The Politics of International Economic Relations

Jeffrey A. Hart, Joan Edelman Spero

• Publisher: Routledge
• Year: 2013
• Print ISBN: 9781138146211
• eBook ISBN: 9781136218521
• Topic: Politics & International Relations
• Subtopic: Politics
• Index: Politics & International Relations

The first and definitive book of its kind, Joan Spero's The Politics of International Economic Relations has been fully updated to reflect the sweeping changes in the international arena. With the expertise of co-author Jeffrey Hart, the fifth edition strengthens the coverage of political and economic relations since the end of the Cold War, economic polarization in developing nations and the roots of economic decline in centrally planned economies. A new chapter on industrial policy and competitiveness debates further illustrates the changing dynamics of International Political Economy. Ideal as a supplement to the International Relations course or as the core text in International Political Economy, Spero and Hart's The Politics of International Economic Relations continues to give students the breadth and depth of scholarship needed to understand the politics of world economy.

1

The Management of International Economic Relations since World War II

During and after World War II, governments developed and enforced a set of rules, institutions, and procedures to regulate important aspects of international economic interaction. For nearly two decades, this order, known as the Bretton Woods Regime, was effective in controlling conflict and in achieving the common goals of the states that had created it. There were three political bases for the Bretton Woods system: (1) the concentration of power in a small number of states, (2) the existence of a cluster of important interests shared by those states, and (3) the presence of a dominant power willing and able to assume a leadership role.¹

The concentration of both political and economic power in the developed countries of North America and Western Europe enabled them to dominate the Bretton Woods system. They faced no challenge from the Communist states of Eastern Europe and Asia, including the Soviet Union, which were isolated from the rest of the international economy in a separate international economic system. Although the less-developed countries (LDCs) were integrated into the world economy, they had no voice in management because of their political and economic weakness. Finally, Japan, weakened by the war and lacking the level of development and the political power of North America and Western Europe, remained subordinate and outside the management group for much of the Bretton Woods era. The concentration of power facilitated the economic system's management by confining the number of actors whose agreement was necessary to establish rules, institutions, and procedures and to carry out management within the agreed-upon system.

Management was also made easier by a high level of agreement among the powerful on the goals and means of the international economic system. The foundation of that agreement was a shared belief in capitalism and liberalism. The developed countries relied primarily on market mechanisms and private ownership.

They also agreed that the liberal economic system required governmental intervention. In the postwar era, government has assumed responsibility for the economic well-being of its citizens, and employment, stability, and growth have become important subjects of public policy. The welfare state grew out of the Great Depression, which created a popular demand for governmental intervention in the economy, and out of the theoretical contributions of the Keynesian school of economics, which prescribed governmental intervention to maintain adequate levels of employment.

For the international economy, the developed countries favored a liberal system, one that relied primarily on a free market with the minimum of barriers to the flow of private trade and capital. The experience of the 1930s, when proliferation of exchange controls and trade barriers led to economic disaster, remained fresh in the minds of public officials. Although they disagreed on the specific implementation of this liberal system, all agreed that an open system would maximize economic welfare.

Some also believed that a liberal international economic system would enhance the possibilities of peace, that a liberal international economic system would lead not only to economic prosperity and economic harmony but also to international peace.² One of those who saw such a security link was Cordell Hull, the U.S. secretary of state from 1933 to 1944. Hull argued that

unhampered trade dovetailed with peace; high tariffs, trade barriers, and unfair economic competition, with war … if we could get a freer flow of trade—freer in the sense of fewer discriminations and obstructions—so that one country would not be deadly jealous of another and the living standards of all countries might rise, thereby eliminating the economic dissatisfaction that breeds war, we might have a reasonable chance of lasting peace.³

A belief in governmental intervention and cooperation at the international level also evolved from the experience of the 1930s. The failure to control beggar-thy-neighbor policies, such as high tariffs and competitive devaluations, contributed to economic breakdown, domestic political instability, and international war. Harry D. White, a major architect of the Bretton Woods system, summarized the lesson that was learned:

The absence of a high degree of economic collaboration among the leading nations will … inevitably result in economic warfare that will be but the prelude and instigator of military warfare on an even vaster scale.⁴

To ensure economic stability and political peace, states agreed to cooperate to regulate the international economic system.

