since no one state can provide goods by itself but all have an interest in their continued provision (Snidal, 1985a).

Building on this functional explanation, scholars have turned then-attention to how rational egoistic states cooperate, given the anarchical nature of the international system (Axelrod and Keohane, 1986; Oye, 1986). They identify three factors that promote cooperation under anarchy. The first factor is ‘mutuality of interest.’ The story of the stag hunt illustrates how individuals may cooperate to realize mutual interests (Oye, 1986, p. 8). In Rousseau’s story, if the hunters cooperate they can trap the stag and eat well. The stag will escape, however, if one person defects to hunt rabbit, that is, if one pursues individual self-interests instead of the collective good. In this case, the rabbit hunter will eat lightly and the rest will go hungry. Each person may be tempted to hunt rabbit rather than taking the chance of going hungry, yet all prefer stag to rabbit. In international relations, actors cooperate to maintain economic global stability. When the major players erect trade barriers or restrict the flow of transnational capital it is analogous to them hunting for rabbit. Each is pursuing individual rather than universal interests. The result is economic instability. For example, in the 1930s, national protectionism resulted in global economic disaster as each country individually and competitively raised its tariffs. If states pursue universal policies, they may realize their mutual interest of a stable, liberal economic order.

Oye (1986) refers to the second factor necessary to promote cooperation as “the shadow of the future.” This means that an expectation of future interaction increases the likelihood of cooperation among egoists. The incentive to cooperate is strong not only because they prefer stag to rabbit, but also because ongoing, or “iterated,” interactions reduce uncertainty and the temptation to defect. International actors expect to interact perpetually with others. They also know that their actions will probably be reciprocated, that is, if they erect barriers others will do likewise in the future, a tit-for-tat strategy. Axelrod (1984) found in a computer prisoner’s dilemma tournament that tit-for-tat, proposed by Anatol Rapoport, was the winning strategy. In an iterated prisoner’s dilemma situation, countries may cooperate to achieve mutual gains. They may also exploit one another or forgo cooperation. The shadow of the future increases the likelihood of cooperation based on continual interaction and reciprocity.

The third factor concerns the effect of the number of actors on cooperation (Olson, 1965; Keohane, 1984, chapter 6; Oye, 1986). Oye (1986, pp. 18–20) argues that as the number of players increases, the likelihood of cooperation lessens for three reasons. First, it is much more difficult to identify and coordinate policies to realize mutual interests when there are more players. As Oye (1986, p. 19) states it, “As the number of players increases, transactions and information costs rise.” Second, it is hard to detect defectors and control the players as their numbers increase. Third, if defectors are identified, who should bear the responsibility and cost of sanctioning them? However, Oye (1986, p. 20) asserts that regime creation can rectify the problems of large numbers. “First, conventions provide rules of thumb that can diminish transaction and information costs. Second, collective enforcement mechanisms both decrease the likelihood of autonomous defection and permit selective punishment of violators of norms.” This is consistent with Keohane’s (1984, p. 88) proposal that international regimes help establish patterns of legal liability, provide information that would otherw...

Table of contents

• Cover
• Half Title
• Title
• Copyright
• Contents
• List of Tables
• List of Figures
• Preface
• List of Abbreviations
• 1 Introduction: Group Hegemony
• 2 The Group Hegemon
• 3 Too Many CEOs in the Boardroom?
• 4 Maintaining the Status Quo
• 5 Integration and the Gap
• 6 The Downfall of Group Hegemony
• Appendix A
• References
• Index