Questions 1 To what extent and why did the Bretton Woods framework for the post-war economy break down? 2 Are there any issues on which mercantilists agree with liberals? 3 What is different about the Marxian and mercantilist depictions of power in the international economy? 4 Does rational choice theory explain more about outcomes than actors' preferences? Chapter 16 International political economy in an age of globalization 5 In what way do neo-Gramscians invoke structure in their explanation of IPE? 6 Why do sceptics doubt that globalization is transforming IPE? 7 What vulnerabilities faced by states in the globalizing economy did the 2008 financial crisis demonstrate? 8 How can we explain the different impact globalization has on different states? 9 How and why do institutionalists argue that institutions change the behaviour of states? 10 For whom might the realist account of institutions and globalization be cheerful reading? EMPA, 1 , Final 143 Chapter 16 International political economy in an age of globalization NGAIRE WOODS Introduction The post-war world economy Traditional and new approaches to IPE The globalization debate in IPE International institutions in the globalizing world economy . Conclusion Reader's Guide In 2008 the world economy faced meltdown. A financial crisis began in the USA and soon spread around the world. These events highlighted the ten- sions between states and markets, the challenges of globalization, shifting global power, and the role of institutions in the global economy. This chapter examines what drives actors, and explains events in the international economy. The first section out- lines how international economic relations and insti- tutions were created and shaped in the post-war economy. The second section outlines three tradi- tional approaches to international political economy (IPE) that help to identify key actors, processes, and 244 244 249 252 253 256 levels of analysis. These are the liberal, mercantilist, and Marxist traditions. More modern approaches have built on rational choice' analysis. What rational choice' means and the argument about how it should be used are both explored. These perspectives and tools for studying IPE are then applied to help us make sense of globalization and its impact on the world economy. What is globalization and what chal lenges does it pose for all states (and other actors) in the world economy? It is often assumed that inter- national institutions and organizations will manage these challenges. In the final section of the chapter we return to the theories of IPE in order to answer the question: what role can we expect institutions to play in managing globalization? 244 NGAIRE WOODS Introduction International political economy (IPE) is about the inter- play of economics and politics in world affairs. The core question of IPE is what drives and explains events in the world economy? For some people, this comes down to a battle of 'states versus markets. However, this is mis- leading. The 'markets' of the world economy are not like local street bazaars in which all items can be openly and competitively traded and exchanged. Equally, politicians cannot rule the global economy. World markets and countries, local firms, and multinational corporations that trade and invest within them are all shaped by lay ers of rules, norms, laws, organizations, and even hab- its. Political scientists like to call all these features of the system institutions. International political economy triest to explain what creates and perpetuates institutions and what impact institutions have on the world economy In 2008 a global economic crisis began when a major US financial firm failed (see Case Study 1). The crash of Lehman Brothers exposed the degree to which some banks had excessively leveraged themselves, spiralling into a dizzyingly profitable but-as it turned out-cata- strophically risky way. All too few institutions prevented them. As a result, prominent economists declared that the world was facing a 'Great Depression of a kind not seen since the 1930s. Governments in the USA and the UK were forced to bail out banks, and to pump money into the wider economy to prevent jobs, sales, and mar kets from drying up. The crisis quickly spread across the world, creating an emergency in many developing countries as the collapse in demand for commodities, goods, and services in the world's largest, richest econ- omies affected all those countries that supplied them (see Case Study 1). Subsequently, a fully fledged euro- zone crisis emerged in the heart of the European Union The post-war world economy The institutions and framework of the world economy have their roots in the planning for a new economic order that took place during the last phase of the Second World War. In 1944, policy-makers gathered at Bretton Woods in the USA to consider how to resolve two very serious problems. First, they needed to ensure that the Great Depression of the 1930s would not happen again In other words, they had to find ways to ensure a stable as Greece, Portugal, and Ireland were unable to meet their debt obligations and were forced to seek assistance from the IMF and the European institutions. At first the global dimensions of the problem were recognized by leaders, who created a new forum-the G20-com- prising the leaders of the world's largest economies so as to coordinate responses to the crisis. However, the G20 lost force as disagreements emerged over how best to respond to the contraction in the world economy. The economic shocks of 2008 brought into sharp focus perennial themes of international political economy. The relationship between states and mar- kets was highlighted by the fact that some (but not all) states failed to restrain their financial markets. They let their banks make massive profits at the expense of societies (and other countries), which ended up pay- ing the costs when the banks failed. The question of who benefits most from globalization was revisited in the wake of the crisis, particularly by countries that t benefited little from financial liberalization but were harshly affected by the crisis. The primacy of the US economic model came under renewed scrutiny as t emerging economies trumpeted the success of their more state-centric policies in weathering the crisis. Relations between the so-called 'North' (industrial- ized countries) and 'South' (developing countries) were transformed as emerging economies carved out a new position for themselves in international insti- tutions, including in the new G20, while other devel- oping countries remained marginalized. Perhaps surprisingly, the international economic institutions used to manage the crisis were those created in the aftermath of the Second World War, in spite of wide spread agreement that they needed updating. global monetary system and an open world trading system. Second, they needed to rebuild the war-torn economies of Europe (see Box 16.1). Three institutions were planned in order to pro- mote a new world economic order (see Boxes 16.2 and 16.4). The International Monetary Fund was created to ensure a stable exchange rate regime and the pro- vision of emergency assistance to countries facing at Chapter 16 International political economy in an age of globalization 245 The 1944 plans for the world economy, however, were soon postponed when in 1945 the USA made its first priority the containment of the Soviet Union. Fearing the rise of communism in war-ravaged Europe, the USA announced the Marshall Plan in 1947, which directed massive financial aid to Europe and permitted the USA to set conditions on it. By the time the IMF, the World Bank, and the GATT began to function in the 1950s, they were distinctly Western bloc organizations that depended heavily on the USA. US support for the Bretton Woods system began to change when weaknesses emerged in the US economy and Europe began to 'catch up. The competitiveness of US goods and services in the world economy dropped. European allies were benefiting from the growing and deepening economic integration in Europe. By the late 1960s, European policy-makers were able to diverge from US positions, such as over NATO, mili- tary exercises, and support for the gold standard. In Asia, the phenomenal success of export-led growth in Japan and in newly industrializing countries such as South Korea and Taiwan created a new challenge to US trade competitiveness, and a new agenda for trade negotiations. Facing these pressures, the USA changed the rules of the international monetary system in 1971. The govern ment announced that it would no longer convert dol- lars to gold at $35 per ounce, and that it was imposing a 10 per cent surcharge on import duties (to improve its trade balance by curtailing imports which were flooding Box 16.1 Planning the post-war economy and avoiding another Great Depression The Great Depression had been greatly exacerbated, if not caused by beggar thy neighbour economic policies. In the ate 1920s and 1930s, governments all over the world tried to protect themselves from economic crisis by putting up trade barners and devaluing their currencies. Each country believed that by doing this they would somehow manage to keep their conomy afloat while all around them neighbouring econo mes sank The Great Depression demonstrated that this did not work. At the end of the Second World War, the challenge was to create a system which would prevent this, in particular by ensuring a stable exchange rate system a reserve asset or unit of account (such as the gold standard) control of international capital flow the availability of short-term loans to countries facing a temporary balance of payments crisis rules to keep economies open to trade temporary crisis in their balance of payments regime. The International Bank for Reconstruction and Development (IBRD, later called the World Bank) was created to facilitate private investment and reconstruc- tion in Europe, and development in other countries. The General Agreement on Tariffs and Trade (GATT) was signed in 1947 and became a forum for negotia- tions on trade liberalization (see Box 16.2). Box 16.2 The Bretton Woods institutions: the IMF and the World Bank Both the international Monetary Fund and the World Bank were established in 1946 after wartime negotiations held at Bretton Woods in the USA, with headquarters (opposite one another) in Washington, DC. The IMF was created to promote international monetary cooperation and resolve the inter-war economic problems (see Box 16.1), although several of these functions ended when the Bretton Woods system broke down in 1971 (seeBox 16.3). The IMF now has a membership of 185 countries, each of which contributes a quota of resources to the organization (proportionate to the size of their economy) which abo determines their percentage of voting rights and the amount of resources to which they can have automatic access. Since the 1980s, the IMF has become an institution offering financial and technical assistance to developing and transitional economies. The terms on which countries receive assistance include the government having to commit to undertake spe ofic conditions or policy reforms, called conditionalities (see www.mt.org) What we now call the World Bark started out as the International Bank for Reconstruction and Development (1BRD), an agency to foster reconstruction in war-torn Europe as well as development in the rest of the world. It has since become the world's largest source of development assistance, providing nearly $16 billion in loans annually to eligible member countries, through the BRD, the International Development Association (IDA), the International Finance Corporation (IFC), and the Multilateral Investment Guarantee Agency (MIGA). As with the IMF, the World Bank requires members to whom it lends to undertake specific reforms in their economy. Most recently, this has included requiring borrowing governments to demonstrate their commitment to reducing poverty in their countries. With the exception of the IDA (which is funded by donations), the World Bank's resources come from its issue of bonds in the capi- tal markets. These bonds are backed up by guarantees provided by the governments who belong to the institution (see www. worldbank.org) 246 NGAIRE WOODS into the USA, and to try to stem the outflow of dollars to the rest of the world). These actions broke the Bretton Woods system (see Box 16.3). But this was not the only change in the world economy during this period. In the 1970s, the period of high growth enjoyed. after the Second World War came to an abrupt end. leaving very high inflation. Further compounding the problem, the first oil crisis in 1973 plunged the world economy into stagflation (a combination of economic stagnation or low growth and high inflation). In the monetary system, the role of the IMF collapsed when the Bretton Woods system broke down in 1971 and the major industrialized countries failed to find a way to coordinate their exchange rate policies within the IME framework. Instead, the major currencies floated and industrialized countries began to discuss mon etary issues among themselves in groups such as the Group of Seven (or G7, comprising the USA, Japan, Germany, the UK, France, Italy, and Canada), which first met in 1975. In the trading system, cooperation had steadily grown in negotiations under the auspices of the GATT. However, in the 1970s, countries began using new pro tectionism (non-tariff barriers) to keep out the com petitive imports from successful developing countries. An egregious example of the new protectionism was the Multifiber Arrangement of 1974, which placed restrictions on all textile and apparel imports from developing countries blatantly violating the GATT principle of non-discrimination The developing countries' push for reform of the international economic system was grounded in a dif ferent way of thinking about IPE. Dependency theory and structuralist theories of international economic relations highlighted negative aspects of interdepen dence. Their central concern was to answer why so many countries in the world economy remained under- developed, in spite of the promises of modernization and global growth. Their answer was that the struc tures and institutions of the world economy impeded the possibilities of development in the South. The most sympathetic official 'Northern' answer to these con- cerns was voiced in the Brandt Report in 1980, the find- ings of a group of high-level policy-makers who had 15.12.2020 Against this background, developing countries strengthened their 1970s concerted campaign in the United Nations General Assembly for a New International Economic Order (NIEO). They were bolstered by the success of OPEC oil-producing devel oping countries in raising oil prices in 1973. They sought better representation in international eco- nomic institutions, a fairer trading system, more aid. the regulation of foreign investment, the protection of economic sovereignty, and reforms to ensure a more stable and equitable financial and monetary system (see Box 16.4). What was the breakdown' of the system? August 1971 US government announced that it was sus pending the convertibility of the dollar to gold at $35 per ounce This removed gold from the dollar-gold standard and paved the way for major currencies to float instead of staying at fixed val ces. The USA also announced at the same time that it was add- ing a 10 per cent surcharge on import duties (to improve trade balance by curtailing imports that were flooding into the USA, and to try to stem the outflow of dollars to the rest of the world) Box 16.3 The 'Bretton Woods system and its breakdown What was the Bretton Woods system? At the Bretton Woods Conference in 1944 t was agreed that all countries currencies would be fixed at a certain value. They became faxed to the dollar, and the US government promised, to convert af dollars to gold at $35 per ounce. In other words exchange rates were anchored to a dolar-gold standard in the vetton Woods system, any country wanting to change the value ofits currency had to apply to the IMF for permission. The result was very stable and unchanging exchange rate hence also turning back the Beetton Woods ideal of maintaining open trade in times of economic officulty Was this a sign of declining US hegemony? Over a decade after the breakdown of the Bretton Woods system, leading academics detuated whether the change reflected as us power or was indeed an exercise of its power, For some, the breakdown of the system was an exercise of US leadership the US hegemon smashed the Bretton Woods system in order to increase its own freedom of economic and political action (Gows 1983 Others argued that the USA had lost its capacity to maintain the sys tem, but explained that a regime could neverthes survive without the hegemon (Keohane 1984) At the heart of the debatewasa disa greement about whether cooperation in the international political economy depends on one state being both capable and willing to set and enforce the rules of the game, with powers to abrogate and adjust those rules. This debate about the nature of cooperation con tinues today in competing explanations of international institutions (see International institutions in the globalizing world economy) andan genocide 1999 Kosovo China's Wie tractors . 1-0661 A in chip you Chapter 16 International political economy in an age of globalization Box 164. The post war trading system, the GATT, and the WTO The General Agreement on Tarts and Trade RATES was an interum agreement signed in 1947 in the expectation that it would be superseded by an international trade organization. A perma nenttrade organization was not created until 1994, and so for four decades the interim GATT continued to exist an contracting parties, backed up by a very small secretariat Genewa and a minuscule budget in essence, the GATT wak forum for trade negotiations throu noftis culminating in the very successful Kennedy Round of 1962-7, where breakthroughs were made in the reduction of trade bar- rers among industrialized countries. However, when protection- sm flourished in the 1970s, the GATT proved powerless to restrain powerful members such as the USA and European countries from restricting trade ing the Multifiber Arrangement 1974 restricting been asked to examine how and why the international community should respond to the challenges of inter- dependence and development. The NEO campaign was unsuccessful for sev eral reasons. The United Nations General Assembly (UNGA) was an obvious institution for developing countries to choose in making their case since, unlike the IMF or World Bank, it offers every country one vote. However, the UNGA had no power to implements the agenda of the developing countries Furthermore, though many industrialized countries were sympa thetic to the developing countries' case in the 1970s. these governments did notact on the agenda at the time and by the 1980s a new set of governments with a de tinctly less sympathetic ideology had come to power in the USA, the UK, and Western Germany. The 1980s opened with a shift in US economic pol In 1979 the US Federal Reserve dramatically raised interest rates. This action was taken to stem inflation by contracting economic activity in the USA. However, the reverberations in the rest of the world economy were immediate and extensive. During the 1960s and 1970s, US and European deregulation led to the rise of global capital markets and an explosion of lending to develop- ing country governments. The rise in interest rates in 1979 made many of these loans unrepayable. The IMF was immediately called in to prevent any developing country defaulting on these loans, since it was feared that such a default would cause a global financial crisis. The debt crisis thrust the IMF into a repayment- enforcing role, ensuring that indebted countries under- took structural adjustment. This included measures to reduce inflation, government expenditure, and the role of the government in the economy including tele impor) and abusing the many exceptions and safeguards written into the agreement. The GATT also functioned as a forum for dispute selemente upholding trade rules. However, it was both slow and impotent in this regard, constrained by the need for consemus on any decision regarding disputes The GATT was replaced by the World Trade Organization (WTO) as a result of agreements forged in the last round of GATT us, the Uruguay Round (1966-4) Established on 1 January 1995, the WTOs func tions include administering WTO wade agreements acting as a forum for trade negotiations handling trade disputes, monitoring national trade policinc supplying technical assistance and train- ing for developing countries and cooperating with other interna tonal organizations. It is located in Geneva with a secretariat staff of 500 bewwww.o.org 247 trade liberaltration privatization, and deregulation Advocates of these policies were soon tabelled 'neo- liberals and contrasted with Keynesians (named after economist John Maynard Keynes) who advocated an active and interventionist government role in the econ- omy in order to ensure both growth and equity. By the late 1980s, the term Washington Consensus was being used, sometimes pejoratively, to imply that neo-liberal policies were mainly a reflection of US interests The 1990s