In 1997, the ‘Asian financial crisis’ started with the Thai Central Bank devaluing its currency (baht). During the crisis several Asian countries experienced economic depression. Although the Asian financial crisis represents an important development in the Global Political Economy (GPE), its causes were not immediately apparent. A number of interpretations of the events are available:
The brief example of the Asian financial crisis demonstrates that the same event can be analysed in different ways. Theories are used for a variety of purposes:
The main purpose of this book is to describe a number of theories to guide the reader in understanding the world. The development of the International Political Economy (IPE) is often presented as a debate between three contending schools of thought which will be subsequently introduced here.
The economic nationalist theories stress the importance of the interests of the state in understanding how international relations (IR) unfold. Central issue relates to protection of the national unit.
The emergence of this school of thought can be traced to Mercantilism period in the 15th century Europe. Mercantilists believed that there is a limited amount of wealth in the world and therefore each nation acts to secure their interests first by obstructing other states in achieving their goals. Two famous advocates of the theory were Alexander Hamilton (1791) and Fredrick List (1885).
The main actor in the global political economy is the state. This is based on two main assumptions. Firstly, inter-state system is anarchical and as a result it is every state’s duty to protect its own interests. Generally, economic community acts for the good of all of its members. Secondly, there is a recognised primacy of political over other aspects of social life. For instance, economic policy is designed to strengthen the state. Therefore, market relations and operations are perceived to have a secondary role because they are shaped by political power. The importance of the market-based actors (e.g. corporations) is subordinated to the state.
IPE is seen to be constituted by the actions of rational states; therefore, the nature of global economy reflects the interests of the dominant countries.
Within the IR theory, realism, with its focus on the primacy of the state, the anarchical nature of relations and inevitability of conflict, provides for a foundation for economic rationalist thought. The relations between states are characterised by unending conflict and pursuit of power.
The theory remains relevant today as countries continue to protect their markets from foreign competition even though they have committed themselves to free trade. In times of economic downturn, economic nationalism concerns become more prevalent. Such an approach has a damaging effect on the interests of all states because it reduces the possibility of growth through trade.
Notable theorist: Susan Strange, a British professor at London School of Economics and Warwick University. She viewed IPE as a method of understanding the world and focused on the relationship between markets and authority. Her textbook ‘States and Markets’ (1988) argued that in additional to relational power, power also resides in structures. She defined structural power as the ability of actors to shape the rules of the game in a particular sphere.
Liberals focus on either individual or on a wide range of actors from the state to the corporation interest groups. In their view, the state is not unitary but is a result of influences of a number of factors.
Liberals search out for conditions of cooperation instead of focusing on conflict. They believe in individuals’ ability to choose between attractive courses of action and the ability to negotiate their differences.
The Liberal theories emerged in the 18th and 19th century in Britain, alongside with the Industrial Revolution. Adam Smith (1776) is known for advocating for freeing up trade and creating larger national and international markets as method of generating wealth for everyone. David Ricardo (1817) has introduced as comparative advantage theory, demonstrating that all nations can benefit from free trade and cooperation. Today’s global economy is largely based on liberal principles: e.g. goals of free trade. However, liberal thought is not uniform, there are divergences between different theories.
For liberals, the starting point of analysis is about individuals who are perceived as key economic actors. They focus on the behaviour of individuals, firms and states. In addition, liberals view firms as sources of wealth. The state is viewed with caution and even hostility by many liberals because it brings political influences into economics; insertion of control of the markets is perceived to have damaging effects on the market participants through reducing the benefits and increasing the costs of participation.
For liberal theorists, the market is central to the economic life. While liberals acknowledge that market relations are not always optimal, they tend to argue against any form of intervention. The IPE is established by the pursuit of wealth. Globalization is viewed as reality and a positive force in achieving this goal. Keynesian influenced liberals or those of a reformist stance are more reserved about the benefits of globalization.
Liberal theorists view international relations and IPE as essentially cooperative; they focus on the positive outcomes because they perceive international cooperation as a source of prosperity and peace. According to liberals, economic nationalist policies lead to conflict.
Liberal neoclassical economics, who stress the importance of rational decision-makers in free markets, dominate the contemporary field of economics. However, the Great Financial Crisis in 2008 has stirred a debate among liberals about the importance of the government intervention as well as the role of the state in times of crises.
Notable theorist: Robert Keohane, a professor at Harvard, Stanford, Duke and Princeton Universities. His research developed a liberal institutionalist approach to IPE and world politics. Its basic idea is that institutions or sets of rules and norms can have a significant impact on state behaviour as long as they are bound by mutual interests.
Marxist theory emerged in the 19th century as a response to the liberalist view. The theory focuses on class and the interests of workers rather than the state interests. These critical theories stress the nature of oppression within and across societies and the struggle for justice waged by or on behalf of workers, women and environment.
The main actor in global political economy is perceived to be ‘class’. In this book, class is defined as arising from one’s position in the structure of production. Within Marxist theory, the firm is an instrument of exploitation. Marxists oppose the notion of individualism that is found in the liberal theory and built upon the economic nationalist perspectives’ collectivist approach.
Dominance and exploitation among and within classes is central to the Marxist theories of IPE. They perceive relations inherently exploitative. There are three main sources (tendencies of capitalism) of international economic relations’ instability:
A revision of Marxists theory, so-called 'dependency theory' suggests that poor states faced immense obstacles to development because they were vulnerable to economic exploitation from developed states. Underdevelopment in some parts of the world was caused by development in other parts. Globalisation was perceived as evil because it was just a new version of imperialism.
Critical writers view international economic relations as fundamentally conflictual (zero sum game).Two forms of conflict are prevalent: within the state, capitalists and workers have the competing interests and the state is the scene for these classes’ interests to clash; on a global scale, the conflict is often driven by the nationalism and the intervention of the state. Through the mechanism of imperialism, stronger states oppress weaker ones. International conflict is seen to be inevitable because of the drive for profit.
The collapse of Soviet Union and communism resulted in the diminishing power of Marxist states. However, the theory survived, and is relevant in a number of areas for analysis, especially of inequalities driven by capitalism and reoccurring crises.
Notable theorist: Robert Cox, who has developed a historical realist approach. He recognises that each historical era has its own institutions and understanding of them, therefore, the human behaviour is not universal, but changes over the time. At the centre of analysis is the organisation of production and social relations surrounding it. Class and class conflict allows for a greater understanding of the realities of world political economy.
The IPE study traces its roots back to the 1970s. Topics like the impact of TNCs, international finance and international trade have remained central to the IPE study over the years. Generally, the IPE themes have shifted from the analysis of interdependencies of countries to globalization.
Even though before 1900 universities did not always separate the studies of different social sciences fields, eventually each field has developed its own theoretical and methodological ways to answer a particular set of questions. The specialisation of social sciences was largely a result of the solidification of nation states in Western Europe. It is possible to analyse the same subject through the lens of different disciplines. IPE ultimately aims to bridge the gap between the studies of politics and economics, national and international.
Terms: IPE refers to the study of history of economic and political activity across state borders up until the last quarter of the 20th century. GPE, on the other hand, refers to the study of the environment from the last quarter of the 20th century until now.
The term ‘economics’ traditionally comes from the Greek oikonomia (management of one’s household). Neoclassical economists are mostly concerned with most efficient allocation of resources. The solution to this problem is said to be in the efficient operation of markets. Markets are places where individuals can exchange goods or services in a mutually beneficial manner. The idea is that consumers are informed individuals acting in self-interest; under this assumption, the market should be left alone to produce most efficient allocation of resources. Thus, neoclassical economists often view government intervention as undesired because it is inefficient. However, governments are needed to provide some public goods that facilitate market functioning.
Another approach to economics is 'Keynesian', which sees the government as crucial to the well-functioning economy. In this view, when businesses fail to invest for economic growth, the governments must play their part. In addition, institutional economics approach argues that markets are not natural but instead are born because of the mix of series of institutions (legal structure, financial system, social values). The main focus of institutional economists is the real world, instead of abstract economic models. Other approaches to economics include: Marxist, feminist and ecological perspective.
Political theory examines the most important philosophical and political texts to understand how societies should be governed. Comparative politics looks into how different countries are governed. Common characteristics of political science studies: (1) concerned with power or the ability of actors to achieve their goals; in the world of politics, decision-making is influenced by ideology, argument, institutions and the threat of violence; (2) most focus on institutions, for example, the state or the government.
The term ‘political economy’ has meant many different things over time. For instance, the work of the authors such as Adam Smith, Karl Marx or David Ricardo embodied the political economy scholarship. In contrast, the Oxford Handbook of Political Economy defines it as ‘the methodology of economics applied to the analysis of political behaviour and institutions’ (Weingast & Wittman, 2006, p.3). In this view, the unit of analysis is an individual, who operates by making rational decisions.
Within the mainstream view of political economy, it means the attempt to integrate politics and economics along the line of institutional economics; it can also mean the application of neoclassical economics assumptions and methods into the study of politics.
The origins of IR study can be traced back to the aftermath of World War 1. As part of the efforts to prevent another war, there was an attempt to increase understanding of the causes of war and the operation of the international system. Thus, IR tends to focus on study of foreign relations, war and peace, various states and the operation of international organisations. The focus of IR is the interactions between different states; however, not the workings of individual states, but their interaction within the international system.
The dominant IR theoretical approach has been realism. The theory is based on the notion that there is a lack of overarching power in the international system and that there is a continuous competition for power between states.
There are a number approaches to IR studies. The liberal and realist approaches are still important, other theoretical orientations including feminist (stressing the role of gender), Marxist (emphasizing class), constructivist and post-structural (emphasising the role of language and culture), postcolonial (focus on the legacy of imperialism) have also found their place.