The common interest in economic cooperation was enhanced by the outbreak of the Cold War at the end of the 1940s. The economic weakness of the West, it was felt, would make it vulnerable to internal Communist threats and external pressure from the Soviet Union. Economic cooperation became necessary not only to rebuild Western economies and to ensure their continuing vitality but also to provide for their political and military security. In addition, the perceived Communist military threat led the developed countries to subordinate their economic conflict to their common security interests.

The developed market economies also agreed on the nature of international economic management, which was to be designed to create and maintain a liberal system. It would require the establishment of an effective international monetary system and the reduction of barriers to trade and capital flows. With these barriers removed and a stable monetary system in place, states would have a favorable environment for ensuring national stability and growth. The state, not the international system, bore the main responsibility for national stability and growth. Thus the members of the system shared a very limited conception of international economic management: regulation of the liberal system by removing barriers to trade and capital flows and creating a stable monetary system.

Finally, international management relied on the dominant power to lead the system. As the world's foremost economic and political power, the United States was clearly in a position to assume that responsibility of leadership. The U.S. economy, undamaged by war and with its large market, great productive capability, financial facilities, and strong currency, was the dominant world economy. The ability to support a large military force plus the possession of an atomic weapon made the United States the world's strongest military power and the leader of the Western alliance. The European states, with their economies in disarray owing to the war, their production and markets divided by national boundaries, and their armies dismantled or weakened by the war, were not in a position to assume the leadership role. Japan, defeated and destroyed, was at that time not even considered part of the management system.

The United States was both able and willing to assume the leadership role. U.S. policymakers had learned an important lesson from the interwar period. The failure of U.S. leadership and the country's withdrawal into isolationism after World War I were viewed as major factors in the collapse of the economic system and of the peace. U.S. policymakers believed that after World War II the United States could no longer isolate itself. As the strongest power in the postwar world, the United States would have to assume primary responsibility for establishing political and economic order. With the outbreak of the Cold War, yet another dimension was added to the need for American leadership. Without such leadership, it was believed, the economic weakness in Europe and Japan would lead to Communist political victories.

Furthermore, the Europeans and the Japanese—economically exhausted by the war—actively encouraged this U.S. leadership role. They needed American assistance to rebuild their domestic production and to finance their international trade. The political implications of U.S. leadership, therefore, were viewed as positive, because it was felt that U.S. economic assistance would alleviate domestic economic and political problems and encourage international stability. What the Europeans feared was not U.S. domination but U.S. isolation: the history of the late entry into the two world wars by the United States was fresh in their minds.

Throughout the Bretton Woods period, the United States mobilized the other developed countries for management and, in some cases, managed the system alone. The United States acted as the world's central banker, provided the major initiatives in international trade negotiations, and dominated international production.

This coincidence of three favorable political conditions—the concentration of power, the cluster of shared interests, and the leadership of the United States—provided the political capability equal to the tasks of managing the international economy. It enabled Europe and Japan to recover from the devastation of the war and established a stable monetary system and a more open trade and financial system that led to a period of unparalleled economic growth.

By the 1970s, however, the Bretton Woods system was in disarray, and the management of the international economy was gravely threatened. Changes in power, leadership, and the consensus on a liberal, limited system undermined political management.

Although the developed countries remained the dominant political and economic powers, states outside the group challenged their right to manage the system. The less-developed countries sought to increase their access to the management and, thus, to the rewards of the international economic system. The Soviet Union and the countries of Eastern Europe also sought greater participation in the international economy. That quest intensified with the breakup of the Soviet system beginning in the late 1980s.

More importantly, power shifted within the group of advanced industrial nations. In the 1960s, Europe experienced a period of great economic growth and dynamism in international trade. Six European countries had united in 1957 to form the European Economic Community, an economic bloc rivaling the U.S. economy and a potential political force. The six countries became fifteen by 1995 and the European Economic Community has now evolved into the European Union (EU).

Japan's economic development was even more spectacular. In the 1960s, Japan became a major world economic power and joined the developed countries' condominium. By the 1990s, Japan was a powerful economic competitor to both the United States and Europe.