brought the end of the cold war, and the challenge of how to integrate Central and Eastern European countries and the former Soviet Union into the global economy. The IMF and World Bank had to expand their toolkit and embrace a broader and deeper view of reform aimed at promoting 'good governance, in member countries. But many thought conditionality had gone too far when, in the wake of the East Asian financial crisis in 1997, the IMF imposed far-reaching and overly draconian conditions on Korea. The impact would be felt in subsequent years as the IMF's len ing role waned in most emerging market economies and they in turn took their place in a 620 of finance ministers Over this time, the World Bank sought to broaden its appeal through enhanced relations with govern ments as well as with non-governmental organiza tions (NGON Ins legitimacy seemed less tarnishe At the same time, the newly established World Trade Organization (WTO) began operations in 1995, open- ing up a new forum within which a broad range of international es would be negotiated, including not traditional trade issues but such things as intell lectual property rights, trade-related investment mea ures and food safety standards Case Study 1 The international financial crisis of 2008 WALL ST www.istockphoto.com/ONYS In September 2008, a large US investment bank called Lehman Brothers defaulted, catalysing a major financial crisis. The govern ment of the USA was soon forced to rescue the largest US in- ance company, American International Group (AIG), while the UK and other European governments were forced to intervene to rescue other institutions. The total costs of deaning up after the crisis were estimated one year laterat US$11.9 tillion, and in the fourth quarter of 2008 industrialized countries were experiencing an unprecedented economic decline of 75 per cent. In wealthy industrialized countries, the financial crisis exposed dures in corporate governance, in credit rating agencies, and In the first decade of the twenty-first century, a shift in global economic power became clear. In September 2003, during global trade negotiations in Mexico, a group of twenty countries, including Brazil, South Africa, India, and China, resisted the powerful USA and European Union and refused to engage unless some of their terms were heeded. This shift in power acceler- ated dramatically after the 2008 financial crisis, which cemented leaders of emerging economies into a new summit diplomacy-the G20. Several emerging coun- tries with China in the lead-became donors in their own right. As world energy consumption grew, so too did the power of countries supplying energy resources. In Venezuela, this led to a rhetoric of renewed Third Worldism not seen since the 1970s. Meanwhile, across most industrialized countries, calls for greater efforts to reduce climate-changing emissions became ever stronger. For scholars of International Relations, the twenty-first century brought serious questions about how international institutions might assist not only in managing new challenges in the global economy, but equally in managing a shift in power among the states that make up-and make work-the existing institutions. in regulation Poor corporate governance led to excessive risk uking by some providers of financial services Poorly designed incentives, such as pay and bonuses, favoured short-term risk- taking Credit-rating agencies, which should have signaled fra gilities in some institutions, had little incentive to do so. Most of all, the financial crisis exposed the enormous and costly implicit guarantee that governments give to financial services firms because they are simply too big to fail h poorer developing countries the crisis provoked what the IMF and World Bank would describe in 2009 as a 'development emer gency. Trade slumped a demand from the rich countries fell, and even as the world economy revered in 2010 the IMF was still pre dicting a further 16 per cent drop in low-income countries exports of goods and services. Remittances, or money sent back home by further 10 per cent in 2010. Flows of foreign direct investment dried workers in foreign countries, plummeted and were set to fall by a up. Aid flows became yet more unpredictable and never reached the levels donors had promised. In short, for developing countries, the crisis revealed that participation in an interdependent global economy carries great risks due to unregulated global finance (from which most developing countries benefit ). National and international policy-makers alike have agreed on the primacy of state authorities in regulation to restrict excessive risk. They have also agreed that national regulators must harmo nize their policies in order to achieve global financial stability Key Points Immediately after the Second World War international institutions were created to facilitate cooperation in the world economy. The onset of the cold war postponed the operation of these institutions, as the USA stepped in directly to manage the reconstruction of Europe and the international monetary system based on the dollar. The Bretton Woods system of managed exchange rates and capital flows operated until its breakdown in 1971, when the USA announced it would no longer convert the dollar to gold The 1970s were marked by a lack of international economic cooperation among the industrialized countries, which floated their exchange rates and indulged in new forms of trade protectionism Developing countries' dissatisfaction with the international system came to a head in the 1970s when they pushed unsuccessfully for a new international economic order Trade negotiations were broadened to include many new areas, but this led to later resistance from emerging economies In 2007 a power shift became more obvious in the global economy, with emerging economies such as China and India playing a more prominent role in negotiations in trade, finance, and development assistance, and in the G20 formed after the 2008 financial crisis. Traditional and new approaches to IPE Traditional approaches to IPE: liberal, mercantilist, and Marxian There are several competing explanations for the nature of the institutions and system described above. A slightly old-fashioned way to describe the competing approaches to IPE is to divide the subject into liberal, mercantilist, and Marxist traditions. These labels still usefully describe different economic traditions, each of which has a particular moral and analytical slant on global economic relations. The liberal tradition The liberal tradition is the free market one in which the role of voluntary exchange and markets is emphasized both as efficient and as morally desirable. The assump- tion is that free trade and the free movement of capi- tal will ensure that investment flows to where it is most profitable to invest (hence, for example, flowing into underdeveloped areas where maximal gains might be i made). Free trade is crucial, for it permits countries to benefit from their comparative advantages. In other i words, each country can exploit its own natural advan- tages, resources, and endowments, and gain from spe- cialization. The economy is oiled by freely exchangeable currencies and open markets that create a global system of prices, which, like an invisible hand, ensures an effi- cient and equitable distribution of goods and services across the world economy. Order in the global economy is a fairly minimal one. The optimal role of governments and institutions is to ensure the smooth and relatively unfettered operation markets. It is assumed that governments face a wide range of choices in the world system, and likewise vis--vis their own societies and populations. This means that governments that fail to pursue 'good' economic policies do so because decision- makers are either too corrupt or too ignorant of the correct economic choices they might make. The mercantilist tradition The mercantilist tradition stands in stark contrast to the liberal one. Mercantilists share the presumptions of realists in international relations. They do not focus on individual policy-makers and their policy choices, but rather assume that the world economy is an arena of competition among states seeking to maximize rela- tive strength and power. Simply put, the international system is like a jungle in which each state has to do what it can to survive. For this reason, the aim of every state must be to maximize its wealth and indepen- dence. States will seek to do this by ensuring their self- sufficiency in key strategic industries and commodities, and by using trade protectionism (tariffs and other limits on exports and imports), subsidies, and selective investments in the domestic economy. Obviously, in this system some states have more power and capability than others. The most powerful states define the rules and limits of the system: through hegemony, alliances, and balances of power. Indeed, stability and order will be achieved only where one state can play the role of hegemon, or in other words, is willing and able to cre- ate, maintain, and enforce basic rules. Amid this, the economic policies of any one government will always be subservient to its quest to secure the external and internal sovereignty of the state. The Marxian tradition The Marxian tradition also sees the world economy as an arena of competition, but not among states. Capitalism is the driving force in the world economy. Using Marx's language, this means that world economic relations are best conceived as a class struggle between the 'oppressor and the oppressed. The oppressors or capitalists are those who own the means of production (trade and industry). The oppressed are the working class. The struggle between the two arises because capi- talists seek to increase their profits and this requires them to exploit the working class ever more harshly. In International Relations this description of 'class rela- tions in a capitalist system has been applied to describe relations between the core (industrialized countries) and periphery (developing countries), and the unequal exchange that occurs between the two. Dependency theorists (who have focused mainly on Latin America) describe the ways classes and groups in the 'core' link to the 'periphery'. Underdevelopment and poverty in so many countries is explained as the result of economic, social, and political structures in countries that have been deeply influenced by their international economic relations. The global capitalist order within which these societies have emerged is, after all, a global capitalist order that reflects the interests of those who own the means of production. It becomes clear in contrasting these traditions of thinking about international economic relations that each focuses on different actors and driving forces in 250 NGAIRE WOODS Box 16.5 Traditional perspectives on IPE Liberal The world economy has the potential to be a seamless global market-place in which free trade and the free movement of capital shape the policies of governments and economic actors Order would be achieved by the invisible hand of competition in the global market-place. Mercantillist As an arena of inter-state competition, the world economy is one in which states seek to maximize their wealth and inde pendence vis--vis other states. Order is achieved only where there is a balance of power or hegemony Marxist The world economy is best described as an arena of capital- st competition in which classes (capitalists and workers) and social groups are in constant conflict, Capitalists (and the states they are based in) are driven by the search for profits and order is achieved only where they succeed in exacting the submission of all others the world economy, and that each has a different con- ception of what 'order' means and what is necessary to achieve it (see Box 16.5). Comparing the different traditions also highlights three different levels of analysis: the structure of the international system (be that international capitalism or the configuration of power among states in the sys tem); the nature of a particular government or com- petition within its institutions; and the role of interest groups and societal forces in a country. At each of these levels of analysis we need to ask: what drives the actors concerned, and therefore how might we explain their preferences, actions, and the outcomes that result? In answering this question we enter into more methodological preoccupations that today divide the study of IPE. New approaches to IPE International political economy is divided by the dif- ferent normative concerns and analytical questions highlighted by the traditions outlined above. Equally, the discipline is now subject to a lively methodologi- cal debate about how scholars might best explain poli- cies and outcomes in IPE. In essence, this debate is about whether you can assume what states' (and other actors') preferences and interests are. If you can, then rational choice (or 'neo-utilitarian') approaches to IPE make sense. However, if you open up the question as to why and how states and other actors come to have particular preferences, then you are pushed towards approaches now often labelled 'social constructivism (see Ch. 10). Political economy: the application of rational choice to groups within the state In the USA, the study of IPE has become dominated by a 'rational choice' or neo-utilitarian approach. This bor- rows economic concepts to explain politics. Instead of exploring the ideas, personalities, ideologies, or histori- cal traditions that lie behind policies and institutions, rational choice focuses on the incentive structure faced by those making decisions. It is assumed that actors interests and preferences are known or fixed, and that actors can make strategic choices as to how best to pro- mote their interests. The term 'rational choice' is a use- ful one to describe this approach since it proposes that even though a particular policy may seem stupid or wrong, it may well once have been rational. "Rational" in this sense means that for the actor or group con cerned, this was the optimal choice given the specific incentives and institutional constraints and opportuni- ties that existed at the time. Rational choice has been applied to interest groups and their influence on IPE in what has been called a political economy approach. This approach has its roots in explanations of trade policy which focus on interest groups. More recent applications have attempted to explain why countries adapt in par- ticular ways to changes in the world economy. The analysis proceeds on the assumption that govern- ments and their policies are important, but that the policies and preferences of governments reflect the actions of specific interest groups in the economy. These groups may emerge along class or sectoral lines. Indeed, the assumptions of rational choice are applied to explain how particular groups in the economy emerge and what their goals and policy preferences are. Furthermore, rational choice provides a frame- work for understanding the coalitions into which these groups enter and their interactions with other institutions. For example, in explaining why banks were able to expose the public to such risks through their excessively leveraged activities, some scholars focus on the ways the financial sector 'captured' the regulatory system. The private financial sector had 252 NGAIRE WOODS Box 16.6 Examples of new approaches to IPE Institutionalist Institutionalsts regard the world economy as an area of inter state cooperation. They see the core actors as governments and the institutions to whom they delegate power, and the key dre ing forces as rational choice at the level of the state, motivated by the potential gains from cooperation. For institutionalus, the kry condition for orders the existence of international institutions, which permit cooperation to continue Political economy For political economists, the world economy is characterized by competition among vested interests in different kinds of states, and the core actors are interest groups formed within the domes tic economies of the states. The key driving force is rational choice at the level of groups within the domestic economy responding to changes in the international economy Political economists are The globalization debate in IPE The nature and impact of globalization is the sub- ject of profound debate within IPE (as in other areas of International Relations discussed in this book). The term globalization is used to refer to at least four different sets of forces or processes in the world econ- omy (see Box 16.7) Internationalization describes the increase in economic transactions across borders that has been taking place since the turn of the century but that some argue has undergone a quantitative leap in recent decades. The technological revolution describes the effect of new electronic communication, which per- mits firms and other actors to operate globally with much less regard for location, distance, and borders. One effect of the technological revolution is to speed up Box 16.7 Four aspects of globalization Internationalization describes the increase in transactions among states reflected in flows of trade, investment, and capital, facilitated by inter-state agreements on trade, investment, and capital, and by domestic policies permitting the private sector to transact abroad The technological revolution refers to the way modern communications (Internet, satellite communications, high-tech computers) have made distance and location less important factors not just for government (including at local and regional levels) but equally in the calculations of other actors, such as firms in their investment decisions or in the activities of social movements not concerned with theorizing about the conditions necessary for international order Constructivist Constructivists focus on the ideas, knowledge, and historical circumstances that shape identity and preferences in the global economy and the boundaries within which international eco nomic relations take place. The concept of hegemony is used by those who probe the interests and ideas embodied in the rules and norms of the system Neo-Gramscians highlight that the dominant power in the system will achieve goals not just through coercion but equally by ensuring the consent of other actors in the system. This means that dominant powers will promulgate institutions, ideologies, and ideas, all of which help to persuade other actors that their best interests converge with those of the dominant power deterritorialization, or the extent to which territorial distances, borders, and places influence the way people collectively identify themselves and act, and seek politi- cal voice or recognition. In the decade before the 2008 crisis, there was much talk of footloose banks becom- ing deterritorialized and global. Their nationality was no longer relevant. However, in the wake of the crisis it became clear that banks may "live globally', but they die nationally, with their national governments picking up the costs of bailing them out. Finally, liberalization describes the policies undertaken by states that have made a new global economy possible. This includes changes in rules and institutions, which facilitated a new scale of transnational economic activity in certain Deterritorialization is accelerated by the technological revolution and refers to the diminution of influence of territorial places, distances, and boundaries over the way people collectively identify themselves or seek political recognition. This permits transnational political and economic activity, both positive and negative Liberalization describes government policies that reduce the role of the state in the economy, such as through the dismantling of trade tariffs and barriers, the deregulation and opening of the financial sector to foreign investors, and the privatization of state enterprises Chapter 16 International political economy in an age of globalization sectors (but by no means all) of the world economy. including the liberalizing of trade, investment, and production In IPE, several competing claims are made about glo- balization. For example, while some scholars argue that globalization is nothing new, others posit that global- ination is dramatically diminishing the role of the state (see Ch. 1) Still others claim that globalization is exac- ebating inequalities and giving rise to a more unequal and unjust world. To make sense of these different argu- ments and the evidence adduced to support them, it is worth thinking about the approaches to IPE covered in previous sections, for they help to identify key differ- ences in emphasis that give rise to conflicting interpre- tations of globalization. For example, sceptics who deny that globalization is transforming world politics tend to focus on the internationalization' element of globaliza- tion. They can then draw on evidence that throws into doubt whether the number of transactions taking place among states has indeed risen (UNDP 1997), and make the argument that there is nothing new' in the growing interdependence of states. By contrast, liberal enthusi- asts for globalization focus on technological innovation and the non-political 'objective' forces that are shrink- ing the world economy. They argue that this is creat- ing a less