Three issues complicate the methodology of IPE:
A case study is a detailed investigation of a specific event or problem. The event is studied to determine why it occurred in the first place.
Descriptive case studies merely describe a particular event. They can usefully serve as evidence. Comparative case studies focus on finding out situations when particular theories would hold true and when not. ‘Large n studies’ describe statistical investigations which use a database to find common features or causes across a large number of cases.
Case studies and multi-country statistical analysis have their advantages and disadvantages. The benefits of the study involve: useful means of generating theories, concepts, typologies and hypothesis; especially in circumstances where no statistical data is available, case study may serve as only means to investigate a particular phenomenon. The biggest drawback of the case study is the fact that it is difficult to tell how representative the case actually is. Is it the general trend or an exception to the rule?
The rational choice approach was founded in the US. It explains outcomes as a result of choices that individual actors (individuals, states) made. It operates on the assumption that individuals are utility maximizers that conduct cost-benefit analysis for their decisions.
Rational choice theories are important for generating a number of insights into the political behaviour, especially by addressing how aggregated individual choices can lead to surprising outcomes. One such insight relates to the fact that in systems of majority rule, it is not the majority’s policy preferences that end up being implemented. In addition, while the benefits of public policy tend to be highly concentrated, the costs are spread across the society.
Rational choice also highlighted the problem of collective action in the areas of public goods. Public goods are characterised as: non-rival (they can be enjoyed by more than one person without any reduction in the good) and non-excludable (people cannot be excluded from their consumption). For instance: water, clean air or a lighthouse. The problem associated with such goods is that no individual or entity has the incentive to invest in the public good or provide for it. People are incentivised to make use of the resources for own benefit, to everyone else’s detriment. Rational choice theory demonstrates how rationally acting individuals may lead to poor outcomes for society as a whole.
'Game theory' provides for an important study of the decision-making when actors are influenced by choices of others. It concerns a strategic interaction between market players. For example, the prisoner’s dilemma can help explain why countries keep protectionist measures even though free trade may appear more beneficial. In game theory, games are changed when the circumstances and the rules are changed over time.
The focus is on the formal and informal institutions in producing political outcomes. At its core is the emphasis on the importance of the rules, they focus on the broader rules of the game. The global economy is not conceived as a result of actions of individuals, but instead, the interaction of institutions that shape individual decisions. Institutionalism was particularly prominent in the discussions about capitalism. Institutionalists pointed to different political, social and economic factors that explain continuing variations between countries. Some have also incorporated the role of the finance for different systems. Many institutionalists come from a comparative politics background.
The method rests upon the idea that there is an intimate and reciprocal connection between human subjects and the social world; values and beliefs are seen to be fundamental for shaping and determining our reality, therefore, they must be examined. From this viewpoint, the GPE is a set of material conditions and practices, a set of normative statements about the world and an academic discipline. A constructivist approach to IPE encourages analysts to look for explanations about different outcomes in different places. The question that constructivist would ask: ‘What are the actor’s preferences, how have they been created and how might they change?’ The direct attention, therefore, is placed on the norms, identities, ideas and social understanding in influencing behaviour.
There are two main issues surrounding the different methods:
Relates to the attempt to consolidate a politics of international economics approach to IPE. In this approach, the boundaries and subject matter of the field are relatively clearly identified. The suitable theoretical approached and methodologies are agreed upon; the task is to build upon pre-existing work by solving a number of agreed upon problems. The approach has both benefits and costs. While the acceptance of the narrow range of questions of investigation and agreement on methodologies employed allows researchers to progress on a number of specialised issues, the vision may also be too narrow to allow for meaningful criticism. The field becomes a tool for problem-solving; however, it ignores many crucial questions.
Describes attempts to bring comparative and IPE together; or to connect IPE with classical political economy. There are two reasons why the interconnection of issues between IPE and comparative political economy are to be greater in the near future: (1) increased attention to regionalism brings out the importance of regional and domestic structure. The complexity of regionalism requires comparative analysis. (2) The renewed emphasis on public-private interface directs attention to developments at national, regional and global levels.
Describes an attempt to expand the subject matter of IPE. One strategy relates to pursuing a truly ‘global’ political economy. The second strategy relates to expanding the issues of inquiry.
Focus on expansion emerged because: (1) IPE’s empirical scope was perceived as too narrow as it only focused on a few core countries. (2) By privileging and universalizing the historical experiences of Western Europe, US, Japan, IPE scholars were shifting the concepts of bounded utility as applicable to the rest of the world. Generally, academics tend to agree that IPE has for the most part been limited in its concerns.
The importance of expansion of research can be implied because of two main reasons:
Some non-traditional issues, for instance, race, culture or leisure, may become more important in the IPE studies because:
In the authors’ view, at GPE’s core lie the issues of power and inequality in a global economy. The book pays particular attention to historical changes, structural-agency dynamics, integration of cognitive structures, political-economic interaction, dynamic institutionalism, salience and variety of domestic structures.
The IPE study traces its roots back to the 1970s. Topics like the impact of TNCs, international finance and international trade have remained central to the IPE study over the years. Generally, the IPE themes have shifted from the analysis of interdependencies of countries to globalization.
Even though before 1900 universities did not always separate the studies of different social sciences fields, eventually each field has developed its own theoretical and methodological ways to answer a particular set of questions. The specialisation of social sciences was largely a result of the solidification of nation states in Western Europe. It is possible to analyse the same subject through the lens of different disciplines. IPE ultimately aims to bridge the gap between the studies of politics and economics, national and international.
Terms: IPE refers to the study of history of economic and political activity across state borders up until the last quarter of the 20th century. GPE, on the other hand, refers to the study of the environment from the last quarter of the 20th century until now.
The full understanding of today’s global economy requires familiarity with the historical patterns and explanations. However, historical interpretations vary according to the times they are written in. Cultural approach explains history by arguing that the rich were wealthy because they had virtuous social, political and economic institutions. On the other side of the debate, global historical approach asserted that the rich are rich because they had a culture that supported their wealth and success.
This chapter introduces three major arguments: (1) regional political economies that were connected during the examined period varied greatly in terms of social, political and economic organization; (2) the heterogeneity created a variety of interactions from free exchange to open warfare and slavery; (3) these interactions would have long-lasting impact.
This part is dedicated to examining the period before there was European contact with the Americas (1400s). At this time, with few exceptions, economic activity was on a local level. However, intercontinental trade of luxury goods has already existed for thousands of years. At the heart of this trade are very diverse civilizations with distinct political economies. Janet Abu-Lughod (1989) is known for providing research on the world in this period.
According to Abu-Lughod, the Middle East acts as a gateway between the Mediterranean/European and the Eastern worlds. For almost 1000 years the Islamic world managed to protect itself from the European forces. While the religion of Islam was prevalent, there was a competition for political authority between different actors in the region. However, by early 1500s, the Ottoman Empire became the dominant authority.
The Mamlukes, followed by Ottomans, presided over the thriving economy. They developed a structured and prosperous trading relationship with Venetians. Outside Mediterranean, Arab traders also pursued commerce along the coast of East Africa, the Western coast of India and into South-east Asia.
In the 15th century, China had the most powerful and largest civilization. China produced luxury goods including silk and ceramics, it had the most developed cities and newest technology and advanced military forces. During this time, China was also undergoing some extensive changes. The Ming Dynasty (1368-1644) halted expeditions to the west and the seagoing fleet was decommissioned. There are several explanations for why the excursions have ended. One of them focuses on the fact that the leader of expeditions has lost the support of the emperors. Another one refers to the fact that Chinese already had a lot of innovative goods and did not need to invest time and money into travelling to other lands for goods. Finally, the centre of gravity in China was moved from the north to the internal development.
Like China, India was also perceived as a powerful country, rich with military and economic wealth. The coastal areas of India were quite autonomous and economic activity was conducted by a range of social and economic groups.
Reflecting on the Middle East, China and India, it is evident that it was difficult for maritime and trade interests to influence political power at the time.
Africa contained a large variety of political groups that were linked with each other via trading activity. The main characteristics of African political economy at the time: (1) There was a significant variation between different regions, including a range of different goods produced in particular areas. (2) Commercial activity has shifted as commercial centres rose and old ones declined. (3) Drought and famine were the forces that disrupted African economic activity and consistent development.
Two advanced civilizations existed in Americas at the time: Maya (The Andes in Peru and Bolivia region) and Aztecs (Mexico and Guatemala). The Native Americans faced great transportation difficulties. Most goods, therefore, were carried by foot. Water transport was also limited due to geographical situation of the civilizations. The exchange of goods was not primarily considered to be a trade, but a tribute (empires tended to demand tribute from weaker states). Under the Aztecs, the political relations were characterised by the use of force.
In the 14th and 15th centuries, the economic activity saw a huge development - southern and northern trade centres began to be linked together. The Italians have developed a strong trading activity and accumulated wealth by tapping into a lucrative trade in the Mediterranean. Simultaneously, a commercial network was developing in Northern Europe, with Bruges being coined as a second ‘Venice’. Although this economic activity led to increased prosperity in most parts of Europe, wealth was unequally divided because of imbalance in trade.
In this period, new forms of money and credit were developed in Europe. It is only in the last century that the value of money could be readily accepted by the public without intense scrutiny. A key advance in the financial systems is said to be the development of banking. There are three main types of banks:
The invention of credit was a milestone that facilitated the growth of European economic activity. Credit notes allowed person to buy now and pay later. Another significant development relates to beginning of companies with partners and shareholders.
