Financial Globalization and

International Trade
The classical liberal political economy of
England and Scotland:

 In the long run, it is beneficial to all if markets are

allowed to operate freely with each other.
Why is the market good?

 As the most efficient means of organizing human

production and exchange (an ‘invisible hand’ guiding
and coordinating economic activity).
Some of the advantages of international
markets over national markets:

 trade across national borders, which in turn generates

wealth and brings about prosperity;

 opportunities for economic co-operation that brings about

interdependence among states;

 International capital markets, allocate money more

efficiently than local ones.
The argument in favor of free markets
speaks:
 against protectionism, which, from a liberal perspective,
is a consequence of states acting according to short-
sighted and perverse conceptions of the ‘national
interest’.

 against mercantilism (the dominant trade practice at in

the early 1800s).
Two important limitations of markets:

 Built-in inequality of participants.

 Periods of irrational behavior and speculative excess

(market inefficiencies particularly in financial
markets).
The great depression: led to the economic
collapse of 1929-1934:
There are important similarities with the current
crisis:

 The banking crises so crippled credit markets that lending

virtually stopped.
 Depositors would not keep money in banks fearing that
banks would close. So a run on the banks developed at the
first sign of difficulties.
The US federal government dramatically
increased its role during the New Deal:
 It imposed significant controls on trade.

 There was a decreased reliance on markets and more on

state regulation and state-induced consumption (large public
projects, etc.)

 Regulated economy.

 Demand-side economics (associated with British economist

John Maynard Keynes)
Markets are imperfect
 International economic order is imperfect.
 All markets operate within a political framework.
 To the extent to which international power structures are
supportive of global markets, global markets are likely to be
sustained.
 But international power structures are fragile and prone to
instability, which often undermines the stability of markets.
Summary from the last time:
Markets are efficient but need some regulation because of
inherent limitations. How much regulation is subject to political
debate.

Stable currency values are necessary in order to have trade.

Political arrangement to underline a stable international monetary

system (corresponding to the political structures of power).

There were two such important political arrangements over the

last 150 years: the gold standard and the Breton Wood system.
In order to have international trade you need
to have stable monetary relations:

 The Gold standard (the period of classical liberalism,

the first attempt to expand international trade;
roughly between 1860s and 1914) Created a system
of fixed exchange rates (and helped both investment
and trade).
The Bretton Woods System after WW2
 created the IMF, the World and the GATT (the set or
rules, norms and values);

 system created the gold-dollar regime (fixed

exchange rate system).
International Monetary Fund
 Its primary role was to prevent the global economic crisis that engulfed
the world during and after the Great Depression of the 1930s:

 1. Monitor a new system for valuing national currencies, the dollar-gold

standard.
 2. Make short-term loans to countries experiencing balance-of-payments
problems;
 3. Compile an annual report on each member country's economy.
Originally, the IMF was:
 1. based on a recognition that markets often did not work
well – that they could result in massive unemployment and
might fail to make needed funds available.

 2. founded on the belief that there is a need for international

pressure on countries to have more economic policies that
promote expansion.
The triumph of the Keynesian (“demand-
side economics)…

 over the laissez faire economics (both

domestically and internationally).
IMF:
 1. Monitor a new system for valuing national
currencies, the dollar-gold standard.

 2. Make short-term loans to countries experiencing

balance-of-payments problems;

 3. Compile an annual report on each member

country's economy.
International monetary relations stabilized,
international trade was liberalized:

 The liberalization of world trade was the most important

achievement of the Bretton Woods system.

 After six months of negotiations, the original GATT members

signed over a 100 agreements, affecting more than 45
thousand tariffs that covered about half of world trade.

 This was a shift in the direction of global liberalization of

trade.
The Bretton Woods system delivered the
goods:
economic growth,
 low unemployment (Unemployment averaged just 3 percent
in the main OECD countries, compared to 5 percent during
the gold standard and 8 percent in the interwar years).
 stable prices.
 relatively free trade,
 stable currency values,
 and high levels of international investment (but mostly across
the Atlantic).
Postwar (1950-1973) economic growth was
extraordinary everywhere:

 The advanced capitalist nations as a whole grew three times

as fast as in the interwar years and twice as fast as before
World War One.

 In the glory years of classical liberalism before 1914 world

trade volume doubled every 20 to 25 years.

 After 1950 world trade volume doubled every 10 years.

This was a political arrangement.
 It was a compromise dictated by the needs of the day.
 Back then the US was dominant and there was a common
threat around which to unite. (Even with those conditions, it
took the US almost four full years from the end of World War
II until Marshall Plan money really started making its way into
Europe).
 It took a depression, the Second World War, and the
beginning of the Cold War to motivate real rather than
symbolic actions concerning the creation of a functioning
international community, at least the western branch of such
a community.
Some examples of the political
arrangements involved:
 In monetary relations, European countries tightly controlled
their currencies, strictly limiting the degree to which private
citizens could convert national money into gold or dollars.

 The US removed most of its trade barriers but accepted

European and Japanese protection.

 The US provided significant funds through the Marshal plan.

Post WW2 alternative models of economic
development:

 1. Import Substitution Industrialization (ISI): government

involvement (like that in W. Europe and North America in the
19th century) relied on trade barriers to stimulate national
industry -- in response to the first limitation of free markets,
namely, inequality of participants)

 2. More radical: state intervention but also redistribution of

wealth and virtual elimination of private ownership -- largely
addressing the second limitation of free markets, excesses in
financial markets).
Two trends, undermined the Bretton Woods
system:
 1. the restoration of international finance in the
course of the 1960s;

 2. the increasing pressure on the American dollar.