political, more efficient, more unified world i order. Those who focus on deterritorialization highlight that there is also a negative side to globalization. Just as technological innovation permits a more active global civil society, so too it permits the growth of an uncivil one. Terrorist networks and the growth of transna- tional crime grow easily and are harder to combat in an 253 era of globalization. This puts an important caveat on a final argument about globalization-one that priori tizes the role powerful states play in shaping the process Focusing on liberalization, several analysts highlight the role of powerful states, and the USA especially, in setting the rules of the new globalized international economy, and predict their increasing influence over other states. Yet the 2008 crisis demonstrated some limits to this. The post-war order and institutions were created by the USA, which was at the time the world's largest creditor, and had much to gain from the liber- alization of trade in certain sectors and the liberaliza- tion of global finance. However, in 2008 the USA was the world's largest debtor. Emerging economies such as China (see Case Study 2), Brazil, and India had to be the government plays a stronger role in the economy engaged in a coordinated solution. In these countries than in the USA. At the same time, as these economies internationalize in more sectors, they too will acquire an interest in global liberalization. Key Points 08 Globalization is used to describe the effects of several different drivers of change Internationalization is worth distinguishing from liberalization. The former refers to increasing economic transactions across borders, while the latter refers to governments policies which promote this activity While technology has transformed what can be done globally, the deterritorialization it creates spurs both globalization and anti-globalization networks. International institutions in the globalizing world economy institutions might play in managing the new problems and challenges arising from globalization. Globalization increases interdependence among states and increases the need for governments to coordinate. Financial crises in the 1990s, including in East Asia, led some policy-makers to call for stronger, more effective international institutions, including a capacity to ensure better information and monitoring, deeper coopera- tion, and regulation in the world economy. At the same time, critics argued that the crisis revealed the problems and flaws of existing international institutions and the bias or interests that they reflect. These positions echo a larger debate in IPE about the nature and impact of by certain rules, norms, or decisions of international institutions in the world economy. This debate is impor- tant in helping us to determine what role international Competing accounts of institutions echo the differ- ences in approaches to IPE already discussed (see Table 16.1). Institutionalists (or neo-liberal institutionalists (see Ch. 8)) tell us that states will create institutions in order to better achieve gains through policy coordina- tion and cooperation. However, several conditions are necessary for this to occur. Under certain conditions, institutionalists argue that states will agree to be bound organizations. This does not mean that the most power- ful states in the system will always obey the rules. Rather, 254 NGAIRE WOODS Table 16.1 The debate about institutions Institutionalist (or neo-liberal institutionalist) Under what conditions will states create international institutions? What impact do institutions have on international relations? What are the implications for globalization? for mutual gains (rationally calculated by states) Expand the possible gains to be made from cooperation Institutions can manage globalization to ensure a transition to a more liberal economy (see Box 16.5) Realist (or 'neo-realist) Only where relative position vis--vis other states is not adversely affected Facilitate the coordination of policies and actions but only in so far as this does not alter the balance of power among states Institutions will manage globalization in the interests of dominant and powerful states institutions affect international politics because they open up new reasons to cooperate, they permit states to define their interests in a more cooperative way, and they foster negotiations among states as well as compli- ance with mutually agreed rules and standards. The institutionalist account offers reasons for a certain kind of optimism about the role international institutions will play in managing globalization. Institutions will smooth over many gaps and failures in the operation of markets, and serve to ensure that states make genuinely rational and optimizing decisions to cooperate. Globalization will be managed by existing institutions and organizations, and indeed new institu- tions will probably also emerge. Globalization managed in this way will ensure that the world economy moves more towards the liberal model and that both strong and weak states benefit. Although the financial crisis of 2008 highlighted serious gaps in financial regulation - (see Case Study I), these can be remedied so as to per- mit countries to harness the advantages of free trade and free movements of capital in the world economy. Realists (and neo-realists in particular) disagree with institutionalists (see Chs 5 and 7). Realists reject the idea that institutions emerge primarily as a solution to universal problems or market failures. They argue that international institutions and organizations will always reflect the interests of dominant states in the system. When these states wish to coordinate policies with others, they will create institutions. Once created, however, these institutions will not (as the institution- alists argue) transform the way states define and pursue Constructivist Institutions arise as reflection of the dentes and interests of states and groups that are themselves forged through interaction Reinforce particular patterns of interaction, and reflect new ones Changing patterns of interaction and discourse will be reflected in institutional responses to globalization their interests. Institutions will be effective only for as long as they do not diminish the power of dominant states vis--vis other states. Let us consider what this means in practice. Take a state deciding whether to sign up to a new trade agree- ment or support the decision of an international orga- nization. The institutionalists argue that policy-makers will consider the absolute gains to be made from the agreement, including the potential longer-term gains, such as advancing a more stable and credible system. of rules. The neo-realists, by contrast, argue that pol icy-makers will primarily be concerned with relative gains. In other words, they will ask, "Do we gain more from this than other states?' (rather than "Do we gain from this?"). If other states stand to gain more, then the advantages of signing up are outweighed by the fact- that the power of the state will be diminished vis--vis other states. For realists, cooperation and institutions are heavily constrained by underlying calculations about power. Having signed an agreement or created an international organization, a powerful state will not necessarily be bound by it. Indeed, if it gets in the way of the state's interests (defined in realist terms), a powerful state will simply sweep the institution aside. The implications for globalization and its impact on weak states are rather grim. International institutions, including organizations such as the IMF, the World Bank, the WTO, the G8, and the EU, will manage glo- balization, but in the interests of their most power- ful members. Institutions will only accommodate the needs and interests of weaker states when in so doing Chapter 16 International political economy in an age of globalization 255 they do not diminish the dominant position of power fal states From a realist perspective, it follows that crit is who argue that the international institutions do not work for the interests of poor and developing countries are correct. However, the realists are equally certain that those protesting about this will have little impact. This interpretation of international institutions is rebutted not only by institutionalists, but by those wrong to assume that institutions can only be reflections who delve into the ways that ideas, beliefs, and inter- actions shape the behaviour of states In an ear er section, New approaches to IPE, we mentioned constructivists and that both its interests and identity are influenced by a social structure of interactions, normative ideas, and beliefs. If we cannot assume that states have a particu- lar identity or interest prior to their interactions, then the institutionalists are wrong to assume that institu tions emerge as rational responses to the needs of mar- kets, trade, finance, and the like. Equally, the realists are of power politics. To quote constructivist Alex Wendt (1992), anarchy is what states make of it In other words, identities and interests are more fluid and changing than realists permit. Through their interactions and dis course, states change and these changes can be reflected in institutions. Constructivists reject the idea that institutions reflect the rational calculations of states, either in inter-state competition (realists) or as part of a calculation of longer-term economic advantage and benefits from cooperation (institutionalists). In fact, what construc- vists reject is the idea that states interests are objec- tively definable and fixed Instead, they argue that any one state's interests are affected by its identity as a state. Case Study 2 The rise of China in global economic governance AS Cre XI'AN KCHANGCHUN 4419 BEIJING ZHUHAI HAIKOU K L L Constructivism and the neo-Gramscian approach highlight actors and processes involved in globaliza- tion that are neglected in realist and institutional- ist accounts, but which have important ramifications for institutions. For example, when transnational groups protest against the WTO, the IMF, and the www.istockphoto.com/Shelly Ac China has risen rapidly since its accession to the World Trade Organization in 2001. By 2010 China was the world's largest exporter, the largest recipient of investment, the fastest growing consumer market, and the world's leading provider of manufac tured goods Chinese aid, investment, and trade were fuelling growth across the continent of Africa. In the IMF, China was set to become the third largest vote-holder The 2008 financial crisis further accelerated the rise of China by weakening the United States and the European Union eco- nomically, eroding the power of their ideas about how best to modernize an economy, and requiring them to include Chinal leader (and others) in a global emergency committee (the G20 Fuelling Chinat se in global economic governance is the country's economic growth and its shift in growth strategy away from low-tech export-led growth towards more high-tech consumption-led growth China) own domestic interest groups are beginning to push for their interests to be reflected in global rules Equally, Chinas expert participation in international organi zations is increasing as Chinese economists and lawyers rise up to positions such as Deputy Managing Director of the IMF, Secretary to the IMF Board, and Chief Economist in the World Bank in the WTO, China has sat as an observer in every single dispute-settle ment case Chinas rise has produced a mixed reaction in the United States and in Europe, China is regularly accused of cheating in the international trade and monetary regimes discussed in this chap tor. China is said to be tealing intellectual property although such allegations can be (and are) formally made by any country against another) and definitely adjudicated by the World Trade Organization Equally, China is accused of manipulating its cur rency to retain export competitiveness. This latter claim has been assessed by the IMF, although the stahs of es aseuament is nowhere near as strong as an adjudication of the WTC not least because the United States will not delegate such power to the IME Beyond accusations of cheating the rise of China is seen by many as a challenge to US hegemony in the United States this leads to contradictory exhortations that China should assume t responsibilities as a great power, and fear about China ever doing such a thing for its part, China has no intention of replacing US hegemony yet. It frames its new policy of engagement in global economic governance as a search for harmonious relations with the rest of the world and as a way to represent and further the interests of other developing countries. 256 NGAIRE WOODS World Bank, they are part of an ongoing dialogue that affects states in several ways. The international attention to these issues places them on the agenda of international meetings and organizations. It also puts pressures on political leaders and encourages interest groups and pressures to form within the state. As a result, the beliefs, ideas, and conceptions of interest in international relations change, and this can shift the attention, nature, and functions of international insti- tutions. On this view, globalization is not just a process affecting and managed by states. Several other actors are involved, both within and across societies, includ- ing international institutions, which play a dynamic role. The governance or management of globalization is shaped by a mixture of interests, beliefs, and values about how the world works and how it ought to be. The existing institutions doubtless reflect the interests of powerful states. However, these interests are the Conclusion Globalization increases the challenges faced by all actors in the world economy: states, firms, trans- national actors, and international organizations. Strong states are trying to shape institutions to man- age financial crises, powerful NGOs, and globalizing firms. Weak states are trying to survive increasingly precarious and changeable economic circumstances. Common to all states is the search for greater stabil- ity and predictability, although governments disagree over how and where this should be achieved. One layer of governance this chapter has not examined is that of regional organizations and institutions (see Ch. 26). The fact that in recent years virtually every state in the world has joined at least one regional trade grouping products of the way states interact and are subject to reinterpretation and change. Key Points . Institutionalists argue that international institutions will play an important and positive role in ensuring that globalization results in widely spread benefits in the world economy. Realists and neo-realists reject the institutionalist argument on the grounds that it does not account for the unwillingness of states ever to sacrifice power relative to other states Constructivists pay more attention to how governments, states, and other actors construct their preferences, highlighting the role that state identities, dominant beliefs, and ongoing debates and contestation plays in this process. underscores the search for new ways to manage global- ization. At the same time, regionalism highlights the scepticism of many states about international institu- tions, and their fears that institutions are too dominated by powerful states, or unlikely to constrain them. The result is an emerging multi-layered governance in the world economy. At each level (international, regional, and state) the core issues debated in this chapter arise. These include: Whose interests are served by the insti- tution? What forces are shaping it? Who has access to it? Whose values does it reflect? Globalization casts a spotlight on these arrangements since the transforma- tions occurring in the world economy are being power- fully shaped by them. Questions 1 To what extent and why did the Bretton Woods framework for the post-war economy break down? 2 Are there any issues on which mercantilists agree with liberals? 3 What is different about the Marxian and mercantilist depictions of power in the international economy? 4 Does rational choice theory explain more about outcomes than actors' preferences? Chapter 16 International political economy in an age of globalization 5 In what way do neo-Gramscians invoke structure in their explanation of IPE? 6 Why do sceptics doubt that globalization is transforming IPE? 7 What vulnerabilities faced by states in the globalizing economy did the 2008 financial crisis demonstrate? 8 How can we explain the different impact globalization has on different states? 9 How and why do institutionalists argue that institutions change the behaviour of states? 10 For whom might the realist account of institutions and globalization be cheerful reading? EMPA, 1 , Final 143 Chapter 16 International political economy in an age of globalization NGAIRE WOODS Introduction The post-war world economy Traditional and new approaches to IPE The globalization debate in IPE International institutions in the globalizing world economy . Conclusion Reader's Guide In 2008 the world economy faced meltdown. A financial crisis began in the USA and soon spread around the world. These events highlighted the ten- sions between states and markets, the challenges of globalization, shifting global power, and the role of institutions in the global economy. This chapter examines what drives actors, and explains events in the international economy. The first section out- lines how international economic relations and insti- tutions were created and shaped in the post-war economy. The second section outlines three tradi- tional approaches to international political economy (IPE) that help to identify key actors, processes, and 244 244 249 252 253 256 levels of analysis. These are the liberal, mercantilist, and Marxist traditions. More modern approaches have built on rational choice' analysis. What rational choice' means and the argument about how it should be used are both explored. These perspectives and tools for studying IPE are then applied to help us make sense of globalization and its impact on the world economy. What is globalization and what chal lenges does it pose for all states (and other actors) in the world economy? It is often assumed that inter- national institutions and organizations will manage these challenges. In the final section of the chapter we return to the theories of IPE in order to answer the question: what role can we expect institutions to play in managing globalization? 