In the 1970s, a weakened dollar and a weakening balance of trade undermined U.S. international economic power. In the early 1980s, a strong dollar paradoxically undermined U.S. economic power by hurting the ability of U.S. firms to compete in export markets. Even though U.S. economic growth was a bit higher in the early 1980s than it had been in the 1970s, and both unemployment and inflation stayed low, the United States suffered from “twin deficits” in both government spending and the balance of payments. The debt crisis of the 1980s and the problems of the United States in continuing to finance its global activities led to a series of power-sharing and burden-sharing arrangements with Europe and Japan.

Europe and Japan became more and more dissatisfied with the prerogatives that leadership gave the United States. The clearest example of this was the growing European and Japanese criticism of the dollar system and U.S. payments deficits. The United States, for its part, was increasingly dissatisfied with the costs of leadership. Whereas the Europeans and Japanese criticized U.S. deficits, the United States criticized their refusal to upwardly revalue their currencies against the dollar. As domestic economic problems emerged from the late 1960s onward, U.S. leaders increasingly began to feel that the costs of economic leadership outweighed its benefits.

The relaxation of security tensions in the early 1970s reinforced the changing attitudes toward American leadership, especially in Europe but also, to a lesser degree, in Japan. Detente and the lessening of the perceived security threat weakened the security argument for Western economic cooperation and U.S. leadership. Europe and Japan were no longer willing to accept U.S. dominance for security reasons, and the United States was no longer willing to bear the economic costs of leadership for reasons of security. By the 1990s, the end of the Cold War further undermined the security imperative for economic cooperation.

Though U.S. dominance was increasingly unsatisfactory for the United States as well as for Europe and Japan, no new leader emerged to fulfill that role. Europe, although economically united in a common market, lacked the political unity necessary to lead the system. West Germany and Japan, the two strongest economic powers after the United States, were unable to manage the system by themselves and, in any case, were kept from leadership by the memories of World War II.

Finally, by the 1970s, the agreement on a liberal and limited system, which was the basis of Bretton Woods, had weakened. The most vociferous dissenters from the liberal vision of international management were the less-developed countries. In their view, the open monetary, trade, and financial system perpetuated their underdevelopment and subordination to the developed countries. They sought to make that development a primary goal and responsibility of the system.

For many in the developed countries as well, liberalism was no longer an adequate goal of management. The challenge to liberalism in the developed countries grew out of its very success. The reduction of barriers to trade and capital enabled an expansion in international economic interaction among the developed market economies: larger international capital flows, the growth of international trade, and the development of international systems of production. As a result, national economies became more interdependent and more sensitive to economic policy and events outside the national economy. The problem was heightened because this sensitivity grew at a time when states were more than ever expected to ensure domestic economic well-being. Because of the influence of external events, states found it increasingly difficult to manage their national economies.

Interdependence led to two reactions and two different challenges to liberalism. One reaction was to erect new barriers to limit economic interaction and, with it, interdependence. An open international system, in the view of many, no longer maximized economic welfare and most certainly undermined national sovereignty and autonomy. Some argued that liberalism was no longer an adequate guide for policy in an increasingly tariff-free world economy, where non-tariff barriers (NTBs) are deeply embedded in national economic policy and economic behavior is the main impediment to trade. Pressures grew for protetion and managed trade, and efforts to strengthen regional groupings, such as the EU and the North American Free Trade Agreement (NAFTA), grew. These regional groupings were not protectionist, although there were temptations to erect new barriers to extra-regional trade and investment flows while reducing the internal ones. By the 1990s it was clear that the most important regional groups had resisted those temptations. The revival of regional integration efforts in the 1980s and 1990s reinforced—rather than undermining—the liberal world economic order.

Another reaction was to go beyond liberalism, beyond the idea of a limited management to new forms of international economic cooperation that would manage interdependence. An open system, according to this viewpoint, maximized welfare but required, in turn, new forms of international management that would assume responsibilities and prerogatives formerly undertaken by the state. These views led to efforts to establish a regular series of international economic summits and attempts (mostly unsuccessful) to coordinate national macroeco-nomic policies. In the 1980s,...

Table of contents

• Cover
• Half Title
• Full Title
• Copyright
• Dedication
• Contents
• Preface
• About the Authors
• Part One An Overview
• Part Two The Western System
• Part Three The North-South System
• Part Four The End of the Cold War and Its Consequences for the World Economy
• Conclusion: Globalization and the New World Order
• Glossary
• Acronyms
• Selected Bibliography
• Index