In the 15th until 17th centuries, Europe began a transition from feudal forms of organization to new political structures to the eventual emergence of sovereign territorial states. The push came from the merchants seeking greater economic freedom to capitalize on growing long-distance trade. As the state was territorial, the authority was confined with a certain geographical area or jurisdiction. There were several consequences of the emergence of sovereign state:
This chapter explores the causes for the European expansion into other continents.
In the 15th century, the sailors from Portugal and Spain travelled through the Atlantic ocean and almost accidentally found the Americas. The clash between European and American civilizations has resulted in the latter being destroyed. It can mostly be explained by the fact that Europeans brought unfamiliar diseases including smallpox or measles.
European political and economic strategy at the time of the so-called ‘new world’ was based on imperialism and mercantilism. Americas were used as resources for European empires. After their conquest, the Spanish and Portuguese did not migrate to the Americas on the large scale, they relied on the labour in those countries for resources extraction. In North America, they also attempted to integrate natives into their culture.
European engagement with sub-Saharan Africa started with the Portuguese. Slavery marked the primary economic interaction in this period. Slavery was not novel to neither African nor European communities; therefore, slave trade, too, did not seem unusual. However, as European began the process of mining for gold and silver into the Americas, the scale of slave trade grew significantly. Africa became a source of slave labour. The activity was called ‘triangular trade’: Europeans manufactured various goods and exchanged them for African slaves, who then were sent to Americas to work in plantations. The fruits of their labour, and goods produced, were then sent to Europe and beyond.
On personal level, the effects of slave trade had horrific effects. The impact of slavery to African communities is more mixed, as some areas benefited from exchange with the Europeans and could strengthen their hands against interior rivals. In general, African suffered from slave trade, the political economy saw a rearrangement and millions of people were moved to a different continent.
In the 1490s, Vasco da Gama has reached India, a new route of wealth from Asia. However, interaction between Europeans and Asians was complex: Asian empires were often bigger, more productive and more densely populated than European. Europeans often faced defeat when attempted to fight Asian countries. However, the success that Europeans had was mainly due to the gun-bearing sailing ships. The British followed Portuguese and Dutch into the Indian Ocean and ultimately gained control over India. The British colonization of India was a huge source of wealth for Britain. However, they struggled to create a successful trading relationship with China.
The full understanding of today’s global economy requires familiarity with the historical patterns and explanations. However, historical interpretations vary according to the times they are written in. Cultural approach explains history by arguing that the rich were wealthy because they had virtuous social, political and economic institutions. On the other side of the debate, global historical approach asserted that the rich are rich because they had a culture that supported their wealth and success.
This chapter introduces three major arguments: (1) regional political economies that were connected during the examined period varied greatly in terms of social, political and economic organization; (2) the heterogeneity created a variety of interactions from free exchange to open warfare and slavery; (3) these interactions would have long-lasting impact.
This chapter will provide for an overview of the 19th and early 20th centuries. It will look into the development of the imperialist international economy and its destruction. A few observations about this period are relevant here:
Industrial Revolution refers to innovation in the application of machinery, introduction of new energy sources and reorganization of labour. The changes were first sparked in the textile industry and then spilled over into steel.
The British textile industry in the 1700s is examined first. The introduction of the mechanised labour force into production meant that the labour force could work with the machines more efficiently. As work in the factories was not well perceived, most of the labour force at the time would come from most exploitable segments of the society, including children and women. However, as the factory work progressed, more men entered into workforce.
The growth of factories led to an array of consequences in Britain. Some locations saw the creation of the metropolitan areas. The new way of life - the system - was characterised by three main features:
There was an international dimension to supply and demand. In terms of supply, the cotton came mostly from outside of Europe. On the demand side, Western states created foreign markets for their goods. By having competitive advantage, British managed to destroy Indian textile production.
In the second phase of Industrial Revolution, iron and coal power was developed; railway building was most vivid example of that. Railway introduction has also stimulated the re-emergence of the particular form of business enterprise - the corporation.
Britain was the most successful state in the Industrial Revolution and it was a result of three main factors: the growth of European knowledge and technology; the rise of liberal state and Britain’s unique position in the world’s economy. As the British industry was becoming more productive and competitive, it caused concern to other states that struggled to catch up.
Pax Britannica (1815-1914) is a term used to describe a particular international system, translating into ‘British peace.’ The period is significant because it was built on liberal principles and the influence of this period can even be seen today. Three arrangements that Britain attempted to make the basis for international system are the gold standard, free trade and balance of power.
Any economic activity must be facilitated by a recognized form of money. The international monetary system (IMS) is a mechanism that allows exchanging one currency to another. A monetary system must address three issues: the role of exchange rates, the nature of reserve assets and the control of capital movement. ‘The gold standard’ was created in the 19th century as a solution to exchange of currency and balance of payments issues. For the gold standard to work, three factors must be present: (1) countries are required to fix their currencies in relation to gold; (2) allowing a relatively free movement of gold across countries; the presence of London as a financial anchor was important to facilitate this movement; (3) currencies would be able to change value in relationship with each other while staying fixed to gold.
Two conditions were necessary for such systems to function smoothly:
In 1846, the Corn Law was repealed in Britain. The laws protected British aristocrats and farmers from imported corn. In this time, David Ricardo, a Member of Parliament, created a liberal theory of comparative advantage. He argued that by specializing in making goods that you are most suited to and engaging in free trade, you can benefit even if other people make better products than you do, because overall the resources will be used more efficiently. Free trade was seen as a universal good.
Under the balance of power system, the main goal was to prevent conflict from degenerating into a system-wide war. There are three characteristics of this system:
The notion of Pax Britannica helps to explain some features of the developing global political economy today. However, it tends to focus on inter-European affairs and fails to take into account the wave of European imperialism in Africa and Asia. The Pax Britannica approach also ignores the flaws that led to its demise as well as the fact that large-scale violence was one of the reasons of the growth of the international market.
The era of expanding European powers brought four key developments:
To understand the imperialism in the 19th century, two main explanations have been developed:
The first and second world wars marked the end of the imperialist and liberal orders. The First World War disrupted the trade and finance partners leaving European states weaker than ever before. Over this period, countries switched their trading partners; there was also a change in exports as part of the resources for production of domestic goods were switched to military production. This also affected the movement of capital across Europe. At this time, the international gold standard was abandoned and international financial dealings became more complicated and destabilizing.
The appalling destruction of the First World War led to discretisation of the international order. American president Woodrow Wilson with other victorious allies came up with a more liberal system of peace and security that rested on economic relations and international organization. At the heart of this system was the international organisation called the League of Nations, which was meant to foster the sense of international security and peace. The critics, including Carr, argued that such liberal system was utopian and peace was not a shared interest amongst many nations.
The Second World War had an even stronger impact on the world economy. Firstly, it shifted the balance of power from Europe to the US. At the end of the war, the US accounted for more than half of world’s manufacturing production. The US also dominated in international finance. Secondly, Europe saw the rise of the welfare states, which were supported by electoral that resisted fascist rule. Thirdly, the war resulted in a large destruction of property and infrastructure. Finally, the shift in relative power between Europe and the societies in its colonies.
The aftermath of the war in Western states was divided into three main phases:
After the First World War, countries attempted to re-establish liberal trading systems. However, they failed to take into account the changed circumstances on the international level. In the quest to revive their economic relations countries faced a number of problems:
The interwar period is an example of how the international order rests upon the balance of social forces across the states. ‘Double movement’ (term introduced by Polanyi 1957) describes the labour dynamic in the early 20th century. The first part of this movement involved the introduction of the liberal market system, which resulted in creation of labour positions with little social protections, some degree of free trade and the gold standard reintroduction. The second part describes the political reaction to the suffering that resulted from this liberal movement. The root of the problem of the liberal system was the fact that people were viewed as commodity - labour - and it was assumed that they would participate in lowering of their wages and income according to economic models. However, these adjustments have proven to be too brutal for many to cope with. There were a number of alternatives to the liberal system: (1) a form of communism in Russia; (2) fascism; (3) in liberal states themselves governments were pushed to taking a more active role in economy as well as taking more responsibility over citizens’ welfare. Such Keynesian policies suggested that when business lost its confidence in the economy and refused to invest, governments should take this role to ensure economic growth.
The US played a central role in re-establishment of the international financial system in the 1930s. In 1976, Krasner, one of the IR theorists, introduced a ‘hegemonic stability theory’, which argued that superpower - hegemonic power - was required to maintain an international liberal economic system. Arguably, following the Second World War, the US took upon itself the role of this hegemonic power in restoring and creating a liberal international economic system.
Industrial Revolution refers to innovation in the application of machinery, introduction of new energy sources and reorganization of labour. The changes were first sparked in the textile industry and then spilled over into steel.
Following the Second World War, the US and its allies created a new international system aimed at global security and economic development. Europe was divided into two camps, what spurred the Cold War. Soviet Russia was leading the Eastern Europe, while the US collaborated with Western states against Soviet Russia. The US funds helped with the reconstruction of Western Europe and Japan. On the military side, the North Atlantic Treaty Organisation (NATO) was set up for security purposes. The relatively stable confrontation between the US and the Soviet Russia had effects on other parts of the world. For instance, if the US supplied weapons to Israel, Saudi Arabia or Iran, the USSR supplied Syria, Egypt and Iraq. The impact of this competition was different across countries.
The US used its military and economic power to construct a set of institutions to manage world economy, which in turn reflected the interests of the US. Key features of this order were: multilateralism, liberalism and legalism. The key aim was to develop a system that had some liberal features, but did not have detrimental effects on national economic stability. Ruggie (1982) coined the term as ‘embedded liberalism’. It was committed to liberal international economy; however, it also was shaped by the domestic states that aimed to support own social purposes, such as employment. Three international institutions were set up: the International Monetary Fund (1944), the World Bank (1944) and the GATT.