244 NGAIRE WOODS Introduction International political economy (IPE) is about the inter- play of economics and politics in world affairs. The core question of IPE is what drives and explains events in the world economy? For some people, this comes down to a battle of 'states versus markets. However, this is mis- leading. The 'markets' of the world economy are not like local street bazaars in which all items can be openly and competitively traded and exchanged. Equally, politicians cannot rule the global economy. World markets and countries, local firms, and multinational corporations that trade and invest within them are all shaped by lay ers of rules, norms, laws, organizations, and even hab- its. Political scientists like to call all these features of the system institutions. International political economy triest to explain what creates and perpetuates institutions and what impact institutions have on the world economy In 2008 a global economic crisis began when a major US financial firm failed (see Case Study 1). The crash of Lehman Brothers exposed the degree to which some banks had excessively leveraged themselves, spiralling into a dizzyingly profitable but-as it turned out-cata- strophically risky way. All too few institutions prevented them. As a result, prominent economists declared that the world was facing a 'Great Depression of a kind not seen since the 1930s. Governments in the USA and the UK were forced to bail out banks, and to pump money into the wider economy to prevent jobs, sales, and mar kets from drying up. The crisis quickly spread across the world, creating an emergency in many developing countries as the collapse in demand for commodities, goods, and services in the world's largest, richest econ- omies affected all those countries that supplied them (see Case Study 1). Subsequently, a fully fledged euro- zone crisis emerged in the heart of the European Union The post-war world economy The institutions and framework of the world economy have their roots in the planning for a new economic order that took place during the last phase of the Second World War. In 1944, policy-makers gathered at Bretton Woods in the USA to consider how to resolve two very serious problems. First, they needed to ensure that the Great Depression of the 1930s would not happen again In other words, they had to find ways to ensure a stable as Greece, Portugal, and Ireland were unable to meet their debt obligations and were forced to seek assistance from the IMF and the European institutions. At first the global dimensions of the problem were recognized by leaders, who created a new forum-the G20-com- prising the leaders of the world's largest economies so as to coordinate responses to the crisis. However, the G20 lost force as disagreements emerged over how best to respond to the contraction in the world economy. The economic shocks of 2008 brought into sharp focus perennial themes of international political economy. The relationship between states and mar- kets was highlighted by the fact that some (but not all) states failed to restrain their financial markets. They let their banks make massive profits at the expense of societies (and other countries), which ended up pay- ing the costs when the banks failed. The question of who benefits most from globalization was revisited in the wake of the crisis, particularly by countries that t benefited little from financial liberalization but were harshly affected by the crisis. The primacy of the US economic model came under renewed scrutiny as t emerging economies trumpeted the success of their more state-centric policies in weathering the crisis. Relations between the so-called 'North' (industrial- ized countries) and 'South' (developing countries) were transformed as emerging economies carved out a new position for themselves in international insti- tutions, including in the new G20, while other devel- oping countries remained marginalized. Perhaps surprisingly, the international economic institutions used to manage the crisis were those created in the aftermath of the Second World War, in spite of wide spread agreement that they needed updating. global monetary system and an open world trading system. Second, they needed to rebuild the war-torn economies of Europe (see Box 16.1). Three institutions were planned in order to pro- mote a new world economic order (see Boxes 16.2 and 16.4). The International Monetary Fund was created to ensure a stable exchange rate regime and the pro- vision of emergency assistance to countries facing at Chapter 16 International political economy in an age of globalization 245 The 1944 plans for the world economy, however, were soon postponed when in 1945 the USA made its first priority the containment of the Soviet Union. Fearing the rise of communism in war-ravaged Europe, the USA announced the Marshall Plan in 1947, which directed massive financial aid to Europe and permitted the USA to set conditions on it. By the time the IMF, the World Bank, and the GATT began to function in the 1950s, they were distinctly Western bloc organizations that depended heavily on the USA. US support for the Bretton Woods system began to change when weaknesses emerged in the US economy and Europe began to 'catch up. The competitiveness of US goods and services in the world economy dropped. European allies were benefiting from the growing and deepening economic integration in Europe. By the late 1960s, European policy-makers were able to diverge from US positions, such as over NATO, mili- tary exercises, and support for the gold standard. In Asia, the phenomenal success of export-led growth in Japan and in newly industrializing countries such as South Korea and Taiwan created a new challenge to US trade competitiveness, and a new agenda for trade negotiations. Facing these pressures, the USA changed the rules of the international monetary system in 1971. The govern ment announced that it would no longer convert dol- lars to gold at $35 per ounce, and that it was imposing a 10 per cent surcharge on import duties (to improve its trade balance by curtailing imports which were flooding Box 16.1 Planning the post-war economy and avoiding another Great Depression The Great Depression had been greatly exacerbated, if not caused by beggar thy neighbour economic policies. In the ate 1920s and 1930s, governments all over the world tried to protect themselves from economic crisis by putting up trade barners and devaluing their currencies. Each country believed that by doing this they would somehow manage to keep their conomy afloat while all around them neighbouring econo mes sank The Great Depression demonstrated that this did not work. At the end of the Second World War, the challenge was to create a system which would prevent this, in particular by ensuring a stable exchange rate system a reserve asset or unit of account (such as the gold standard) control of international capital flow the availability of short-term loans to countries facing a temporary balance of payments crisis rules to keep economies open to trade temporary crisis in their balance of payments regime. The International Bank for Reconstruction and Development (IBRD, later called the World Bank) was created to facilitate private investment and reconstruc- tion in Europe, and development in other countries. The General Agreement on Tariffs and Trade (GATT) was signed in 1947 and became a forum for negotia- tions on trade liberalization (see Box 16.2). Box 16.2 The Bretton Woods institutions: the IMF and the World Bank Both the international Monetary Fund and the World Bank were established in 1946 after wartime negotiations held at Bretton Woods in the USA, with headquarters (opposite one another) in Washington, DC. The IMF was created to promote international monetary cooperation and resolve the inter-war economic problems (see Box 16.1), although several of these functions ended when the Bretton Woods system broke down in 1971 (seeBox 16.3). The IMF now has a membership of 185 countries, each of which contributes a quota of resources to the organization (proportionate to the size of their economy) which abo determines their percentage of voting rights and the amount of resources to which they can have automatic access. Since the 1980s, the IMF has become an institution offering financial and technical assistance to developing and transitional economies. The terms on which countries receive assistance include the government having to commit to undertake spe ofic conditions or policy reforms, called conditionalities (see www.mt.org) What we now call the World Bark started out as the International Bank for Reconstruction and Development (1BRD), an agency to foster reconstruction in war-torn Europe as well as development in the rest of the world. It has since become the world's largest source of development assistance, providing nearly $16 billion in loans annually to eligible member countries, through the BRD, the International Development Association (IDA), the International Finance Corporation (IFC), and the Multilateral Investment Guarantee Agency (MIGA). As with the IMF, the World Bank requires members to whom it lends to undertake specific reforms in their economy. Most recently, this has included requiring borrowing governments to demonstrate their commitment to reducing poverty in their countries. With the exception of the IDA (which is funded by donations), the World Bank's resources come from its issue of bonds in the capi- tal markets. These bonds are backed up by guarantees provided by the governments who belong to the institution (see www. worldbank.org) 246 NGAIRE WOODS into the USA, and to try to stem the outflow of dollars to the rest of the world). These actions broke the Bretton Woods system (see Box 16.3). But this was not the only change in the world economy during this period. In the 1970s, the period of high growth enjoyed. after the Second World War came to an abrupt end. leaving very high inflation. Further compounding the problem, the first oil crisis in 1973 plunged the world economy into stagflation (a combination of economic stagnation or low growth and high inflation). In the monetary system, the role of the IMF collapsed when the Bretton Woods system broke down in 1971 and the major industrialized countries failed to find a way to coordinate their exchange rate policies within the IME framework. Instead, the major currencies floated and industrialized countries began to discuss mon etary issues among themselves in groups such as the Group of Seven (or G7, comprising the USA, Japan, Germany, the UK, France, Italy, and Canada), which first met in 1975. In the trading system, cooperation had steadily grown in negotiations under the auspices of the GATT. However, in the 1970s, countries began using new pro tectionism (non-tariff barriers) to keep out the com petitive imports from successful developing countries. An egregious example of the new protectionism was the Multifiber Arrangement of 1974, which placed restrictions on all textile and apparel imports from developing countries blatantly violating the GATT principle of non-discrimination The developing countries' push for reform of the international economic system was grounded in a dif ferent way of thinking about IPE. Dependency theory and structuralist theories of international economic relations highlighted negative aspects of interdepen dence. Their central concern was to answer why so many countries in the world economy remained under- developed, in spite of the promises of modernization and global growth. Their answer was that the struc tures and institutions of the world economy impeded the possibilities of development in the South. The most sympathetic official 'Northern' answer to these con- cerns was voiced in the Brandt Report in 1980, the find- ings of a group of high-level policy-makers who had 15.12.2020 Against this background, developing countries strengthened their 1970s concerted campaign in the United Nations General Assembly for a New International Economic Order (NIEO). They were bolstered by the success of OPEC oil-producing devel oping countries in raising oil prices in 1973. They sought better representation in international eco- nomic institutions, a fairer trading system, more aid. the regulation of foreign investment, the protection of economic sovereignty, and reforms to ensure a more stable and equitable financial and monetary system (see Box 16.4). What was the breakdown' of the system? August 1971 US government announced that it was sus pending the convertibility of the dollar to gold at $35 per ounce This removed gold from the dollar-gold standard and paved the way for major currencies to float instead of staying at fixed val ces. The USA also announced at the same time that it was add- ing a 10 per cent surcharge on import duties (to improve trade balance by curtailing imports that were flooding into the USA, and to try to stem the outflow of dollars to the rest of the world) Box 16.3 The 'Bretton Woods system and its breakdown What was the Bretton Woods system? At the Bretton Woods Conference in 1944 t was agreed that all countries currencies would be fixed at a certain value. They became faxed to the dollar, and the US government promised, to convert af dollars to gold at $35 per ounce. In other words exchange rates were anchored to a dolar-gold standard in the vetton Woods system, any country wanting to change the value ofits currency had to apply to the IMF for permission. The result was very stable and unchanging exchange rate hence also turning back the Beetton Woods ideal of maintaining open trade in times of economic officulty Was this a sign of declining US hegemony? Over a decade after the breakdown of the Bretton Woods system, leading academics detuated whether the change reflected as us power or was indeed an exercise of its power, For some, the breakdown of the system was an exercise of US leadership the US hegemon smashed the Bretton Woods system in order to increase its own freedom of economic and political action (Gows 1983 Others argued that the USA had lost its capacity to maintain the sys tem, but explained that a regime could neverthes survive without the hegemon (Keohane 1984) At the heart of the debatewasa disa greement about whether cooperation in the international political economy depends on one state being both capable and willing to set and enforce the rules of the game, with powers to abrogate and adjust those rules. This debate about the nature of cooperation con tinues today in competing explanations of international institutions (see International institutions in the globalizing world economy) andan genocide 1999 Kosovo China's Wie tractors . 1-0661 A in chip you Chapter 16 International political economy in an age of globalization Box 164. The post war trading system, the GATT, and the WTO The General Agreement on Tarts and Trade RATES was an interum agreement signed in 1947 in the expectation that it would be superseded by an international trade organization. A perma nenttrade organization was not created until 1994, and so for four decades the interim GATT continued to exist an contracting parties, backed up by a very small secretariat Genewa and a minuscule budget in essence, the GATT wak forum for trade negotiations throu noftis culminating in the very successful Kennedy Round of 1962-7, where breakthroughs were made in the reduction of trade bar- rers among industrialized countries. However, when protection- sm flourished in the 1970s, the GATT proved powerless to restrain powerful members such as the USA and European countries from restricting trade ing the Multifiber Arrangement 1974 restricting been asked to examine how and why the international community should respond to the challenges of inter- dependence and development. The NEO campaign was unsuccessful for sev eral reasons. The United Nations General Assembly (UNGA) was an obvious institution for developing countries to choose in making their case since, unlike the IMF or World Bank, it offers every country one vote. However, the UNGA had no power to implements the agenda of the developing countries Furthermore, though many industrialized countries were sympa thetic to the developing countries' case in the 1970s. these governments did notact on the agenda at the time and by the 1980s a new set of governments with a de tinctly less sympathetic ideology had come to power in the USA, the UK, and Western Germany. The 1980s opened with a shift in US economic pol In 1979 the US Federal Reserve dramatically raised interest rates. This action was taken to stem inflation by contracting economic activity in the USA. However, the reverberations in the rest of the world economy were immediate and extensive. During the 1960s and 1970s, US and European deregulation led to the rise of global capital markets and an explosion of lending to develop- ing country governments. The rise in interest rates in 1979 made many of these loans unrepayable. The IMF was immediately called in to prevent any developing country defaulting on these loans, since it was feared that such a default would cause a global financial crisis. The debt crisis thrust the IMF into a repayment- enforcing role, ensuring that indebted countries under- took structural adjustment. This included measures to reduce inflation, government expenditure, and the role of the government in the economy including tele impor) and abusing the many exceptions and safeguards written into the agreement. The GATT also functioned as a forum for dispute selemente upholding trade rules. However, it was both slow and impotent in this regard, constrained by the need for consemus on any decision regarding disputes The GATT was replaced by the World Trade Organization (WTO) as a result of agreements forged in the last round of GATT us, the Uruguay Round (1966-4) Established on 1 January 1995, the WTOs func tions include administering WTO wade agreements acting as a forum for trade negotiations handling trade disputes, monitoring national trade policinc supplying technical assistance and train- ing for developing countries and cooperating with other interna tonal organizations. It is located in Geneva with a secretariat staff of 500 bewwww.o.org 247 trade liberaltration privatization, and deregulation Advocates of these policies were soon tabelled 'neo- liberals and contrasted with Keynesians (named after economist John Maynard Keynes) who advocated an active and interventionist government role in the econ- omy in order to ensure both growth and equity. By the late 1980s, the term Washington Consensus was being used, sometimes pejoratively, to imply that neo-liberal policies were mainly a reflection of US interests The 1990s brought the end of the cold war, and the challenge of how to integrate Central and Eastern European countries and the former Soviet Union into the global economy. The IMF and World Bank had to expand their toolkit and embrace a broader and deeper view of reform aimed at promoting 'good governance, in member countries. But many thought conditionality had gone too far when, in the wake of the East Asian financial crisis in 1997, the IMF imposed far-reaching and overly draconian conditions on Korea. The impact would be felt in subsequent years as the IMF's len ing role waned in most emerging market economies and they in turn took their place in a 620 of finance ministers Over this time, the World Bank sought to broaden its appeal through enhanced relations with govern ments as well as with non-governmental organiza tions (NGON Ins legitimacy seemed less tarnishe At the same time, the newly established World Trade Organization (WTO) began operations in 1995, open- ing up a new forum within which a broad range of international es would be negotiated, including not traditional trade issues but such things as intell lectual property rights, trade-related investment mea ures and food safety standards Case Study 1 The international financial crisis of 2008 WALL ST www.istockphoto.com/ONYS In September 2008, a large US investment bank called Lehman Brothers defaulted, catalysing a major financial crisis. The govern ment of the USA was soon forced to rescue the largest US in- ance company, American International Group (AIG), while the UK and other European governments were forced to intervene to rescue other institutions. The total costs of deaning up after the crisis were estimated one year laterat US$11.9 tillion, and in the fourth quarter of 2008 industrialized countries were experiencing an unprecedented economic decline of 75 per cent. In wealthy industrialized countries, the financial crisis exposed dures in corporate governance, in credit rating agencies, and In the first decade of the twenty-first century, a shift in global economic power became clear. In September 2003, during global trade negotiations in Mexico, a group of twenty countries, including Brazil, South Africa, India, and China, resisted the powerful USA and European Union and refused to engage unless some of their terms were heeded. This shift in power acceler- ated dramatically after the 2008 financial crisis, which cemented leaders of emerging economies into a new summit diplomacy-the G20. Several emerging coun- tries with China in the lead-became donors in their own right. As world energy consumption grew, so too did the power of countries supplying energy resources. In Venezuela, this led to a rhetoric of renewed Third Worldism not seen since the 1970s. Meanwhile, across most industrialized countries, calls for greater efforts to reduce climate-changing emissions became ever stronger. For scholars of International Relations, the twenty-first century brought serious questions about how international institutions might assist not only in managing new challenges in the global economy, but equally in managing a shift in power among the states that make up-and make work-the existing institutions. in regulation Poor corporate governance led to excessive risk uking by some providers of financial services Poorly designed incentives, such as pay and bonuses, favoured short-term risk- taking Credit-rating agencies, which should have signaled fra gilities in some institutions, had little incentive to do so. Most of all, the financial crisis exposed the enormous and costly implicit guarantee that governments give to financial services firms because they are simply too big to fail h poorer developing countries the crisis provoked what the IMF and World Bank would describe in 2009 as a 'development emer gency. Trade slumped a demand from the rich countries fell, and even as the world economy revered in 2010 the IMF was still pre dicting a further 16 per cent drop in low-income countries exports of goods and services. Remittances, or money sent back home by further 10 per cent in 2010. Flows of foreign direct investment dried workers in foreign countries, plummeted and were set to fall by a up. Aid flows became yet more unpredictable and never reached the levels donors had promised. In short, for developing countries, the crisis revealed that participation in an interdependent global economy carries great risks due to unregulated global finance (from which most developing countries benefit ). National and international policy-makers alike have agreed on the primacy of state authorities in regulation to restrict excessive risk. They have also agreed that national regulators must harmo nize their policies in order to achieve global financial stability Key Points Immediately after the Second World War international institutions were created to facilitate cooperation in the world economy. The onset of the cold war postponed the operation of these institutions, as the USA stepped in directly to manage the reconstruction of Europe and the international monetary system based on the dollar. The Bretton Woods system of managed exchange rates and capital flows operated until its breakdown in 1971, when the USA announced it would no longer convert the dollar to gold The 1970s were marked by a lack of international economic cooperation among the industrialized countries, which floated their exchange rates and indulged