The push for the New Economic
International Order
 international economic regimes that would REGULATE
rather than entirely ABOLISH national interventions;

 greater access to OECD markets.

 for aid similar to what the US had given to Europe;

 higher prices for exports.

The end of the Breton Woods system:

 The Breton Woods System eventually broke down because

of a decline in the power and influence of the US.

 The end of the B-W system marked the end of the rules dear
to the US and opened up the room for the reconstruction of
the economic order.

 This decline led to the switch to a regime of floating

exchange rates from 1971.
What happened to alternative models?

1. The typical ISI economy went through periodic balance of

payments crises.The government restricted imports but
there was an ongoing need for imported goods. Spending
chronically outpaced government revenue, and these
budgets deficits were usually covered by printing money.

2. The communist world also faced increased difficulties:

Economic growth in the centrally planned economies slowed
continually over the late 1960s and early 1970s.
The push for the New Economic
International Order:
 The U.S. imagined postwar international economic institutions as
progressively abolishing national restrictions.
 States that had been wealthy before the War (colonial powers)
went along because the US gave the previously rich market states
the opportunity to reconstruct their economies (through the
Marshall Plan).
 Latin American and the independent and colonial areas in Asia
and Africa accepted the system, because they had no choice (and
were not politically organized at the time).
 Third World governments felt cheated out of the trade-induced
growth that the rich nations enjoyed in the 1950s and the1960s.
Group 77
 It pressed for changes in the rules of the international economic system to
make it easier for poor countries to participate).

 Third world countries such as Argentina, Brazil, India, and Lebanon argued for:
international economic regimes that would REGULATE rather than ABOLISH
national interventions;
greater access to OECD markets;
for aid similar to what the US had given to Europe.

 This set of proposals (put forth over the 1970s) came to be known as the New
International Economic Order (NIEO).
Things were getting complicated for the
US…

 On top of this political pressure from the Third World

countries…

 Individual oil producers and, later OPEC as a whole, jumped

on the industrial West’s growing oil dependence.

 The problem was political.

Two important material changes:

 First: the rise of the high-tech companies (Hewlett Packard,

Microsoft, ATT) increasingly interested in global markets.

 Second: there was growing popular concern about high

unemployment, slow growth, and inflation, which left voters
and others open to new policies.
The rise of “the supply-side” economics:

 All of these factors combined pushed a pendulum away from

Keynesian economics and towards freer markets.

 Milton Friedman and his followers: Their approach came to

be called "market fundamentalism," since it saw "freer"
markets as the solution for every economic problem.

 You jump-start the economy by privatizing (UK), cutting

taxes, and deregulating.
Reagan came into office in 1981 with
several objectives:
 Domestic level: antiinflationary policy.

 International level: the push in the direction of regional trade

agreements. The larger blocs: made exports cheaper to
produce, allowed firms to grow, made it easier to attract
foreign investment, and encouraged the consolidation of
banks and corporations. Regional integration (the EU,
NAFTA, Mercosur) in the 1990s became an important
component part of the overall process of economic
globalization.
The Reagan administration tried to:

 1. undermine the Third World alliance;

 2. undermine the UN system;
 3. privilege institutions that encourage market
discipline on Third World development policies.
During the 1990s the issue was decided in
favor of supporters of global integration.

 From an economic point of view N. America and W. Europe

defined the world’s course (1/10 of the population but half the
world economy and 2/3 of world trade).

 There was hardly universal agreement on free trade, but

official policy came to accept it as a matter of course.
The Washington consensus:

 the use of international financial institutions (the IMF

and the World bank) to promote free markets and the
supply side economics.
International financial institutions

 promoted economic liberalization in the developing

world (things such as trade and capital markets) with
a corresponding deregulation of all aspects of the
economy.
IMF (and the WB) structural adjustment
programs required governments to:
 1. eliminate uncompetitive nationalized industries;

 2. cut subsidies to consumers and eliminate services

(essential food-stuffs, steep reductions in spending
on health, education, and other social services).

 3. lift restrictions on capital movement.

The direction of financial globalization will
change in three important ways:
 First, Western finance is going to be regulated.

 Second, the balance between state and market is

going to change in other economic areas.

 Third, the US is likely to lose its economic clout and

intellectual authority.
International trade negotiations:
 The advanced industrial countries push the opening of the
markets in the developing countries to their industrial products.

 At the same time, they continue to keep their markets closed to

the products of the developing countries, such as textile and
agriculture.

 While they preach that developing countries should not

subsidize their industries, they continue to provide billions in
subsidies to their own farmers.
Official trade negotiations:
 The last time official trade negotiations were successful was in
1994 the year when the World Trade Organization was
created: 125 nations agreed to a significant drop in trade
barriers.

 In 1999, the attempt to launch a new round of trade

negotiations crashed in Seattle.

 In 2001, the trade ministers met again in Doha, Qatar, and

decided to initiate a new round that, they agreed, would be
concluded in four years.
Regionalism and Global Trade:
 The Asia-Pacific Economic Co-operation forum;
 The Association of South-East Asian Nations
 EU,
 NAFTA
 Mercosur
A surge in trade despite the failure of WTO
negotiations for two reasons:
 Technological innovations—from the Internet to
cargo containers—lowered the costs of trading.

 Political environment more tolerant of openness.