In Europe, a shift in state relations also took place by the establishment of the European Economic Community (establishing Treaty of Rome 1957), which was a continuation of the European Coal and Steel Community (1951). The EEC has evolved to become the European Union which created strong political and economic ties between Member States.
In the beginning of 1970s, the northern states have moved to more neo-liberal policies.
In the communist state there was no private property. Instead, the resources were allocated through the state. The communist system began in Russia with the revolution in 1917. The ideology expanded to European states (Poland, Romania, East Germany) as well as shifted to other regions including China, Cuba, North Korea, Vietnam, Angola. Communist states were authoritarian meaning that political expression was suppressed.
Communist states achieved a lot of success; however, it also came with a huge human cost and ultimately its demise. The period in Soviet Russia saw great intensive growth, however, it fell short in other areas. For instance, while USSR was able to produce heavy industrial and basic goods, it did not catch up with the Western states in the area of consumer goods. In the 1990s, series of peaceful revolutions led to the collapse of the Soviet Union. Russia evolved into a capitalist state with the institutional form of democracy, with some authoritarian features present in its political culture.
The Chinese communist model was less successful than one of USSR. In 1979, the Chinese leaders recognized the need to open up its economies to the Western economies and special economic zones were created. Many areas of Chinese economy were transformed into capitalist forms.
The post-1945 period is characterised by decolonization. Its nature and pace varied across states. One of the main reasons for decolonisation was the Second World War. European states suffered losses in their military capacities and economy. This meant that holding on control of foreign states and imposing force became more difficult. In addition, there was an emergence of nationalist movements in the colonies. There was a strong impact of decolonisation felt across the globe, as many new states came into being shifting the balance in some international institutions like the UN General Assembly. However, most of these new states remained to large extent dependent on their former metropoles. The so-called ‘New International Economic Order’ has been established.
There are three main trends persistent in global economy after the Cold War era:
There was no winner in the Western competition of capitalists. Each model had its benefits and downsides: European system provided for a broadly based welfare, but the unemployment struggle was present too; in contrast, the US system had low levels of unemployment but citizens lacked access to welfare services.
The welfare capitalism of Western Europe and Anglo-Saxon liberal models were competing with other models. The emergence of BRIC countries (Brazil, Russia, India and China) created conditions for increased economic activity and political influence. For example, China enjoyed huge economic growth and had immense manufacturing power; however, the benefits were not equally dispersed across a large population.
In the advanced industrialised countries, there was a shift from a welfare state towards preparation of citizens and companies to succeed in an international competition. The phenomenon was named ‘competition state’. One feature of such a state is the focus on providing competitive environment, instead of supporting particular sectors in the state. The governments are also moving away from full employment or social programmes to programmes that aim to increase citizens’ skillset and therefore employability.
Two developments in the developing states are important for increasing global competition. Firstly, the Chinese government has opened up to Western countries by seeking a foreign trade and direct investment (FDI). Secondly, the debt crisis was a catalyser for countries to abandon the inward looking strategies and to turn to more liberal approaches to economic development. Crucially, the opening up of trade happened under different political regimes in various countries.
The system has also developed to incorporate greater off-shore regulation. Off-shore in this context refers to areas of the global economy where countries set up territorial and juridical enclaves characterised by less regulation. One such significant development example is tax havens. The new political jurisdiction provided market actors with greater economic flexibility. However, while some countries benefited greatly from off-shore regulation, others lost too.
Development of communication and information technologies (ICT) began in the 1970s with the invention of the computer chip (micro-processor). In 1977, the first mass-produced personal computer was created by Apple. Since the mid-1970s there was an acceleration of technological development.
The economic implications of technology development are not completely clear yet, however, it is certain that innovations played an instrumental role in globalisation. The information revolution facilitates increased productivity and creation of new economic sectors. On the other hand, new concerns were born those including ethical implications of genetic testing or human cloning as well as dangers of genetically modified food and plants.
Information Revolution also has strong impact on the social life, as elaborated by Castells (1996). He argues that ICT allows individuals to organise themselves in networks instead of hierarchies. Considering how influential these technologies and the Internet can be, it is not surprising that governments now attempt to also oversee its content.
The military service has also developed as a result of technological improvement. For example, through creating better surveillance and attack capabilities.
The United Nations was set up in 1945. The UN Security Council has influence over the international security structure and has a power to impose economic sanctions on states, which may affect global political economy. In addition, an array of UN specialised agencies promote collaboration and address specific issues. They have less power to directly influence economic structures on a global level.
International Economic Organisations provide for a structure where nations, companies and citizens are increasingly governed through international organisations. While in some cases the impact is relatively small (e.g. OECD may publish non-binding reports), other organisations have more power to affect global political economy directly (e.g. WTO may rule that a particular domestic regulation is not conforming with the law and must be changed).
Corporate and civic organisations have been active in facilitating international development. NGOs often facilitate provision of international aid, undertake advocacy roles for important causes.
The post-1945 period is characterised by decolonization. Its nature and pace varied across states. One of the main reasons for decolonisation was the Second World War. European states suffered losses in their military capacities and economy. This meant that holding on control of foreign states and imposing force became more difficult. In addition, there was an emergence of nationalist movements in the colonies. There was a strong impact of decolonisation felt across the globe, as many new states came into being shifting the balance in some international institutions like the UN General Assembly. However, most of these new states remained to large extent dependent on their former metropoles. The so-called ‘New International Economic Order’ has been established.
This chapter provides an overview of the international trade while focusing on the normative and material structures that organise the international trading system.
Trade is the exchange of one commodity to another. International trade occurs when exchange happens across the borders. Two issues are important in this regard: the existing barriers to trade (usually concerns political barriers) and the medium of exchange accepted for goods and services. In regards to the former, protectionism is a policy adopted by state - a type of trade restriction. While protectionism takes many forms, usually it is through imposing tariffs.
In regards to the latter, there are two main means of facilitating exchange - through barter (direct exchange of commodities) or money.
There is no agreement as to advantages and disadvantages that are incurred when countries pursue international trade activity. Liberal political economy stresses the benefits of free trade. The liberal study of free trade emerged in the 19th century. The main idea of liberal free trade is that each participating party wins - it’s a positive-sum view.
In the 19th century, Ricardo developed a theory of comparative advantage: if a country specialises in producing goods or services in which it is even a bit better than its competitors, it should do so and would end up being better off. The theory built upon Smith’s ‘absolute advantage’ theory (two countries could benefit if they specialized in the goods they are better at producing than their competitors and sold to each other).
In liberal view, countries would specialise in line with their comparative advantage; they would become more prosperous, stable and efficient. However, theory’s assumption that differences in labour productivity are the only determinants of comparative advantage is too limiting. Modern trade theory introduces other factors (Heckscher 1919 & Ohlin 1933 contributed to its development). Different relative factor endowments of countries should be considered as well. It is necessary to concentrate on natural advantages that each state has. The theory was further refined to account for the intra-firm and intra-industry trade.
In liberal view, protectionism is inefficient because it minimises competition thereby increasing monopoly power. There are two aspects to be derived from the gain: static and dynamic benefits. According to liberalists, the comparative advantage theory is relevant to all countries, including developing ones.
Mercantilist and neomercantilist proponents advocate for protectionist policies and pose the greatest critique to the liberalists. They believe that protectionist measures lead to greater domestic welfare. They pose two main arguments against free trade. Firstly, infant industry argument promotes temporary protection of new industry before it can get competitive on the international level also allowing building industry stability and economies of scale. The politically difficult point about infant industries is finding the right moment and conditions to discontinue the protectionist measures. Secondly, national security precedes concerns over free trade. Certain strategic industries, therefore, must be self-sufficient. Further arguments against free trade built upon the previous two: the strategic trade theory and idea that protectionist measures should be implemented to protect national culture in an increasingly globalised world.
Radical critique on free trade identified by authors:
Since the end of Second World War the trade has expanded at a greater pace than production, which is demonstrated by greater interconnectedness of the world economy and growing institutionalisation.
The growth of trade has been uneven and there have been periods of recession, however, overall the trend is positive. Economists generally agree that trade promotes growth. The relationship between trade and growth is two-fold: trade provides stimulus to the local economy, as the goods are cheaper than it would have been to produce them domestically; trade forces producers to manufacture goods according to global market quality standards, which also results in more efficient use of resources. However, while the theory of comparative advantage suggested that trade will grow fastest between unlike economies, post-war trade development demonstrated that opposite was true. The trade in services has been the fastest growing sector overall.
One of the features of trade growth has been intra-trade industry trade - the situation where trade occurs within the same industry, instead of different ones. While states exchanged similar products, product differentiation played an important role. This has been supported by infra-firm trade.
GAAT was important for shaping new forms of protectionism. 1947 GAAT articles provide for restrictions of trade under designated circumstances.
The liberal trade regime that was originally created reflected the US interests and was coined as ‘embedded liberalism’ (it mainly rests upon liberal principles, but allows for some derogation to support most important national goals). The trading regime is based on four main principles: non-discrimination, reciprocity, transparency and multilateralism.