in new forms of trade protectionism Developing countries' dissatisfaction with the international system came to a head in the 1970s when they pushed unsuccessfully for a new international economic order Trade negotiations were broadened to include many new areas, but this led to later resistance from emerging economies In 2007 a power shift became more obvious in the global economy, with emerging economies such as China and India playing a more prominent role in negotiations in trade, finance, and development assistance, and in the G20 formed after the 2008 financial crisis. Traditional and new approaches to IPE Traditional approaches to IPE: liberal, mercantilist, and Marxian There are several competing explanations for the nature of the institutions and system described above. A slightly old-fashioned way to describe the competing approaches to IPE is to divide the subject into liberal, mercantilist, and Marxist traditions. These labels still usefully describe different economic traditions, each of which has a particular moral and analytical slant on global economic relations. The liberal tradition The liberal tradition is the free market one in which the role of voluntary exchange and markets is emphasized both as efficient and as morally desirable. The assump- tion is that free trade and the free movement of capi- tal will ensure that investment flows to where it is most profitable to invest (hence, for example, flowing into underdeveloped areas where maximal gains might be i made). Free trade is crucial, for it permits countries to benefit from their comparative advantages. In other i words, each country can exploit its own natural advan- tages, resources, and endowments, and gain from spe- cialization. The economy is oiled by freely exchangeable currencies and open markets that create a global system of prices, which, like an invisible hand, ensures an effi- cient and equitable distribution of goods and services across the world economy. Order in the global economy is a fairly minimal one. The optimal role of governments and institutions is to ensure the smooth and relatively unfettered operation markets. It is assumed that governments face a wide range of choices in the world system, and likewise vis--vis their own societies and populations. This means that governments that fail to pursue 'good' economic policies do so because decision- makers are either too corrupt or too ignorant of the correct economic choices they might make. The mercantilist tradition The mercantilist tradition stands in stark contrast to the liberal one. Mercantilists share the presumptions of realists in international relations. They do not focus on individual policy-makers and their policy choices, but rather assume that the world economy is an arena of competition among states seeking to maximize rela- tive strength and power. Simply put, the international system is like a jungle in which each state has to do what it can to survive. For this reason, the aim of every state must be to maximize its wealth and indepen- dence. States will seek to do this by ensuring their self- sufficiency in key strategic industries and commodities, and by using trade protectionism (tariffs and other limits on exports and imports), subsidies, and selective investments in the domestic economy. Obviously, in this system some states have more power and capability than others. The most powerful states define the rules and limits of the system: through hegemony, alliances, and balances of power. Indeed, stability and order will be achieved only where one state can play the role of hegemon, or in other words, is willing and able to cre- ate, maintain, and enforce basic rules. Amid this, the economic policies of any one government will always be subservient to its quest to secure the external and internal sovereignty of the state. The Marxian tradition The Marxian tradition also sees the world economy as an arena of competition, but not among states. Capitalism is the driving force in the world economy. Using Marx's language, this means that world economic relations are best conceived as a class struggle between the 'oppressor and the oppressed. The oppressors or capitalists are those who own the means of production (trade and industry). The oppressed are the working class. The struggle between the two arises because capi- talists seek to increase their profits and this requires them to exploit the working class ever more harshly. In International Relations this description of 'class rela- tions in a capitalist system has been applied to describe relations between the core (industrialized countries) and periphery (developing countries), and the unequal exchange that occurs between the two. Dependency theorists (who have focused mainly on Latin America) describe the ways classes and groups in the 'core' link to the 'periphery'. Underdevelopment and poverty in so many countries is explained as the result of economic, social, and political structures in countries that have been deeply influenced by their international economic relations. The global capitalist order within which these societies have emerged is, after all, a global capitalist order that reflects the interests of those who own the means of production. It becomes clear in contrasting these traditions of thinking about international economic relations that each focuses on different actors and driving forces in 250 NGAIRE WOODS Box 16.5 Traditional perspectives on IPE Liberal The world economy has the potential to be a seamless global market-place in which free trade and the free movement of capital shape the policies of governments and economic actors Order would be achieved by the invisible hand of competition in the global market-place. Mercantillist As an arena of inter-state competition, the world economy is one in which states seek to maximize their wealth and inde pendence vis--vis other states. Order is achieved only where there is a balance of power or hegemony Marxist The world economy is best described as an arena of capital- st competition in which classes (capitalists and workers) and social groups are in constant conflict, Capitalists (and the states they are based in) are driven by the search for profits and order is achieved only where they succeed in exacting the submission of all others the world economy, and that each has a different con- ception of what 'order' means and what is necessary to achieve it (see Box 16.5). Comparing the different traditions also highlights three different levels of analysis: the structure of the international system (be that international capitalism or the configuration of power among states in the sys tem); the nature of a particular government or com- petition within its institutions; and the role of interest groups and societal forces in a country. At each of these levels of analysis we need to ask: what drives the actors concerned, and therefore how might we explain their preferences, actions, and the outcomes that result? In answering this question we enter into more methodological preoccupations that today divide the study of IPE. New approaches to IPE International political economy is divided by the dif- ferent normative concerns and analytical questions highlighted by the traditions outlined above. Equally, the discipline is now subject to a lively methodologi- cal debate about how scholars might best explain poli- cies and outcomes in IPE. In essence, this debate is about whether you can assume what states' (and other actors') preferences and interests are. If you can, then rational choice (or 'neo-utilitarian') approaches to IPE make sense. However, if you open up the question as to why and how states and other actors come to have particular preferences, then you are pushed towards approaches now often labelled 'social constructivism (see Ch. 10). Political economy: the application of rational choice to groups within the state In the USA, the study of IPE has become dominated by a 'rational choice' or neo-utilitarian approach. This bor- rows economic concepts to explain politics. Instead of exploring the ideas, personalities, ideologies, or histori- cal traditions that lie behind policies and institutions, rational choice focuses on the incentive structure faced by those making decisions. It is assumed that actors interests and preferences are known or fixed, and that actors can make strategic choices as to how best to pro- mote their interests. The term 'rational choice' is a use- ful one to describe this approach since it proposes that even though a particular policy may seem stupid or wrong, it may well once have been rational. "Rational" in this sense means that for the actor or group con cerned, this was the optimal choice given the specific incentives and institutional constraints and opportuni- ties that existed at the time. Rational choice has been applied to interest groups and their influence on IPE in what has been called a political economy approach. This approach has its roots in explanations of trade policy which focus on interest groups. More recent applications have attempted to explain why countries adapt in par- ticular ways to changes in the world economy. The analysis proceeds on the assumption that govern- ments and their policies are important, but that the policies and preferences of governments reflect the actions of specific interest groups in the economy. These groups may emerge along class or sectoral lines. Indeed, the assumptions of rational choice are applied to explain how particular groups in the economy emerge and what their goals and policy preferences are. Furthermore, rational choice provides a frame- work for understanding the coalitions into which these groups enter and their interactions with other institutions. For example, in explaining why banks were able to expose the public to such risks through their excessively leveraged activities, some scholars focus on the ways the financial sector 'captured' the regulatory system. The private financial sector had 252 NGAIRE WOODS Box 16.6 Examples of new approaches to IPE Institutionalist Institutionalsts regard the world economy as an area of inter state cooperation. They see the core actors as governments and the institutions to whom they delegate power, and the key dre ing forces as rational choice at the level of the state, motivated by the potential gains from cooperation. For institutionalus, the kry condition for orders the existence of international institutions, which permit cooperation to continue Political economy For political economists, the world economy is characterized by competition among vested interests in different kinds of states, and the core actors are interest groups formed within the domes tic economies of the states. The key driving force is rational choice at the level of groups within the domestic economy responding to changes in the international economy Political economists are The globalization debate in IPE The nature and impact of globalization is the sub- ject of profound debate within IPE (as in other areas of International Relations discussed in this book). The term globalization is used to refer to at least four different sets of forces or processes in the world econ- omy (see Box 16.7) Internationalization describes the increase in economic transactions across borders that has been taking place since the turn of the century but that some argue has undergone a quantitative leap in recent decades. The technological revolution describes the effect of new electronic communication, which per- mits firms and other actors to operate globally with much less regard for location, distance, and borders. One effect of the technological revolution is to speed up Box 16.7 Four aspects of globalization Internationalization describes the increase in transactions among states reflected in flows of trade, investment, and capital, facilitated by inter-state agreements on trade, investment, and capital, and by domestic policies permitting the private sector to transact abroad The technological revolution refers to the way modern communications (Internet, satellite communications, high-tech computers) have made distance and location less important factors not just for government (including at local and regional levels) but equally in the calculations of other actors, such as firms in their investment decisions or in the activities of social movements not concerned with theorizing about the conditions necessary for international order Constructivist Constructivists focus on the ideas, knowledge, and historical circumstances that shape identity and preferences in the global economy and the boundaries within which international eco nomic relations take place. The concept of hegemony is used by those who probe the interests and ideas embodied in the rules and norms of the system Neo-Gramscians highlight that the dominant power in the system will achieve goals not just through coercion but equally by ensuring the consent of other actors in the system. This means that dominant powers will promulgate institutions, ideologies, and ideas, all of which help to persuade other actors that their best interests converge with those of the dominant power deterritorialization, or the extent to which territorial distances, borders, and places influence the way people collectively identify themselves and act, and seek politi- cal voice or recognition. In the decade before the 2008 crisis, there was much talk of footloose banks becom- ing deterritorialized and global. Their nationality was no longer relevant. However, in the wake of the crisis it became clear that banks may "live globally', but they die nationally, with their national governments picking up the costs of bailing them out. Finally, liberalization describes the policies undertaken by states that have made a new global economy possible. This includes changes in rules and institutions, which facilitated a new scale of transnational economic activity in certain Deterritorialization is accelerated by the technological revolution and refers to the diminution of influence of territorial places, distances, and boundaries over the way people collectively identify themselves or seek political recognition. This permits transnational political and economic activity, both positive and negative Liberalization describes government policies that reduce the role of the state in the economy, such as through the dismantling of trade tariffs and barriers, the deregulation and opening of the financial sector to foreign investors, and the privatization of state enterprises Chapter 16 International political economy in an age of globalization sectors (but by no means all) of the world economy. including the liberalizing of trade, investment, and production In IPE, several competing claims are made about glo- balization. For example, while some scholars argue that globalization is nothing new, others posit that global- ination is dramatically diminishing the role of the state (see Ch. 1) Still others claim that globalization is exac- ebating inequalities and giving rise to a more unequal and unjust world. To make sense of these different argu- ments and the evidence adduced to support them, it is worth thinking about the approaches to IPE covered in previous sections, for they help to identify key differ- ences in emphasis that give rise to conflicting interpre- tations of globalization. For example, sceptics who deny that globalization is transforming world politics tend to focus on the internationalization' element of globaliza- tion. They can then draw on evidence that throws into doubt whether the number of transactions taking place among states has indeed risen (UNDP 1997), and make the argument that there is nothing new' in the growing interdependence of states. By contrast, liberal enthusi- asts for globalization focus on technological innovation and the non-political 'objective' forces that are shrink- ing the world economy. They argue that this is creat- ing a less political, more efficient, more unified world i order. Those who focus on deterritorialization highlight that there is also a negative side to globalization. Just as technological innovation permits a more active global civil society, so too it permits the growth of an uncivil one. Terrorist networks and the growth of transna- tional crime grow easily and are harder to combat in an 253 era of globalization. This puts an important caveat on a final argument about globalization-one that priori tizes the role powerful states play in shaping the process Focusing on liberalization, several analysts highlight the role of powerful states, and the USA especially, in setting the rules of the new globalized international economy, and predict their increasing influence over other states. Yet the 2008 crisis demonstrated some limits to this. The post-war order and institutions were created by the USA, which was at the time the world's largest creditor, and had much to gain from the liber- alization of trade in certain sectors and the liberaliza- tion of global finance. However, in 2008 the USA was the world's largest debtor. Emerging economies such as China (see Case Study 2), Brazil, and India had to be the government plays a stronger role in the economy engaged in a coordinated solution. In these countries than in the USA. At the same time, as these economies internationalize in more sectors, they too will acquire an interest in global liberalization. Key Points 08 Globalization is used to describe the effects of several different drivers of change Internationalization is worth distinguishing from liberalization. The former refers to increasing economic transactions across borders, while the latter refers to governments policies which promote this activity While technology has transformed what can be done globally, the deterritorialization it creates spurs both globalization and anti-globalization networks. International institutions in the globalizing world economy institutions might play in managing the new problems and challenges arising from globalization. Globalization increases interdependence among states and increases the need for governments to coordinate. Financial crises in the 1990s, including in East Asia, led some policy-makers to call for stronger, more effective international institutions, including a capacity to ensure better information and monitoring, deeper coopera- tion, and regulation in the world economy. At the same time, critics argued that the crisis revealed the problems and flaws of existing international institutions and the bias or interests that they reflect. These positions echo a larger debate in IPE about the nature and impact of by certain rules, norms, or decisions of international institutions in the world economy. This debate is impor- tant in helping us to determine what role international Competing accounts of institutions echo the differ- ences in approaches to IPE already discussed (see Table 16.1). Institutionalists (or neo-liberal institutionalists (see Ch. 8)) tell us that states will create institutions in order to better achieve gains through policy coordina- tion and cooperation. However, several conditions are necessary for this to occur. Under certain conditions, institutionalists argue that states will agree to be bound organizations. This does not mean that the most power- ful states in the system will always obey the rules. Rather, 254 NGAIRE WOODS Table 16.1 The debate about institutions Institutionalist (or neo-liberal institutionalist) Under what conditions will states create international institutions? What impact do institutions have on international relations? What are the implications for globalization? for mutual gains (rationally calculated by states) Expand the possible gains to be made from cooperation Institutions can manage globalization to ensure a transition to a more liberal economy (see Box 16.5) Realist (or 'neo-realist) Only where relative position vis--vis other states is not adversely affected Facilitate the coordination of policies and actions but only in so far as this does not alter the balance of power among states Institutions will manage globalization in the interests of dominant and powerful states institutions affect international politics because they open up new reasons to cooperate, they permit states to define their interests in a more cooperative way, and they foster negotiations among states as well as compli- ance with mutually agreed rules and standards. The institutionalist account offers reasons for a certain kind of optimism about the role international institutions will play in managing globalization. Institutions will smooth over many gaps and failures in the operation of markets, and serve to ensure that states make genuinely rational and optimizing decisions to cooperate. Globalization will be managed by existing institutions and organizations, and indeed new institu- tions will probably also emerge. Globalization managed in this way will ensure that the world economy moves more towards the liberal model and that both strong and weak states benefit. Although the financial crisis of 2008 highlighted serious gaps in financial regulation - (see Case Study I), these can be remedied so as to per- mit countries to harness the advantages of free trade and free movements of capital in the world economy. Realists (and neo-realists in particular) disagree with institutionalists (see Chs 5 and 7). Realists reject the idea that institutions emerge primarily as a solution to universal problems or market failures. They argue that international institutions and organizations will always reflect the interests of dominant states in the system. When these states wish to coordinate policies with others, they will create institutions. Once created, however, these institutions will not (as the institution- alists argue) transform the way states define and pursue Constructivist Institutions arise as reflection of the dentes and interests of states and groups that are themselves forged through interaction Reinforce particular patterns of interaction, and reflect new ones Changing patterns of interaction and discourse will be reflected in institutional responses to globalization their interests. Institutions will be effective only for as long as they do not diminish the power of dominant states vis--vis other states. Let us consider what this means in practice. Take a state deciding whether to sign up to a new trade agree- ment or support the decision of an international orga- nization. The institutionalists argue that policy-makers will consider the absolute gains to be made from the agreement, including the potential longer-term gains, such as advancing a more stable and credible system. of rules. The neo-realists, by contrast, argue that pol icy-makers will primarily be concerned with relative gains. In other words, they will ask, "Do we gain more from this than other states?' (rather than "Do we gain from this?"). If other states stand to gain more, then the advantages of signing up are outweighed by the fact- that the power of the state will be diminished vis--vis other states. For realists, cooperation and institutions are heavily constrained by underlying calculations about power. Having signed an agreement or created an international organization, a powerful state will not necessarily be bound by it. Indeed, if it gets in the way of the state's interests (defined in realist terms), a powerful state will simply sweep the institution aside. The implications for globalization and its impact on weak states are rather grim. International institutions, including organizations such as the IMF, the World Bank, the WTO, the G8, and the EU, will manage glo- balization, but in the interests of their most power- ful members. Institutions will only accommodate the needs and interests of weaker states when in so doing Chapter 16 International political economy in an age of globalization 255 they do not diminish the dominant position of power fal states From a realist perspective, it follows that crit is who argue that the international institutions do not work for the interests of poor and developing countries are correct. However, the realists are equally certain that those protesting about this will have little impact. This interpretation of international institutions is rebutted not only by institutionalists, but by those wrong to assume that institutions can only be reflections who delve into the ways that ideas, beliefs, and inter- actions shape the behaviour of states In an ear er section, New approaches to IPE, we mentioned constructivists and that both its interests and identity are influenced by a social structure of interactions, normative ideas, and beliefs. If we cannot assume that states have a particu- lar identity or interest prior to their interactions, then the institutionalists are wrong to assume that institu tions emerge as rational responses to the needs of mar- kets, trade, finance, and the like. Equally, the realists are of power politics. To quote constructivist Alex Wendt (1992), anarchy is what states make of it In other words, identities and interests are more fluid and changing than realists permit. Through their interactions and dis course, states change and these changes can be reflected in institutions. Constructivists reject the idea that institutions reflect the rational calculations of states, either in inter-state competition (realists) or as part of a calculation of longer-term economic advantage and benefits from cooperation (institutionalists). In fact, what construc- vists reject is the idea that states interests are objec- tively definable and fixed Instead, they argue that any one state's interests are affected by its identity as a state. Case Study 2 The rise of China in global economic governance AS Cre XI'AN KCHANGCHUN 4419 BEIJING ZHUHAI HAIKOU K L L Constructivism and the neo-Gramscian approach highlight actors and processes involved in globaliza- tion that are neglected in realist and institutional- ist accounts, but which have important ramifications for institutions. For example, when transnational groups protest against the WTO, the IMF, and the www.istockphoto.com/Shelly Ac China has risen rapidly since its accession to the World Trade Organization in 2001. By 2010 China was the world's largest exporter, the largest recipient of investment, the fastest growing consumer market, and the world's leading provider of manufac tured goods Chinese aid, investment, and trade were fuelling growth across the continent of Africa. In the IMF, China was set to become the third largest vote-holder The 2008 financial crisis further accelerated the rise of China by weakening the United States and the European Union eco- nomically, eroding the power of their ideas about how best to modernize an economy, and requiring them to include Chinal leader (and others) in a global emergency committee (the G20 Fuelling Chinat se in global economic governance is the country's economic growth and its shift in growth strategy away from low-tech export-led growth towards more high-tech consumption-led growth China) own domestic interest groups are beginning to push for their interests to be reflected in global rules Equally, Chinas expert participation in international organi zations is increasing as Chinese economists and lawyers rise up to positions such as Deputy Managing Director of the IMF, Secretary to the IMF Board, and Chief Economist in the World Bank in the WTO, China has sat as an observer in every single dispute-settle ment case Chinas rise has produced a mixed reaction in the United States and in Europe, China is regularly accused of cheating in the international trade and monetary regimes discussed in this chap tor. China is said to be tealing intellectual property although such allegations can be (and are) formally made by any country against another) and definitely adjudicated by the World Trade Organization Equally, China is accused of manipulating its cur rency to retain export competitiveness. This latter claim has been assessed by the IMF, although the stahs of es aseuament is nowhere near as strong as an adjudication of the WTC not least because the United States will not delegate such power to the IME Beyond accusations of cheating the rise of China is seen by many as a challenge to US hegemony in the United States this leads to contradictory exhortations that China should assume t responsibilities as a great power, and fear about China ever doing such a thing for its part, China has no intention of replacing US hegemony yet. It frames its new policy of engagement in global economic governance as a search for harmonious relations with the rest of the world and as a way to represent and further the interests of other developing countries. 256 NGAIRE WOODS World Bank, they are part of an ongoing dialogue that affects states in several ways. The international attention to these issues places them on the agenda of international meetings and organizations. It also puts pressures on political leaders and encourages interest groups and pressures to form within the state. As a result, the beliefs, ideas, and conceptions of interest in international relations change, and this can shift the attention, nature, and functions of international insti- tutions. On this view, globalization is not just a process affecting and managed by states. Several other actors are involved, both within and across societies, includ- ing international institutions, which play a dynamic role. The governance or management of globalization is shaped by a mixture of interests, beliefs, and values about how the world works and how it ought to be. The existing institutions doubtless reflect the interests of powerful states. However, these interests are the Conclusion Globalization increases the challenges faced by all actors in the world economy: states, firms, trans- national actors, and international organizations. Strong states are trying to shape institutions to man- age financial crises, powerful NGOs, and globalizing firms. Weak states are trying to survive increasingly precarious and changeable economic circumstances. Common to all states is the search for greater stabil- ity and predictability, although governments disagree over how and where this should be achieved. One layer of governance this chapter has not examined is that of regional organizations and institutions (see Ch. 26). The fact that in recent years virtually every state in the world has joined at least one regional trade grouping products of the way states interact and are subject to reinterpretation and change. Key Points . Institutionalists argue that international institutions will play an important and positive role in ensuring that globalization results in widely spread benefits in the world economy. Realists and neo-realists reject the institutionalist argument on the grounds that it does not account for the unwillingness of states ever to sacrifice power relative to other states Constructivists pay more attention to how governments, states, and other actors construct their preferences, highlighting the role that state identities, dominant beliefs, and ongoing debates and contestation plays in this process. underscores the search for new ways to manage global- ization. At the same time, regionalism highlights the scepticism of many states about international institu- tions, and their fears that institutions are too dominated by powerful states, or unlikely to constrain them. The result is an emerging multi-layered governance in the world economy. At each level (international, regional, and state) the core issues debated in this chapter arise. These include: Whose interests are served by the insti- tution? What forces are shaping it? Who has access to it? Whose values does it reflect? Globalization casts a spotlight on these arrangements since the transforma- tions occurring in the world economy are being power- fully shaped by them. Questions 1 To what extent and why did the Bretton Woods framework for the post-war economy break down? 2 Are there any issues on which mercantilists agree with liberals? 3 What is different about the Marxian and mercantilist depictions of power in the international economy? 4 Does rational choice theory explain more about outcomes than actors' preferences? Chapter 16 International political economy in an age of globalization 5 In what way do neo-Gramscians invoke structure in their explanation of IPE? 6 Why do sceptics doubt that globalization is transforming IPE? 7 What vulnerabilities faced by states in the globalizing economy did the 2008 financial crisis demonstrate? 8 How can we explain the different impact globalization has on different states? 9 How and why do institutionalists argue that institutions change the behaviour of states? 10 For whom might the realist account of institutions and globalization be cheerful reading? EMPA, 1 , Final 143 Chapter 16 International political economy in an age of globalization NGAIRE WOODS Introduction The post-war world economy Traditional and new approaches to IPE The globalization debate in IPE International institutions in the globalizing world economy . Conclusion Reader's Guide In 2008 the world economy faced meltdown. A financial crisis began in the USA and soon spread around the world. These events highlighted the ten- sions between states and markets, the challenges of globalization, shifting global power, and the role of institutions in the global economy. This chapter examines what drives actors, and explains events in the international economy. The first section out- lines how international economic relations and insti- tutions were created and shaped in the post-war economy. The second section outlines three tradi- tional approaches to international political economy (IPE) that help to identify key actors, processes, and 244 244 249 252 253 256 levels of analysis. These are the liberal, mercantilist, and Marxist traditions. More modern approaches have built on rational choice' analysis. What rational choice' means and the argument about how it should be used are both explored. These perspectives and tools for studying IPE are then applied to help us make sense of globalization and its impact on the world economy. What is globalization and what chal lenges does it pose for all states (and other actors) in the world economy? It is often assumed that inter- national institutions and organizations will manage these challenges. In the final section of the chapter we return to the theories of IPE in order to answer the question: what role can we expect institutions to play in managing globalization? 244 NGAIRE WOODS Introduction International political economy (IPE) is about the inter- play of economics and politics in world affairs. The core question of IPE is what drives and explains events in the world economy? For some people, this comes down to a battle of 'states versus markets. However, this is mis- leading. The 'markets' of the world economy are not like local street bazaars in which all items can be openly and competitively traded and exchanged. Equally, politicians cannot rule the global economy. World markets and countries, local firms, and multinational corporations that trade and invest within them are all shaped by lay ers of rules, norms, laws, organizations, and even hab- its. Political scientists like to call all these features of the system institutions. International political economy triest to explain what creates and perpetuates institutions and what impact institutions have on the world economy In 2008 a global economic crisis began when a major US financial firm failed (see Case Study 1). The crash of Lehman Brothers exposed the degree to which some banks had excessively leveraged themselves, spiralling into a dizzyingly profitable but-as it turned out-cata- strophically risky way. All too few institutions prevented them. As a result, prominent economists declared that the world was facing a 'Great Depression of a kind not seen since the 1930s. Governments in the USA and the UK were forced to bail out banks, and to pump money into the wider economy to prevent jobs, sales, and mar kets from drying up. The crisis quickly spread across the world, creating an emergency in many developing countries as the collapse in demand for commodities, goods, and services in the world's largest, richest econ- omies affected all those countries that supplied them (see Case Study 1). Subsequently, a fully fledged euro- zone crisis emerged in the heart of the European Union The post-war world economy The institutions and framework of the world economy have their roots in the planning for a new economic order that took place during the last phase of the Second World War. In 1944, policy-makers gathered at Bretton Woods in the USA to consider how to resolve two very serious problems. First, they needed to ensure that the Great Depression of the 1930s would not happen again In other words, they had to find ways to ensure a stable as Greece, Portugal, and Ireland were unable to meet their debt obligations and were forced to seek assistance from the IMF and the European institutions. At first the global dimensions of the problem were recognized by leaders, who created a new forum-the G20-com- prising the leaders of the world's largest economies so as to coordinate responses to the crisis. However, the G20 lost force as disagreements emerged over how best to respond to the contraction in the world economy. The economic shocks of 2008 brought into sharp focus perennial themes of international political economy. The relationship between states and mar- kets was highlighted by the fact that some (but not all) states failed to restrain their financial markets. They let their banks make massive profits at the expense of societies (and other countries), which ended up pay- ing the costs when the banks failed. The question of who benefits most from globalization was revisited in the wake of the crisis, particularly by countries that t benefited little from financial liberalization but were harshly affected by the crisis. The primacy of the US economic model came under renewed scrutiny as t emerging economies trumpeted the success of their more state-centric policies in weathering the crisis. Relations between the so-called 'North' (industrial- ized countries) and 'South' (developing countries) were transformed as emerging economies carved out a new position for themselves in international insti- tutions, including in the new G20, while other devel- oping countries remained marginalized. Perhaps surprisingly, the international economic institutions used to manage the crisis were those created in the aftermath of the Second World War, in spite of wide spread agreement that they needed updating. global monetary system and an open world trading system. Second, they needed to rebuild the war-torn economies of Europe (see Box 16.1). Three institutions were planned in order to pro- mote a new world economic order (see Boxes 16.2 and 16.4). The International Monetary Fund was created to ensure a stable exchange rate regime and the pro- vision of emergency assistance to countries facing at Chapter 16 International political economy in an age of globalization 245 The 1944 plans for the world economy, however, were soon postponed when in 1945 the USA made its first priority the containment of the Soviet Union. Fearing the rise of communism in war-ravaged Europe, the USA announced the Marshall Plan in 1947, which directed massive financial aid to Europe and permitted the USA to set conditions on it. By the time the IMF, the World Bank, and the GATT began to function in the 1950s, they were distinctly Western bloc organizations that depended heavily on the USA. US support for the Bretton Woods system began to change when weaknesses emerged in the US economy and Europe began to 'catch up. The competitiveness of US goods and services in the world economy dropped. European allies were benefiting from the growing and deepening economic integration in Europe. By the late 1960s, European policy-makers were able to diverge from US positions, such as over NATO, mili- tary exercises, and support for the gold standard. In Asia, the phenomenal success of export-led growth in Japan and in newly industrializing countries such as South Korea and Taiwan created a new challenge to US trade competitiveness, and a new agenda for trade negotiations. Facing these pressures, the USA changed the rules of the international monetary system in 1971. The govern ment announced that it would no longer convert dol- lars to gold at $35 per ounce, and that it was imposing a 10 per cent surcharge on import duties (to improve its trade balance by curtailing imports which were flooding Box 16.1 Planning the post-war economy and avoiding another Great Depression The Great Depression had been greatly exacerbated, if not caused by beggar thy neighbour economic policies. In the ate 1920s and 1930s, governments all over the world tried to protect themselves from economic crisis by putting up trade barners and devaluing their currencies. Each country believed that by doing this they would somehow manage to keep their conomy afloat while all around them neighbouring econo mes sank The Great Depression demonstrated that this did not work. At the end of the Second World War, the challenge was to create a system which would prevent this, in particular by ensuring a stable exchange rate system a reserve asset or unit of account (such as the gold standard) control of international capital flow the availability of short-term loans to countries facing a temporary balance of payments crisis rules to keep economies open to trade temporary crisis in their balance of payments regime. The International Bank for Reconstruction and Development (IBRD, later called the World Bank) was created to facilitate private investment and reconstruc- tion in Europe, and development in other countries. The General Agreement on Tariffs and Trade (GATT) was signed in 1947 and became a forum for negotia- tions on trade liberalization (see Box 16.2). Box 16.2 The Bretton Woods institutions: the IMF and the World Bank Both the international Monetary Fund and the World Bank were established in 1946 after wartime negotiations held at Bretton Woods in the USA, with headquarters (opposite one another) in Washington, DC. The IMF was created to promote international monetary cooperation and resolve the inter-war economic problems (see Box 16.1), although several of these functions ended when the Bretton Woods system broke down in 1971 (seeBox 16.3). The IMF now has a membership of 185 countries, each of which contributes a quota of resources to the organization (proportionate to the size of their economy) which abo determines their percentage of