In 1948, the ITO was set up as a framework for the post-war international trade system. However, it got a lot of national critique for not being liberal enough and the President Truman as well as other governments ultimately backed down on the agreement. Thus, the GAAT, established in 1947, became the global institutional focus. It provided for a code of rules, a dispute settlement mechanism and a forum for negotiations of trade. Three features of trade liberalisation are prominent in the GAAT period:
In 1995, WTO was has officially commenced as a successor of GAAT, originally aiming to reverse protectionism and foster trade liberalisation. While GAAT was in essence an international agreement between participating states, WTO has an international organisation status. The WTO has transformed the management of world trade in three main ways:
Although economic structures of developing countries are diverse, they have often identified common interests. A debate exists between those that assert that reform of trading arrangements will benefit developing countries and those that argue that trading system is inherently exploitative. In these debates, developing countries have attempted to define and promote some issues. Agricultural trade liberalisation has been one of the key concerns of developing countries, as they are still heavily reliant on export of agricultural goods. Developed countries have been reluctant to fully liberalise agricultural trade. Other relevant issues include intellectual property rights, their special status in trade negotiations (Special and Differential Treatment - S&D). In regards to S&D, while developing countries are given some concessions, they are generally expected to conform to general rules. The main goal of the WTO is to include developing countries in the system to the extent that S&D would become unnecessary.
The acceleration of RTAs use over the past two decades is in concurrence with the slow pace of multinational negotiations. The recent developments of RTAs include: Trans-Atlantic Trade Investment Partnership (TIIP) between the US and the EU, and negotiations on the Trans-Pacific Partnership (TPP). Regional economic organisations usually serve an array of aims including: liberalisation, economic conflict management, liberalisation of investment, domestic restructuring and political integration. Impact on global welfare is an important consideration in negotiations of RTAs. Although regionalism is present in most parts of the globe, specific regional arrangements vary in specific terms and aims. Some economists believe that increased regionalisation will undermine multilateral trading because it is inherently inefficient and discriminatory. Finally, there is an issue of developing countries, that are not parties to WTO, becoming marginalised and therefore cannot participate in the prominent regional trading areas.
The trade agreements on the international and regional level have influenced the domestic political economies, which was criticised by various segments of societies. Some argue that international institutions, while influential, are largely isolated from democratic control. Thus, the focus of the debate has been on the democratisation process and representative nature of multilateral trade agreements. Others believe that international trade agreements have detrimental effects on social policies, environmental degradation and labour standards. Trade organizations are seen to face legitimacy problem because they are seen to place values of liberalising economic activity or protecting private interests above other goals.
This chapter provides an overview of the international trade while focusing on the normative and material structures that organise the international trading system.
Nowadays many companies, in order to achieve economic benefits, have distributed their production processes over two or several countries. The global production system is a very complex system. It involves millions of workers, divided into several systems, both national and international.
One way to look at the global production system is to focus mainly on the role of the largest Transnational Corporations (TNCs); the TNC is one of the principal agents in the global production processes. It is estimated that 50% of global trade is done via TNCs. According to the Fortune Global 500, the combined revenue of these companies was 31.1 trillion dollar.
This chapter focusses on the main definitions on TNCs, the impact of TNCs on societies and the key issues TNCs regarding the costs and benefits for the world.
A Foreign Direct Investment (FDI) is when an investment is made outside of the home country of the company, but the control over the resources transferred remains with the investor in the home country. Foreign Indirect Investment refers to transferring only the financial resources between countries; the control over the resources is transferred from the seller to the buyer.
Before the Second World War, FDI played a minor role in the international global trade, after the Second World War (in the 50's and 60's) FDI was mainly used by the manufacturing sector, with as main player the US. The grow continued in the 80's and 90's, also in the Japanese and European markets, and reached its high in 2007. Due to the economic crisis, the FDI nowadays is somewhat unstable.
The book "Global Political Economy" chooses the term Transnational Corporation over the term "multinational" or "multinational corporation" because most TNC's are active in various countries; but all the main assets are owned by the nationals of one country. Unilever and Royal Dutch Shell are by the way some of the few notable exceptions for this.
A simple definition for a TNC is therefore a firm that owns and controls production facilities in two or more countries.
The discussions of transnational production are mainly dominated by two issues, the growth of the TNC and the impact of this growth on sovereign states. There are some main theories used in the study of IPE. These theories can be divided into liberal, structuralist and radical theories:
The first widely used theory was the product life cycle model, by Raymond Vernon (1966). This theory provides an explanation for the expansion of the US business overseas. Vernon stated that in the first stage, US firms were content to sell their products abroad. However, the importers begin to acquire the technology needed to start producing these goods domestically; for locally produced goods do not face transport costs. In order to protect their markets, the US firms start producing abroad. In the third stage, the foreign companies begin producing the product cheaper than the US companies and therefore start exporting to the US themselves. According to this theory, the main motivation for FDI arises from the desire to exploit technological comparative advantage and maintain market share.
A second liberal theory was developed by John Dunning. He developed the ownership, location and internationalisation model. A comprehensive theory focusing on the decision to invest abroad, with focus on ownership characteristics and the desirability of the foreign country.
In the structuralist theories, the emphasis on the decisions of firms in the liberal theories, shifted to emphasis on the major structural changes in the global economy. The main theory, developed by Strange, lists three structural changes that have led to the growth of TNCs:
Stephen Hymer had a more Marxist view on the growth of TNCs. He argued that the dominance of US business ventures abroad arose from the oligopolistic business structure. He also emphasises the uneven development of capital.
FDI provides five main positive direct effects on the host country:
FDI provides also four main negative direct effects:
FDI provides three positive indirect effects:
FDI provides three negative indirect effects:
Of course the overview above is not complete, also the negative and positive effects of course vary per case. The "truth" probably lies somewhere half-way.
There have been two major developments, firstly the globalisation of production and secondly, the change in the underlying principles of the organisation of production and the key features of the production systems:
Globalisation of production is simply put "from national production to global production". This development can be viewed from different perspectives:
Different steps of production processes were very often controlled by different firms in the past. Firms came to realise that by merging and therefore controlling different steps, costs could be reduced. Also, the control of these steps is in the company's hands, the company is no longer dependent on a second party. This merging is very often done on an international scale. Technological developments have made this easier.
"Fordist production" (named after Henry Ford) is based on two principles, mass production and mass consumption. In the 50s and 60s this Fordist principle was used widely to produce price competitive goods. In the 70s, however, product innovation became more and more important. Consumers started to demand innovative and qualitative goods, rather than price competitive goods. Therefore cheap production processes (low wages) became less important, the focus shifted to producing goods that could speedily response to demands in the market. In order to be able to do this, production processes have to be based in one region. Under this post-Fordism system, the demand for mass-produced goods is still a feature of markets, but the need for more innovative products that can be produced speedily is also a very important feature.
A global supply chain is the global network of organisations that cooperate to transform raw materials into finished goods and services for consumers (OECD, 2012). Key characteristics of global supply chains are outsourcing some of the firm's activities to third parties and off-shoring parts of their supply chain outside their home country. This can create benefits, such as reduced total costs, a reduction in the inventory they hold, increased productivity and access to new markets. Global supply chains also add risks, such as increased security risks and political risks. Global supply chains may be more profitable short-term than long-term.
It is very difficult to put the theoretical perspectives on the impact of TNCs on national societies in a practical perspective. One of the problems is that this impact is both country and firm dependent. In this paragraph the focus will be on what governments can do to increase the benefits for their society. This can be from a economic point of view (tax revenues, economic growth), but also from a political (sovereignty) and a cultural (traditional national culture protection) point of view. If the economy benefits, the political situation might not, and vice versa. This makes the situation sometimes even more complex.
Although the success of increasing the benefits of a TNC for the host country is dependent on more than the government policies, these policies can have a huge effect.
Developing countries that have been open to foreign investments seem to have industrialised at greater rates than countries that not have been open for foreign investments, this is supported by various figures and research. It is, however, vital that the state then also provides the proper infrastructure. However, the likelihood that a country actually benefits from the vast industrialisation, can be discussed. Very often high value added R&D activities remain in the home country, while basic component production takes place in the host country. The Third World more or less became an inexpensive source of consumer goods that are no longer viable to produce in First World nations. The home countries keep their know-how within their own borders and this does not help the host country to move forward.
A number of groups is concerned that this globalisation of production has led to a situation where the state loses some of its authority and the TNCs are gaining power. TNCs create wealth, and can therefore influence political systems. Nowadays, states are more and more bargaining with TNCs, in order to achieve economic growth.
In the 80s, most host countries were positive about TNCs settling in their countries. There several reasons for this. One is that the faith in the free market system was restoring during the mid 80s and some Asian countries, for example, are proof of FDI being successful for the host country.
A TNC can add value to a countries economy, which can create wealth. This however, can make a government (partly) dependent on the TNC. The TNC therefore gains power in the host country, which makes the government less sovereign. Firms, however, are usually not dependent on the government of just one country. They can choose to switch, for example to the country with the most profitable tax benefits. Next to that, some of the bigger TNCs have so many resources that compared to a lot of (Third World, but not exclusively) states, the state has little or no bargaining space towards the TNC.
One development that can be seen, starting in the mid 90s, is that states are more and more competing economically; the nature of states is changing. States are becoming more and more dependent on the economic management of other states.
Chapter 9 will tell you more about the organisation of transnational labour. State-firm interaction, however, also has influence on labour in the host nation. Very often TNCs not only seek to benefit from lower wages in other countries, they very often also seek to (economically) benefit from a non-unionised workforce; because many health and safety regulations do not apply. The state has role in protecting these workers. Doing this, however, can also damage the reputation of a company; one example the book describes is Nike.
Civil society actors call for regulation of international business, but due to state, private and corporate interests this is a very difficult discussion.
Taxes for example are very often evaded by TNCs due to using tax systems of different countries. There is a huge call for international surveillance and cooperation to regulate this. TNCs, however, (successfully) use lobbyists to obstruct this.
Therefore it could be stated that TNCs have joined state governments as authorities exercising power over the course of national and global economic development.
The spread of TNCs and the creation of global production processes has had a great effect on international economic and trade structures, and on national economic structures and government policies. TNCs have become an important power in the global political economy playing field, due to their large amount of capital owned and controlled.
Nowadays many companies, in order to achieve economic benefits, have distributed their production processes over two or several countries. The global production system is a very complex system. It involves millions of workers, divided into several systems, both national and international.
One way to look at the global production system is to focus mainly on the role of the largest Transnational Corporations (TNCs); the TNC is one of the principal agents in the global production processes. It is estimated that 50% of global trade is done via TNCs. According to the Fortune Global 500, the combined revenue of these companies was 31.1 trillion dollar.
This chapter focusses on the main definitions on TNCs, the impact of TNCs on societies and the key issues TNCs regarding the costs and benefits for the world.
This chapter will, for analytical reasons, look at the Global Financial System by focusing on the two most significant parts. This is the International Monetary System (IMS) on the one hand and the Global Credit System on the other.
The key issues examined in this chapter are the global credit crisis, the future of the US dollar, the European debt crisis and the corporate and individual tax abuse.
The IMS governs how one national currency is exchanged for another. This is needed in order to have successful cross border economic activities. Before World War II, the exchange rates were more or less fixed, nowadays the rates are floating. The post war IMS was negotiated by (mainly) the US and Great Britain in Bretton Woods in 1944. The core of this system is the US dollar, which was at the time fixed at a rate of 35 dollar to one ounce of gold; back then there was a huge faith in the US gold reserves. All other currencies were fixed to the US dollar, with provisions that allowed these currencies to adjust their rates if needed.
Also the International Monetary Fund (IMF) and the World Bank were funded in Bretton Woods. The IMF has to support the IMS, for example by loaning money to countries when they are unable to pay their imports.
This dilemma was described by economist Robert Triffin. He suggested that the world needs US dollars to participate in the international economy, but as US dollars flood out into the world through inter alia trade, the balance between dollars and gold would decay, until people will loose faith that the US would be able to honour its commitment to gold. Eventually there would be a time when there are more dollars outside the US than gold inside, and the US government would not be able to exchange all dollars for gold. The outflow of dollars is needed to provide money or liquidity to other parts of the world, but this would eventually undermine the US's attempts at keeping its currency fixed to gold. The rest of the world will begin to worry that the US would run out of gold and would start to cash in dollars for gold, to make sure that they secured full value for their currency. This eventually happened in 1971.
In 1945 Europe needed credit in order to rebuild. The US set up the Marshall plan, that transferred about 13 billion dollars in grants form the US to Europe. The US (mainly) did this in order to prevent a communist takeover in Europe, one of the conditions for receiving money from the Marshall plan was that the state had to commit to liberalising its economy and engaging in free trade.
This model stresses the tension between:
Mundell and Fleming, two economists, theorised in the 60s that states can not have an independent monetary policy, stable exchange rates and free flows of capital in and out the country at the same time. Two of the three can be achieved, but these two will always counteract the third aim. The state always has to choose which one has priority.
Due to the Triffin dilemma and impossibility of countries to fully voluntarily adjust their exchange rate, the system of fixed exchange rates was undermined in the late 60s.
President Nixon initiated the Nixon Shock: the dollar was no longer fixed to gold and he imposed a 10% import tax. The dollar devalued as it began to float against other currencies, this had to restore the competitiveness of the US economy.
The floating rates also made it possible for countries and individuals to sell and buy money (currencies) in order to make profit.
In 1979 the US central bank decided to raise domestic interest in order to slow down the economy and stop the price rises (inflation), which were going to fast at that point. This however did not work. The interest raise attracted investors into the dollar. Therefore the dollar price went up dramatically. This would cause investors to move to the Deutsche Mark (DM), which caused the DM to be out of line with the European currencies.
The European solution was to create the European Currency Unit, which led to the creation of the euro, overseen by the European Central Bank (ECB). The aim of the ECB is price stability, which means low inflation. One of the ways of ensuring this was the Stability and Growth Pact, which stipulated that governments must not run an annual budget deficit of more than 3% of GDP. However, in practice there were no consequences of violating this pact.
Another solution for protecting the national exchange rates can be dollarisation - which can be a confusing name, because it can be done with other currencies than the dollar. This entails that one country eliminates their national currency in favour of another currency. This can be done de facto (in fact) or de jure (in law). There are two main reasons for doing this. The first reason is that businesses may lose faith in the national currency and rather use another (safer) currency. The second is to establish dominant trade relations through the use of this currency. A risk of doing this is that the control over the currency is completely out of national hands.
Due to communicational innovations such as the internet, financial transactions can take place at high speed and with great volume. Another "recent" innovation is that businesses more and more use currencies other than the currency of the country where the business takes place, so called eurocurrency markets. For example, in the Cayman Islands, where the local currency is barely used. A reason for doing this can also be to evade (local) state regulation.
The liberalisation of financial activities in the 70s and 80s resulted in both increased competition and a series of financial crises. The use of futures became very common. A future is that a buyer buys a product at a specified time in the future for a price set today.
Two other large financial players entered the market in the 90s and 00s:
In financial crisis in the 80s, many countries tried to protect their economy by restricting import in order to protect their jobs. Developing countries, who had very often borrowed money during the 70s to industrialize their economies to profit from the world's economy uplift, faced the problem that they therefore had trouble exporting their goods, and therefore could not pay back these loans. Mexico, for example, announced in 1982 that they simply could not pay their debts any more.
The value of the economies of developing countries started spiralling down. This, in combination with other problems, such as the AIDS crisis in Africa, led to many domestic problems.
In order to recover the grip on the global economy the Financial Stability Forum (FSF) and the Group of twenty (G20) were established in 1999. The FSF focused on three issues, the offshore financial markets, cross-border capital flows and highly leveraged institutions (hedge funds). The G20 consists of the finance ministers of the G7 and 13 other large world economies. The G20 accounts for 85% of the world's GDP and 65% of the world's population.
Tobin Tax
Creditors and advanced industrialised countries, or institutions like the G7, very often believe that the problems of financial stability arise because of poor policies at the unit level. Therefore, efforts to increase stability are aimed at reforming the third world countries. Development groups and social democratic critics of the liberal financial system however suggest that capital mobility needs to be slowed down in order to achieve greater stability. One way to achieve this is the Tobin Tax, a tax on foreign exchange dealings. This discourages currency trading, but doesn't deter long term investments. Until now there has been no success in implementing this.
The main difference between the crisis in the 80s and 90s and the crisis that started in 2008, is that the 2008 crisis did not start in the developing countries, but in the US. The root for this crisis is that to many loans were granted to people who could not carry the weight of the risks of these loans.
Because of the low interests in the US during the 00s, many people started buying houses. Banks came up with systems in order to be able to grant more and more mortgages, the risks were sold to other parties and even people with no jobs or assets could get a mortgage for a house. During this time the prices of many houses doubled. During 2006 however, prices started to decline again and many mortgages ended up being more valuable than the houses it was placed upon. Many people had to therefore cut back on their expenses and the economy started spiralling down. Banks, also outside of the US, went bankrupt, and even countries such as Iceland went bankrupt.
There was no common response to this crisis, most countries were looking at the US for a fix, as the crisis started there. This failure to develop a common response can raise many questions regarding the future of the global financial system, such as: "can this failure to react undermine global growth and recovery?"
A reserve currency is the currency that is most used by (central) banks as a reserve asset and is the currency most often used in the provisions of loans or the purchase of products. Most countries nowadays use the US dollar as the main reserve currency. The oil prices, for example, are always stated in dollars. For the US this is beneficiary, because if, for example, the US dollar loses value, the US does not have to pay more for the imported asset (e.g. oil), because it is prices in US dollars; the EU however for example does.
Voices have been raised since the 2008 crisis, for example by China, to change the reserve currency. In order for this to be possible, a viable alternative needs to be in place, otherwise all firms and states owning dollars might suffer big losses. The Euro as a new reserve currency is an option, however the backbone of the Euro only is as strong as the willingness of the European states to defend this currency together. During the Greek crisis it became clear that this might be problematic. In the future a possible combination of currencies might become the "reserve currency".
Starting from 2010, two financial crisis started to emerge in Europe. On the one hand governments were having troubles paying back their loans, which on the other hand these debts were having a huge impact on the viability of the euro.
A couple of countries, especially Portugal, Spain, Greece, Ireland and Italy, were having huge debts and were unable to pay those back. In the case of Greece for example, the IMF and Germany, inter alia, decided to help Greece, but only if Greece agreed to huge cuts in government spending. This led the country into an economic depression. Many feared that Greece would leave the euro, in order to, via a devalued national currency, recover the national economy. Countries leaving the euro, causes the overall faith in the euro to decrease. The euro might not survive this.
Governments finance their programmes mainly relying on their tax incomes; programmes such as health care, defence and education. Lately there has been a huge development where TNCs use the international tax systems, in a very complicated and very often veiled way, in order to evade taxes. Although this is not illegal, it does violate the intent of the law. The home countries, nor most host countries, of these companies barely benefit.
In 2012 the "Luxembourg files" showed that many TNCs around the world, inter alia Ikea, Disney and Pepsi, are using various strategies to avoid paying (up to) billions worth of taxes. Oxfam calculated in 2009 that developing countries lose around 124 billion US dollars a year due to tax evasion. For comparison, annually developing countries receive around 103 billion US dollars of overseas aid.
The Tax Justice Network calculated that as of 2010 at least 21 trillion to 32 trillion US dollars of private financial wealth has been invested through "tax havens". For comparison, this is more than the size of the US and Japanese economies combined.
Because the tax systems are governed by sovereign states, it is a difficult problem to address. Most tax havens have no will to change their systems, they usually benefit from the competitive advantage of their tax systems.