voting rights and the amount of resources to which they can have automatic access. Since the 1980s, the IMF has become an institution offering financial and technical assistance to developing and transitional economies. The terms on which countries receive assistance include the government having to commit to undertake spe ofic conditions or policy reforms, called conditionalities (see www.mt.org) What we now call the World Bark started out as the International Bank for Reconstruction and Development (1BRD), an agency to foster reconstruction in war-torn Europe as well as development in the rest of the world. It has since become the world's largest source of development assistance, providing nearly $16 billion in loans annually to eligible member countries, through the BRD, the International Development Association (IDA), the International Finance Corporation (IFC), and the Multilateral Investment Guarantee Agency (MIGA). As with the IMF, the World Bank requires members to whom it lends to undertake specific reforms in their economy. Most recently, this has included requiring borrowing governments to demonstrate their commitment to reducing poverty in their countries. With the exception of the IDA (which is funded by donations), the World Bank's resources come from its issue of bonds in the capi- tal markets. These bonds are backed up by guarantees provided by the governments who belong to the institution (see www. worldbank.org) 246 NGAIRE WOODS into the USA, and to try to stem the outflow of dollars to the rest of the world). These actions broke the Bretton Woods system (see Box 16.3). But this was not the only change in the world economy during this period. In the 1970s, the period of high growth enjoyed. after the Second World War came to an abrupt end. leaving very high inflation. Further compounding the problem, the first oil crisis in 1973 plunged the world economy into stagflation (a combination of economic stagnation or low growth and high inflation). In the monetary system, the role of the IMF collapsed when the Bretton Woods system broke down in 1971 and the major industrialized countries failed to find a way to coordinate their exchange rate policies within the IME framework. Instead, the major currencies floated and industrialized countries began to discuss mon etary issues among themselves in groups such as the Group of Seven (or G7, comprising the USA, Japan, Germany, the UK, France, Italy, and Canada), which first met in 1975. In the trading system, cooperation had steadily grown in negotiations under the auspices of the GATT. However, in the 1970s, countries began using new pro tectionism (non-tariff barriers) to keep out the com petitive imports from successful developing countries. An egregious example of the new protectionism was the Multifiber Arrangement of 1974, which placed restrictions on all textile and apparel imports from developing countries blatantly violating the GATT principle of non-discrimination The developing countries' push for reform of the international economic system was grounded in a dif ferent way of thinking about IPE. Dependency theory and structuralist theories of international economic relations highlighted negative aspects of interdepen dence. Their central concern was to answer why so many countries in the world economy remained under- developed, in spite of the promises of modernization and global growth. Their answer was that the struc tures and institutions of the world economy impeded the possibilities of development in the South. The most sympathetic official 'Northern' answer to these con- cerns was voiced in the Brandt Report in 1980, the find- ings of a group of high-level policy-makers who had 15.12.2020 Against this background, developing countries strengthened their 1970s concerted campaign in the United Nations General Assembly for a New International Economic Order (NIEO). They were bolstered by the success of OPEC oil-producing devel oping countries in raising oil prices in 1973. They sought better representation in international eco- nomic institutions, a fairer trading system, more aid. the regulation of foreign investment, the protection of economic sovereignty, and reforms to ensure a more stable and equitable financial and monetary system (see Box 16.4). What was the breakdown' of the system? August 1971 US government announced that it was sus pending the convertibility of the dollar to gold at $35 per ounce This removed gold from the dollar-gold standard and paved the way for major currencies to float instead of staying at fixed val ces. The USA also announced at the same time that it was add- ing a 10 per cent surcharge on import duties (to improve trade balance by curtailing imports that were flooding into the USA, and to try to stem the outflow of dollars to the rest of the world) Box 16.3 The 'Bretton Woods system and its breakdown What was the Bretton Woods system? At the Bretton Woods Conference in 1944 t was agreed that all countries currencies would be fixed at a certain value. They became faxed to the dollar, and the US government promised, to convert af dollars to gold at $35 per ounce. In other words exchange rates were anchored to a dolar-gold standard in the vetton Woods system, any country wanting to change the value ofits currency had to apply to the IMF for permission. The result was very stable and unchanging exchange rate hence also turning back the Beetton Woods ideal of maintaining open trade in times of economic officulty Was this a sign of declining US hegemony? Over a decade after the breakdown of the Bretton Woods system, leading academics detuated whether the change reflected as us power or was indeed an exercise of its power, For some, the breakdown of the system was an exercise of US leadership the US hegemon smashed the Bretton Woods system in order to increase its own freedom of economic and political action (Gows 1983 Others argued that the USA had lost its capacity to maintain the sys tem, but explained that a regime could neverthes survive without the hegemon (Keohane 1984) At the heart of the debatewasa disa greement about whether cooperation in the international political economy depends on one state being both capable and willing to set and enforce the rules of the game, with powers to abrogate and adjust those rules. This debate about the nature of cooperation con tinues today in competing explanations of international institutions (see International institutions in the globalizing world economy) andan genocide 1999 Kosovo China's Wie tractors . 1-0661 A in chip you Chapter 16 International political economy in an age of globalization Box 164. The post war trading system, the GATT, and the WTO The General Agreement on Tarts and Trade RATES was an interum agreement signed in 1947 in the expectation that it would be superseded by an international trade organization. A perma nenttrade organization was not created until 1994, and so for four decades the interim GATT continued to exist an contracting parties, backed up by a very small secretariat Genewa and a minuscule budget in essence, the GATT wak forum for trade negotiations throu noftis culminating in the very successful Kennedy Round of 1962-7, where breakthroughs were made in the reduction of trade bar- rers among industrialized countries. However, when protection- sm flourished in the 1970s, the GATT proved powerless to restrain powerful members such as the USA and European countries from restricting trade ing the Multifiber Arrangement 1974 restricting been asked to examine how and why the international community should respond to the challenges of inter- dependence and development. The NEO campaign was unsuccessful for sev eral reasons. The United Nations General Assembly (UNGA) was an obvious institution for developing countries to choose in making their case since, unlike the IMF or World Bank, it offers every country one vote. However, the UNGA had no power to implements the agenda of the developing countries Furthermore, though many industrialized countries were sympa thetic to the developing countries' case in the 1970s. these governments did notact on the agenda at the time and by the 1980s a new set of governments with a de tinctly less sympathetic ideology had come to power in the USA, the UK, and Western Germany. The 1980s opened with a shift in US economic pol In 1979 the US Federal Reserve dramatically raised interest rates. This action was taken to stem inflation by contracting economic activity in the USA. However, the reverberations in the rest of the world economy were immediate and extensive. During the 1960s and 1970s, US and European deregulation led to the rise of global capital markets and an explosion of lending to develop- ing country governments. The rise in interest rates in 1979 made many of these loans unrepayable. The IMF was immediately called in to prevent any developing country defaulting on these loans, since it was feared that such a default would cause a global financial crisis. The debt crisis thrust the IMF into a repayment- enforcing role, ensuring that indebted countries under- took structural adjustment. This included measures to reduce inflation, government expenditure, and the role of the government in the economy including tele impor) and abusing the many exceptions and safeguards written into the agreement. The GATT also functioned as a forum for dispute selemente upholding trade rules. However, it was both slow and impotent in this regard, constrained by the need for consemus on any decision regarding disputes The GATT was replaced by the World Trade Organization (WTO) as a result of agreements forged in the last round of GATT us, the Uruguay Round (1966-4) Established on 1 January 1995, the WTOs func tions include administering WTO wade agreements acting as a forum for trade negotiations handling trade disputes, monitoring national trade policinc supplying technical assistance and train- ing for developing countries and cooperating with other interna tonal organizations. It is located in Geneva with a secretariat staff of 500 bewwww.o.org 247 trade liberaltration privatization, and deregulation Advocates of these policies were soon tabelled 'neo- liberals and contrasted with Keynesians (named after economist John Maynard Keynes) who advocated an active and interventionist government role in the econ- omy in order to ensure both growth and equity. By the late 1980s, the term Washington Consensus was being used, sometimes pejoratively, to imply that neo-liberal policies were mainly a reflection of US interests The 1990s brought the end of the cold war, and the challenge of how to integrate Central and Eastern European countries and the former Soviet Union into the global economy. The IMF and World Bank had to expand their toolkit and embrace a broader and deeper view of reform aimed at promoting 'good governance, in member countries. But many thought conditionality had gone too far when, in the wake of the East Asian financial crisis in 1997, the IMF imposed far-reaching and overly draconian conditions on Korea. The impact would be felt in subsequent years as the IMF's len ing role waned in most emerging market economies and they in turn took their place in a 620 of finance ministers Over this time, the World Bank sought to broaden its appeal through enhanced relations with govern ments as well as with non-governmental organiza tions (NGON Ins legitimacy seemed less tarnishe At the same time, the newly established World Trade Organization (WTO) began operations in 1995, open- ing up a new forum within which a broad range of international es would be negotiated, including not traditional trade issues but such things as intell lectual property rights, trade-related investment mea ures and food safety standards Case Study 1 The international financial crisis of 2008 WALL ST www.istockphoto.com/ONYS In September 2008, a large US investment bank called Lehman Brothers defaulted, catalysing a major financial crisis. The govern ment of the USA was soon forced to rescue the largest US in- ance company, American International Group (AIG), while the UK and other European governments were forced to intervene to rescue other institutions. The total costs of deaning up after the crisis were estimated one year laterat US$11.9 tillion, and in the fourth quarter of 2008 industrialized countries were experiencing an unprecedented economic decline of 75 per cent. In wealthy industrialized countries, the financial crisis exposed dures in corporate governance, in credit rating agencies, and In the first decade of the twenty-first century, a shift in global economic power became clear. In September 2003, during global trade negotiations in Mexico, a group of twenty countries, including Brazil, South Africa, India, and China, resisted the powerful USA and European Union and refused to engage unless some of their terms were heeded. This shift in power acceler- ated dramatically after the 2008 financial crisis, which cemented leaders of emerging economies into a new summit diplomacy-the G20. Several emerging coun- tries with China in the lead-became donors in their own right. As world energy consumption grew, so too did the power of countries supplying energy resources. In Venezuela, this led to a rhetoric of renewed Third Worldism not seen since the 1970s. Meanwhile, across most industrialized countries, calls for greater efforts to reduce climate-changing emissions became ever stronger. For scholars of International Relations, the twenty-first century brought serious questions about how international institutions might assist not only in managing new challenges in the global economy, but equally in managing a shift in power among the states that make up-and make work-the existing institutions. in regulation Poor corporate governance led to excessive risk uking by some providers of financial services Poorly designed incentives, such as pay and bonuses, favoured short-term risk- taking Credit-rating agencies, which should have signaled fra gilities in some institutions, had little incentive to do so. Most of all, the financial crisis exposed the enormous and costly implicit guarantee that governments give to financial services firms because they are simply too big to fail h poorer developing countries the crisis provoked what the IMF and World Bank would describe in 2009 as a 'development emer gency. Trade slumped a demand from the rich countries fell, and even as the world economy revered in 2010 the IMF was still pre dicting a further 16 per cent drop in low-income countries exports of goods and services. Remittances, or money sent back home by further 10 per cent in 2010. Flows of foreign direct investment dried workers in foreign countries, plummeted and were set to fall by a up. Aid flows became yet more unpredictable and never reached the levels donors had promised. In short, for developing countries, the crisis revealed that participation in an interdependent global economy carries great risks due to unregulated global finance (from which most developing countries benefit ). National and international policy-makers alike have agreed on the primacy of state authorities in regulation to restrict excessive risk. They have also agreed that national regulators must harmo nize their policies in order to achieve global financial stability Key Points Immediately after the Second World War international institutions were created to facilitate cooperation in the world economy. The onset of the cold war postponed the operation of these institutions, as the USA stepped in directly to manage the reconstruction of Europe and the international monetary system based on the dollar. The Bretton Woods system of managed exchange rates and capital flows operated until its breakdown in 1971, when the USA announced it would no longer convert the dollar to gold The 1970s were marked by a lack of international economic cooperation among the industrialized countries, which floated their exchange rates and indulged in new forms of trade protectionism Developing countries' dissatisfaction with the international system came to a head in the 1970s when they pushed unsuccessfully for a new international economic order Trade negotiations were broadened to include many new areas, but this led to later resistance from emerging economies In 2007 a power shift became more obvious in the global economy, with emerging economies such as China and India playing a more prominent role in negotiations in trade, finance, and development assistance, and in the G20 formed after the 2008 financial crisis. Traditional and new approaches to IPE Traditional approaches to IPE: liberal, mercantilist, and Marxian There are several competing explanations for the nature of the institutions and system described above. A slightly old-fashioned way to describe the competing approaches to IPE is to divide the subject into liberal, mercantilist, and Marxist traditions. These labels still usefully describe different economic traditions, each of which has a particular moral and analytical slant on global economic relations. The liberal tradition The liberal tradition is the free market one in which the role of voluntary exchange and markets is emphasized both as efficient and as morally desirable. The assump- tion is that free trade and the free movement of capi- tal will ensure that investment flows to where it is most profitable to invest (hence, for example, flowing into underdeveloped areas where maximal gains might be i made). Free trade is crucial, for it permits countries to benefit from their comparative advantages. In other i words, each country can exploit its own natural advan- tages, resources, and endowments, and gain from spe- cialization. The economy is oiled by freely exchangeable currencies and open markets that create a global system of prices, which, like an invisible hand, ensures an effi- cient and equitable distribution of goods and services across the world economy. Order in the global economy is a fairly minimal one. The optimal role of governments and institutions is to ensure the smooth and relatively unfettered operation markets. It is assumed that governments face a wide range of choices in the world system, and likewise vis--vis their own societies and populations. This means that governments that fail to pursue 'good' economic policies do so because decision- makers are either too corrupt or too ignorant of the correct economic choices they might make. The mercantilist tradition The mercantilist tradition stands in stark contrast to the liberal one. Mercantilists share the presumptions of realists in international relations. They do not focus on individual policy-makers and their policy choices, but rather assume that the world economy is an arena of competition among states seeking to maximize rela- tive strength and power. Simply put, the international system is like a jungle in which each state has to do what it can to survive. For this reason, the aim of every state must be to maximize its wealth and indepen- dence. States will seek to do this by ensuring their self- sufficiency in key strategic industries and commodities, and by using trade protectionism (tariffs and other limits on exports and imports), subsidies, and selective investments in the domestic economy. Obviously, in this system some states have more power and capability than others. The most powerful states define the rules and limits of the system: through hegemony, alliances, and balances of power. Indeed, stability and order will be achieved only where one state can play the role of hegemon, or in other words, is willing and able to cre- ate, maintain, and enforce basic rules. Amid this, the economic policies of any one government will always be subservient to its quest to secure the external and internal sovereignty of the state. The Marxian tradition The Marxian tradition also sees the world economy as an arena of competition, but not among states. Capitalism is the driving force in the world economy. Using Marx's language, this means that world economic relations are best conceived as a class struggle between the 'oppressor and the oppressed. The oppressors or capitalists are those who own the means of production (trade and industry). The oppressed are the working class. The struggle between the two arises because capi- talists seek to increase their profits and this requires them to exploit the working class ever more harshly. In International Relations this description of 'class rela- tions in a capitalist system has been applied to describe relations between the core (industrialized countries) and periphery (developing countries), and the unequal exchange that occurs between the two. Dependency theorists (who have focused mainly on Latin America) describe the ways classes and groups in the 'core' link to the 'periphery'. Underdevelopment and poverty in so many countries is explained as the result of economic, social, and political structures in countries that have been deeply influenced by their international economic relations. The global capitalist order within which these societies have emerged is, after all, a global capitalist order that reflects the interests of those who own the means of production. It becomes clear in contrasting these traditions of thinking about international economic relations that each focuses on different actors and driving forces in 250 NGAIRE WOODS Box 