Due to the openness of the financial markets a conflict of interests has arisen. On the one hand states want to be autonomous, on the other hand it is impossible to implement national policies without having at least some (if not vast) international convergences. Next to that, market and business leaders seem to have gained more and more power to (local) governments; states and societies usually have different priorities from investors. Therefore the need for international collaboration and financial regulations seems to be more pressing than ever.
This chapter will, for analytical reasons, look at the Global Financial System by focusing on the two most significant parts. This is the International Monetary System (IMS) on the one hand and the Global Credit System on the other.
The key issues examined in this chapter are the global credit crisis, the future of the US dollar, the European debt crisis and the corporate and individual tax abuse.
Different societies and economies have different ways of organising the division of labour. In general it could be stated that in cities there is a more specialised division of labour than on the country side. Farmers need to plant crops, need to fix their machinery and might even have to bake their own bread. Whereas many city employees do one specific job (for example a mail-man or accountant) and pay others to bake their bread.
Sometimes division of labour can also be based on ethnicity, gender or class. Chapter 10 focusses more on the gender aspect. Division of labour based on ethnicity happened for example to an extreme degree in South Africa during the apartheid. Nowadays, however, in many western countries there is still some selection in the division of labour taking place based on race or class.
International division of labour focusses on countries specialising in the production of particular products (or knowledge) for export. The chances of a specific person born in Guatamala working in the banana export industry are for example higher than a person born in the Netherlands working there.
Adam Smith was a liberal philosopher, born in Great Britain in 1723, who wrote the famous book "the Wealth of Nations". He stated: "the greatest improvement in the productive powers of labour, and the greater part of the skill, dexterity, and judgement with which it is anywhere directed or applied, seem to have been the effects of the division of labour.". What he means by that is, for example, that one person might spend all day to create one product, or if especially skilled, maybe 10 products, whereas when the production process is broken down into various tasks, done by a group of people, one person might create (pro rata) 100 products.
According to Smith this increase can be explained, because:
According to Smith the causes of the division of labour has three sources:
Smith also stated that the more advanced a society, the greater the division of labour is. States therefore should support the division of labour. One way of doing this is to enlarge the market, for example by engaging in international trade; which than leads to an international division of labour with specialised states.
The main critique is that the division of labour is not natural, but is shaped by power relations.
For example, in the 17th century, one could (very roughly generalised) state that the African continent was "specialised" in slaves, the Americas and Asia specialised in raw materials and Europe was specialised in manufactures and trade. This was not because of the process of dividing the different labour skills, nor was it natural, it was (mainly) due to power relations. Europe profited the most.
Also, states can use strategies to shape comparative advantage in the division of labour. For example, by acting as tax havens, or exploiting the knowledge base to shield national workers, or by suppressing the costs of labour.
Also, feminists note that there is a gender segregation. Women are usually paid less and rarely reach positions of power: the only woman in the G7 in 2017 was Merkel. Some tasks are more assigned to women than men and vice versa (for example, secretaries vs CEOs).
Fredrick Taylor (the Taylorism form of production is named after him) advocated the breaking down of production into individual tasks, same as Smith. This results in workers only having to do one or two simplified tasks, workers therefore increasingly de-skilled.
Henry Ford applied this Taylorism in his production processes of cars, to make the producing of cars more cheap. He also introduced the idea of paying his employees more than his average competitors. The idea behind this was that employees now also could afford a car; it opened the door to mass consumption, to support the mass production. The Western economies bloomed in the 50s and 60s due to this "Fordism".
Beginning in the 70s, more and more manufacturing took place in the Newly Industrialising Countries (NICs), such as Brazil and Taiwan. As described in Chapter 7, technological innovation made it possible to split up the manufacturing processes and locate these processes in different countries. Labour in the Western world became relatively expensive, due to Fordism.
Due to new technologies migration is also becoming more common, about 3% of the world's population lives in another country than the one of their birth (World Bank, 2011). Of course, there are other reasons for migrating than labour. These migrants play a vital role in the global economy, about 550 billion US dollars were transferred in 2015 from migrants to their home country. This has a positive effect on the economy of the home countries.
Migrants will probably become more and more important for the Western world. The birth rate is so low that the population in the Western countries is shrinking, next to that the population is rapidly ageing. It is estimated (in 2001, by World Guide) that in Europe about 47% of the population will be retired in 2025, if there are no new immigrants allowed.
China and India, the two most populous countries in the world, are becoming more and more important in the global economy.
The rise of China
China exports many goods to Western countries ("made in China"), and attracts a large share of FDI. Before 1978 the Chinese communist economy was mainly closed, as from 1978 the government started to, in a very controlled way, open its borders.
The potential market share that China represents gives the Chinese government leverage to negotiate with foreign TNCs. For example, Google agreed to censor websites for the Chinese government, in return for locating its search engine in China.
The large amount of foreign investment has lead to a mass migration in China, about 150 million people from rural areas moved to the cities for work. Many of these migrants are working in production factories and are being exploited; next to that the economic conditions on the country side are also suffering from this migration. China mainly is the "assembly plant" of Asia. Many other Asian countries have developed brands (Mitsubishi, Samsung, Asus and so on) and wealth, China so far has failed to do so. China seems to be undermining the global labour standards and is making it virtually impossible for other countries to compete.
The rise of India
China excels as an assembly plant, India however is excelling in the business services sector. This is mainly due to the fact that many people in India speak English at a very high level. Many companies outsource their costumer services, IT or administration services to India. Because of the internet and other communicational innovations, this is easily done.
In the Western world there is a growing concern for this outsourcing, many people are loosing their jobs because of it. Indian workers cost less, but it forces many Indian operators to work overnight, in order to answer calls in the Western daytimes, for very low wages. Also the rural areas in India are suffering from the mass migration to urban areas.
Concerns
Although these developments lifted many Chinese and Indian people out of poverty and allowed Western workers to purchase many products at cheaper prices, it also threatens social stability, as inequality is growing. Also there are some political concerns as China and India are gaining more power. China for example is becoming a military and economic rival of the US.
Bolstering labour rights in the global economy has proven to be extremely difficult.
Firms can be regulated either by states or by pressure in the market. An example is the US forbidding trade with Cuba in 1996, the US threatened corporations doing business with Cuba with fines or even prosecution. However, there aren't many economies in the world next to the US economy that can enforce these kind of rules. Next to that, it is not a joined, international, decision or a way to a global system with common rules.
The WTO tried to implement a worldwide convention providing for, among other things, freedom of association and the right to collective bargaining and affective abolition of child labour. This failed for three main reasons:
Another problem is that many other initiatives for regulating workers' rights, lack enforcement power. States might eventually agree to conventions, but might at the same time also not implement the rules.
There is a trend of consumers protesting against TNCs exploiting individuals, for example against sweatshop labour in the clothing industries. Campaigns against corporations exploiting workers are sometimes very successful. For example FIFA, who promised to pay way more attention to labour issues when it was revealed that many footballs are produced using child labour.
A difficulty is that due to the global supply chains that pass through (sometimes several) subcontractors, it is very difficult for the consumer to know the labour conditions in which everyday products are manufactured.
There are two ways of looking at the relationship between labour unrest and social order:
This paragraph focusses on three different "workers", US workers, workers in the NICs and farmers:
US workers
The US labour movements nowadays have a mainly oppositional position to the US government. One way of influencing the international division of labour by the US labour management, is their constant fight for better labour and environmental practices with TNCs.
Workers in the NICs
The Newly Industrialising Countries (NICs) in Asia faced a financial crisis in 1997. The Asian development model before that was that due to economic growth, of which the workers would also prosper, workers could be coerced to work in the production processes. Due to the crisis workers now faced possible unemployment in a not so wealthy state. This led to political chaos in several Asian countries, such as Indonesia. This social chaos had a direct effect on the global and regional stability.
Peasant farmers
The industrialisation led to changing peasant-based agricultural economies into capitalist agricultural economies. Nowadays many peasants are protesting against the dominant notions of liberalisation, consumption and environmental destruction. For example via the PGA, the Peoples' Global Action against free trade and the WTO.
Different societies and economies have different ways of organising the division of labour. In general it could be stated that in cities there is a more specialised division of labour than on the country side. Farmers need to plant crops, need to fix their machinery and might even have to bake their own bread. Whereas many city employees do one specific job (for example a mail-man or accountant) and pay others to bake their bread.
Sometimes division of labour can also be based on ethnicity, gender or class. Chapter 10 focusses more on the gender aspect. Division of labour based on ethnicity happened for example to an extreme degree in South Africa during the apartheid. Nowadays, however, in many western countries there is still some selection in the division of labour taking place based on race or class.
International division of labour focusses on countries specialising in the production of particular products (or knowledge) for export. The chances of a specific person born in Guatamala working in the banana export industry are for example higher than a person born in the Netherlands working there.
Gender is a social construction. As defined by Steans (1998, p.10): ‘gender refers not to what men and women are biologically, but to the ideological and material relations between them.’
It is important to examine gender because it allows us to infer the power axis in societies. Gender roles impact production, distribution and consumption activities both domestically and internationally. It has been found that gender bias may reduce economic growth.
The study of gender in IR began with the feminist work. There is no consensus over the real meaning of term feminism. Feminist scholars recognise that gender differences are also differences in power (in all aspects of social life). In addition, feminist research is committed to making a difference in existing power structures.
Research on gender in IPE has developed in two main categories. On the one hand, it has developed in the context of discussion between IR theory and feminist scholars as well as internal debates in IPE in the quest to advance its identity. On the other hand, the feminist scholarship in relation to the social sciences, economics and development studies played a significant part.
When feminism related concerns have emerged in IR, the dominant ideologies (liberalism, realism and Marxism) did not consider women or gender issues as such. One notable exception was the development of Marxist feminist analyses.
Generally, conventional IPE was restrictive and would engage with feminist scholarship in an exceptional circumstances. Critical approach to IPE was more open to engaging with the feminist views, however, studies have suggested that this engagement was still limited, signalling overall neglect of the IPE literature of gender relations.
The authors of the book attempt to unravel the relationship and impact that gender studies may provide for global economic processes. They do not assume that there is a single feminist position and restrict itself to non-exhaustive list of important discussions related to the topic. The importance of gender scholarship is illustrated by the fact that it:
In the post-1945 period, there was an observed increasing integration of women into employment trend. However, these days it has become more evident that the increasing women participation in labour does not mean that the gender inequality decreases. The service sector is now where most women are employed, instead of agriculture sector which was prevalent before. However, agriculture is still a dominant source of employment for women in developing world. The status of women’s work cannot be inferred merely from the statistics on workforce, but must be assessed together with the nature of other cultural and employment factors. The most persistent issues in all societies is the fact that women earn less than men on average. There have been various attempts to explain the phenomenon: women’s progress in moving up a career ladder is hindered by greater barriers than those posed to men; women are less capable to negotiate and lack bargaining power.
Women’s issues were specifically brought to the attention as an issue of the global public sphere because of the conscious action, instead of being an accident. The authors focused on the role of organisations in developing global norms.
In 1946, the UN created a Commission on the Status of Women; however, it was not effective until 1970s. Gender policy started to gain momentum in 1972, when the UN General Assembly accepted a resolution proclaiming the year 1975 as International Women’s Year. The period of 1974-1995 was particularly important for the development of international policy on gender issues and development of the new normative framework. For instance, in 1975, the UN proclaimed period of 1976-1985 as the UN Decade for Women, which played a fundamental part in raising awareness and creating focal points for activities within the UN system at the international level. The influential conferences were held at the time. The events were important for raising profile for women’s issues; each conference produced a report with established policy framework for further action. The documents were important for setting clear objectives and targets. While the impact of conferences was limited due to the limited participation, it set the ground for further work by civil societies.
Gender mainstreaming is a term used to describe the integration of gender perspectives with the goal of reducing gender inequality in all phases of decision-making. Three features of mainstreaming are prevalent today:
Globalization and commercialization of reproductive work is another issue that authors examined while categorizing it into three main categories:
Women have become an integral part of the global production through work at TNCs, especially EPZs. It can be argued that if gender can push globalization of capital, women play a role by providing low-cost capital, and are often exploited because of it. Because of a number of issues that women face in labour, some scholars advocated for ‘ungendering of labour’ (e.g. Peterson and Runyan, 1993, p.160).
Gender is a social construction. As defined by Steans (1998, p.10): ‘gender refers not to what men and women are biologically, but to the ideological and material relations between them.’
It is important to examine gender because it allows us to infer the power axis in societies. Gender roles impact production, distribution and consumption activities both domestically and internationally. It has been found that gender bias may reduce economic growth.
The study of gender in IR began with the feminist work. There is no consensus over the real meaning of term feminism. Feminist scholars recognise that gender differences are also differences in power (in all aspects of social life). In addition, feminist research is committed to making a difference in existing power structures.
The focus of this chapter mainly lies on the global pursuit of (economic) development and the pursuit of eradicating global inequality, in the period after the Second World War.
Defining the word "development" is very complicated. In the light of economic development, you can see it is a process, whereby a society transforms itself so that it achieves economic growth. Thomas and Reader define it as: "a multidimensional process involving change from a less to a more socially desirable state." You can therefore see development both as a process and a condition.
The Gross National Product (GNP) of a country can been used as a measure for economic growth. The GNP, however, says nothing about the cultural or social aspects of development. Moreover, for example the top 2% of the population can have great wealth, creating a high GNP, but the other 98% of the population may still live in grave poverty.
Seers published an important article about development, called "The Meaning of Development" in 1969. He stated that the definition of development should also include objectives such as employment, health and shelter. Development means decreasing poverty and improving welfare indicators such as health and social equity.
The UN developed the HDI for "ranking" countries on a development scale: the Human Development Index. This index takes into account social factors next to economic factors, for example life expectancy, education and income.
Developing countries, also called the "Third World", are not heterogeneous; each have their own strengths and problems. Which makes defining and ranking possibly even more complicated.
There are two main ways of looking at economic development in a country. One way focuses on the importance of internal or external factors for the failure of a country to achieve development. The second way focusses on the comparative roles of the state and the market in promoting development.
One example of an internal causation theory is the modernisation theory. This theory basically states that poor countries should adopt the same structures (socially and economically) as developed countries.
The dependency theory focusses on external causes to underdevelopment, mainly on exploitation of these underdeveloped countries by developed countries. They theorise that, in an international economic capitalist system, economically developed countries can't exist without underdeveloped countries also existing.
Both theories are of course too simple to explain the complicated international economic situation thoroughly. The relationship between the external and internal causes are not fixed and the circumstances change over time and are different from country to country. Economic development in a country is not solely an internal affair, nor is it completely dependent on external factors.
In the 60s and 70s, four Asian countries (Singapore, Taiwan, South Korea and Hong Kong) achieved vast amounts of economic growth. These countries are also known as the NICs (Newly Industrialising Countries). In the 80s and 90s other Asian countries followed.
The Neoliberal school attributes this growth to the export oriented market that developed during the 60s and 70s. Liberal economic policies and deregulation of the markets were applied by these states, leading to economic success.
The developmental state school also attributes this growth to the export oriented market, but mainly focusses on the role of the state developing these changes. According to the developmental state school theories, the government interventions and the choice of industrial policies and strategies by the government, and the timing of these, were critical to the economic success.
States were, during this period, trying to establish a balance between supply and demand, encouraging consumption, promoting the domestic industries and providing a social safety net for their population. At the same time many governments were weak or corrupt and were also focussing on staying in, or gaining more, power.
The world economy grew tremendously between 1947 and 1971, when the economic system agreed upon in Bretton Woods collapsed. The Third World, however, did not really benefit from this economic growth: Europe and the US mainly benefited. The "terms of trade argument" tries to explain this difference in economic growth. This argument alleges that there is a persistent tendency for the terms of trade (value) of primary commodities to fall opposite to manufactured exports.
The focus in the 70s changed from industrialisation as a solution for more economic development in the Third World to greater attention to agriculture in the rural sector. Also, gender research started to be seen as a more important factor for development.
Next to that, the focus of the Western world was on helping communist-opposed governments, as a way to obstruct communist power (mainly China and Russia) in the world. Sometimes this was seen as even more important than eradicating poverty.
Also more initiatives from the Third World itself were being started in order to influence the world economy, for example via the G77.
In August 1982, the Mexican government announced that they were no longer able to pay their debts. It became clear that many other countries were having, or would soon be having, the same problem. This debt crisis had a huge impact on the world, mainly in the developing world poverty was growing during the 80s.
States were often no longer capable of supporting the basic needs of many people; the role of NGOs (Non Governmental Organisations) was becoming more and more important.
In 1989 the Cold War came to an end, which ended to focus of states on helping only the communist-opposed (or in the case of Russia and China communist supporting) governments. The earth summit in 1992 established that sustainable development would be the new approach to worldwide economic development. The most widely used definition for sustainable development is the definition by the Brundtland Commission. They defined it as development that meets the needs of the present generation without jeopardising the resources available to future generations.
Development within a country will largely arise from national efforts, but not alone. Development is a process that has to be organised internationally. Many organisations exist that try to "organise development" internationally, this chapter focusses on the World Bank.
The World Bank has three main roles:
In the 80s the World Bank shared the overall view that (underdeveloped) countries needed to liberalise their economies and reduce the role of state intervention. This led to a discussion whether this was a necessary reform to counter the economic crisis, or whether this lead to misguided policies that made poor countries even more vulnerable to external shocks. This policy however did lead to an increased burden on women and (other) vulnerable groups in societies. In the late 90s the focus therefore shifted to helping countries with overall poverty reduction.
Supporters of the World Bank argue that the bank is needed in order to provide capital for governments in need and enhance the stability of the world economy. Critics say that the bank distorts development and that the bank puts profits before development; the bank has a market-based approach rather than an overall developmental/sustainable approach. Another critique on the World Bank is that decisions are being made by the countries that financially contribute the most to the bank, which makes it a bank ruled by rich (Western) countries.
A countries debt can impact the (economic) development of a country severely. It reduces spending power, for example for education and health, and it reduces economic growth. Western governments and international financial agencies have therefore embarked, in response to the pressure form civil society actors, programmes on debt relief, such as the HIPC and the MDRI.
A problem that these initiatives are facing is that many countries do not have a stable domestic environment, which makes economic growth and sustainable development very difficult.
Apart from economic differences there are also diplomatic and political differences between the "North" (industrialised, economically well developed countries) and the "South". The North has more power and has a tendency to speak for the South. The South often states that developmental policies are very often focussed on the (economic) interest of the developed countries and less on the overall, sustainable development of the underdeveloped countries. The South, for example, has no voice in the G20 or the World Banks decisions. This North-South view on the world is of course too simple, but it is a general view. China, for example, is an underdeveloped country in many ways, but does have significant power, for example trough the G20 and UN.
Another difficulty is that there is no uniform "South", there are many many differences (politically, economically, socially and so on) between Asia, South-America and Africa; it is easier to see the North (US, Europe, Australia, although not uniform either of course) as one platform than to see the South as such.
The Third World up until now had mainly presented alternative visions of development and critiqued the liberal economic orders. It has not achieved important gains in material terms however, so far.
The focus of this chapter mainly lies on the global pursuit of (economic) development and the pursuit of eradicating global inequality, in the period after the Second World War.
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