16.5 Traditional perspectives on IPE Liberal The world economy has the potential to be a seamless global market-place in which free trade and the free movement of capital shape the policies of governments and economic actors Order would be achieved by the invisible hand of competition in the global market-place. Mercantillist As an arena of inter-state competition, the world economy is one in which states seek to maximize their wealth and inde pendence vis--vis other states. Order is achieved only where there is a balance of power or hegemony Marxist The world economy is best described as an arena of capital- st competition in which classes (capitalists and workers) and social groups are in constant conflict, Capitalists (and the states they are based in) are driven by the search for profits and order is achieved only where they succeed in exacting the submission of all others the world economy, and that each has a different con- ception of what 'order' means and what is necessary to achieve it (see Box 16.5). Comparing the different traditions also highlights three different levels of analysis: the structure of the international system (be that international capitalism or the configuration of power among states in the sys tem); the nature of a particular government or com- petition within its institutions; and the role of interest groups and societal forces in a country. At each of these levels of analysis we need to ask: what drives the actors concerned, and therefore how might we explain their preferences, actions, and the outcomes that result? In answering this question we enter into more methodological preoccupations that today divide the study of IPE. New approaches to IPE International political economy is divided by the dif- ferent normative concerns and analytical questions highlighted by the traditions outlined above. Equally, the discipline is now subject to a lively methodologi- cal debate about how scholars might best explain poli- cies and outcomes in IPE. In essence, this debate is about whether you can assume what states' (and other actors') preferences and interests are. If you can, then rational choice (or 'neo-utilitarian') approaches to IPE make sense. However, if you open up the question as to why and how states and other actors come to have particular preferences, then you are pushed towards approaches now often labelled 'social constructivism (see Ch. 10). Political economy: the application of rational choice to groups within the state In the USA, the study of IPE has become dominated by a 'rational choice' or neo-utilitarian approach. This bor- rows economic concepts to explain politics. Instead of exploring the ideas, personalities, ideologies, or histori- cal traditions that lie behind policies and institutions, rational choice focuses on the incentive structure faced by those making decisions. It is assumed that actors interests and preferences are known or fixed, and that actors can make strategic choices as to how best to pro- mote their interests. The term 'rational choice' is a use- ful one to describe this approach since it proposes that even though a particular policy may seem stupid or wrong, it may well once have been rational. "Rational" in this sense means that for the actor or group con cerned, this was the optimal choice given the specific incentives and institutional constraints and opportuni- ties that existed at the time. Rational choice has been applied to interest groups and their influence on IPE in what has been called a political economy approach. This approach has its roots in explanations of trade policy which focus on interest groups. More recent applications have attempted to explain why countries adapt in par- ticular ways to changes in the world economy. The analysis proceeds on the assumption that govern- ments and their policies are important, but that the policies and preferences of governments reflect the actions of specific interest groups in the economy. These groups may emerge along class or sectoral lines. Indeed, the assumptions of rational choice are applied to explain how particular groups in the economy emerge and what their goals and policy preferences are. Furthermore, rational choice provides a frame- work for understanding the coalitions into which these groups enter and their interactions with other institutions. For example, in explaining why banks were able to expose the public to such risks through their excessively leveraged activities, some scholars focus on the ways the financial sector 'captured' the regulatory system. The private financial sector had 252 NGAIRE WOODS Box 16.6 Examples of new approaches to IPE Institutionalist Institutionalsts regard the world economy as an area of inter state cooperation. They see the core actors as governments and the institutions to whom they delegate power, and the key dre ing forces as rational choice at the level of the state, motivated by the potential gains from cooperation. For institutionalus, the kry condition for orders the existence of international institutions, which permit cooperation to continue Political economy For political economists, the world economy is characterized by competition among vested interests in different kinds of states, and the core actors are interest groups formed within the domes tic economies of the states. The key driving force is rational choice at the level of groups within the domestic economy responding to changes in the international economy Political economists are The globalization debate in IPE The nature and impact of globalization is the sub- ject of profound debate within IPE (as in other areas of International Relations discussed in this book). The term globalization is used to refer to at least four different sets of forces or processes in the world econ- omy (see Box 16.7) Internationalization describes the increase in economic transactions across borders that has been taking place since the turn of the century but that some argue has undergone a quantitative leap in recent decades. The technological revolution describes the effect of new electronic communication, which per- mits firms and other actors to operate globally with much less regard for location, distance, and borders. One effect of the technological revolution is to speed up Box 16.7 Four aspects of globalization Internationalization describes the increase in transactions among states reflected in flows of trade, investment, and capital, facilitated by inter-state agreements on trade, investment, and capital, and by domestic policies permitting the private sector to transact abroad The technological revolution refers to the way modern communications (Internet, satellite communications, high-tech computers) have made distance and location less important factors not just for government (including at local and regional levels) but equally in the calculations of other actors, such as firms in their investment decisions or in the activities of social movements not concerned with theorizing about the conditions necessary for international order Constructivist Constructivists focus on the ideas, knowledge, and historical circumstances that shape identity and preferences in the global economy and the boundaries within which international eco nomic relations take place. The concept of hegemony is used by those who probe the interests and ideas embodied in the rules and norms of the system Neo-Gramscians highlight that the dominant power in the system will achieve goals not just through coercion but equally by ensuring the consent of other actors in the system. This means that dominant powers will promulgate institutions, ideologies, and ideas, all of which help to persuade other actors that their best interests converge with those of the dominant power deterritorialization, or the extent to which territorial distances, borders, and places influence the way people collectively identify themselves and act, and seek politi- cal voice or recognition. In the decade before the 2008 crisis, there was much talk of footloose banks becom- ing deterritorialized and global. Their nationality was no longer relevant. However, in the wake of the crisis it became clear that banks may "live globally', but they die nationally, with their national governments picking up the costs of bailing them out. Finally, liberalization describes the policies undertaken by states that have made a new global economy possible. This includes changes in rules and institutions, which facilitated a new scale of transnational economic activity in certain Deterritorialization is accelerated by the technological revolution and refers to the diminution of influence of territorial places, distances, and boundaries over the way people collectively identify themselves or seek political recognition. This permits transnational political and economic activity, both positive and negative Liberalization describes government policies that reduce the role of the state in the economy, such as through the dismantling of trade tariffs and barriers, the deregulation and opening of the financial sector to foreign investors, and the privatization of state enterprises Chapter 16 International political economy in an age of globalization sectors (but by no means all) of the world economy. including the liberalizing of trade, investment, and production In IPE, several competing claims are made about glo- balization. For example, while some scholars argue that globalization is nothing new, others posit that global- ination is dramatically diminishing the role of the state (see Ch. 1) Still others claim that globalization is exac- ebating inequalities and giving rise to a more unequal and unjust world. To make sense of these different argu- ments and the evidence adduced to support them, it is worth thinking about the approaches to IPE covered in previous sections, for they help to identify key differ- ences in emphasis that give rise to conflicting interpre- tations of globalization. For example, sceptics who deny that globalization is transforming world politics tend to focus on the internationalization' element of globaliza- tion. They can then draw on evidence that throws into doubt whether the number of transactions taking place among states has indeed risen (UNDP 1997), and make the argument that there is nothing new' in the growing interdependence of states. By contrast, liberal enthusi- asts for globalization focus on technological innovation and the non-political 'objective' forces that are shrink- ing the world economy. They argue that this is creat- ing a less political, more efficient, more unified world i order. Those who focus on deterritorialization highlight that there is also a negative side to globalization. Just as technological innovation permits a more active global civil society, so too it permits the growth of an uncivil one. Terrorist networks and the growth of transna- tional crime grow easily and are harder to combat in an 253 era of globalization. This puts an important caveat on a final argument about globalization-one that priori tizes the role powerful states play in shaping the process Focusing on liberalization, several analysts highlight the role of powerful states, and the USA especially, in setting the rules of the new globalized international economy, and predict their increasing influence over other states. Yet the 2008 crisis demonstrated some limits to this. The post-war order and institutions were created by the USA, which was at the time the world's largest creditor, and had much to gain from the liber- alization of trade in certain sectors and the liberaliza- tion of global finance. However, in 2008 the USA was the world's largest debtor. Emerging economies such as China (see Case Study 2), Brazil, and India had to be the government plays a stronger role in the economy engaged in a coordinated solution. In these countries than in the USA. At the same time, as these economies internationalize in more sectors, they too will acquire an interest in global liberalization. Key Points 08 Globalization is used to describe the effects of several different drivers of change Internationalization is worth distinguishing from liberalization. The former refers to increasing economic transactions across borders, while the latter refers to governments policies which promote this activity While technology has transformed what can be done globally, the deterritorialization it creates spurs both globalization and anti-globalization networks. International institutions in the globalizing world economy institutions might play in managing the new problems and challenges arising from globalization. Globalization increases interdependence among states and increases the need for governments to coordinate. Financial crises in the 1990s, including in East Asia, led some policy-makers to call for stronger, more effective international institutions, including a capacity to ensure better information and monitoring, deeper coopera- tion, and regulation in the world economy. At the same time, critics argued that the crisis revealed the problems and flaws of existing international institutions and the bias or interests that they reflect. These positions echo a larger debate in IPE about the nature and impact of by certain rules, norms, or decisions of international institutions in the world economy. This debate is impor- tant in helping us to determine what role international Competing accounts of institutions echo the differ- ences in approaches to IPE already discussed (see Table 16.1). Institutionalists (or neo-liberal institutionalists (see Ch. 8)) tell us that states will create institutions in order to better achieve gains through policy coordina- tion and cooperation. However, several conditions are necessary for this to occur. Under certain conditions, institutionalists argue that states will agree to be bound organizations. This does not mean that the most power- ful states in the system will always obey the rules. Rather, 254 NGAIRE WOODS Table 16.1 The debate about institutions Institutionalist (or neo-liberal institutionalist) Under what conditions will states create international institutions? What impact do institutions have on international relations? What are the implications for globalization? for mutual gains (rationally calculated by states) Expand the possible gains to be made from cooperation Institutions can manage globalization to ensure a transition to a more liberal economy (see Box 16.5) Realist (or 'neo-realist) Only where relative position vis--vis other states is not adversely affected Facilitate the coordination of policies and actions but only in so far as this does not alter the balance of power among states Institutions will manage globalization in the interests of dominant and powerful states institutions affect international politics because they open up new reasons to cooperate, they permit states to define their interests in a more cooperative way, and they foster negotiations among states as well as compli- ance with mutually agreed rules and standards. The institutionalist account offers reasons for a certain kind of optimism about the role international institutions will play in managing globalization. Institutions will smooth over many gaps and failures in the operation of markets, and serve to ensure that states make genuinely rational and optimizing decisions to cooperate. Globalization will be managed by existing institutions and organizations, and indeed new institu- tions will probably also emerge. Globalization managed in this way will ensure that the world economy moves more towards the liberal model and that both strong and weak states benefit. Although the financial crisis of 2008 highlighted serious gaps in financial regulation - (see Case Study I), these can be remedied so as to per- mit countries to harness the advantages of free trade and free movements of capital in the world economy. Realists (and neo-realists in particular) disagree with institutionalists (see Chs 5 and 7). Realists reject the idea that institutions emerge primarily as a solution to universal problems or market failures. They argue that international institutions and organizations will always reflect the interests of dominant states in the system. When these states wish to coordinate policies with others, they will create institutions. Once created, however, these institutions will not (as the institution- alists argue) transform the way states define and pursue Constructivist Institutions arise as reflection of the dentes and interests of states and groups that are themselves forged through interaction Reinforce particular patterns of interaction, and reflect new ones Changing patterns of interaction and discourse will be reflected in institutional responses to globalization their interests. Institutions will be effective only for as long as they do not diminish the power of dominant states vis--vis other states. Let us consider what this means in practice. Take a state deciding whether to sign up to a new trade agree- ment or support the decision of an international orga- nization. The institutionalists argue that policy-makers will consider the absolute gains to be made from the agreement, including the potential longer-term gains, such as advancing a more stable and credible system. of rules. The neo-realists, by contrast, argue that pol icy-makers will primarily be concerned with relative gains. In other words, they will ask, "Do we gain more from this than other states?' (rather than "Do we gain from this?"). If other states stand to gain more, then the advantages of signing up are outweighed by the fact- that the power of the state will be diminished vis--vis other states. For realists, cooperation and institutions are heavily constrained by underlying calculations about power. Having signed an agreement or created an international organization, a powerful state will not necessarily be bound by it. Indeed, if it gets in the way of the state's interests (defined in realist terms), a powerful state will simply sweep the institution aside. The implications for globalization and its impact on weak states are rather grim. International institutions, including organizations such as the IMF, the World Bank, the WTO, the G8, and the EU, will manage glo- balization, but in the interests of their most power- ful members. Institutions will only accommodate the needs and interests of weaker states when in so doing Chapter 16 International political economy in an age of globalization 255 they do not diminish the dominant position of power fal states From a realist perspective, it follows that crit is who argue that the international institutions do not work for the interests of poor and developing countries are correct. However, the realists are equally certain that those protesting about this will have little impact. This interpretation of international institutions is rebutted not only by institutionalists, but by those wrong to assume that institutions can only be reflections who delve into the ways that ideas, beliefs, and inter- actions shape the behaviour of states In an ear er section, New approaches to IPE, we mentioned constructivists and that both its interests and identity are influenced by a social structure of interactions, normative ideas, and beliefs. If we cannot assume that states have a particu- lar identity or interest prior to their interactions, then the institutionalists are wrong to assume that institu tions emerge as rational responses to the needs of mar- kets, trade, finance, and the like. Equally, the realists are of power politics. To quote constructivist Alex Wendt (1992), anarchy is what states make of it In other words, identities and interests are more fluid and changing than realists permit. Through their interactions and dis course, states change and these changes can be reflected in institutions. Constructivists reject the idea that institutions reflect the rational calculations of states, either in inter-state competition (realists) or as part of a calculation of longer-term economic advantage and benefits from cooperation (institutionalists). In fact, what construc- vists reject is the idea that states interests are objec- tively definable and fixed Instead, they argue that any one state's interests are affected by its identity as a state. Case Study 2 The rise of China in global economic governance AS Cre XI'AN KCHANGCHUN 4419 BEIJING ZHUHAI HAIKOU K L L Constructivism and the neo-Gramscian approach highlight actors and processes involved in globaliza- tion that are neglected in realist and institutional- ist accounts, but which have important ramifications for institutions. For example, when transnational groups protest against the WTO, the IMF, and the www.istockphoto.com/Shelly Ac China has risen rapidly since its accession to the World Trade Organization in 2001. By 2010 China was the world's largest exporter, the largest recipient of investment, the fastest growing consumer market, and the world's leading provider of manufac tured goods Chinese aid, investment, and trade were fuelling growth across the continent of Africa. In the IMF, China was set to become the third largest vote-holder The 2008 financial crisis further accelerated the rise of China by weakening the United States and the European Union eco- nomically, eroding the power of their ideas about how best to modernize an economy, and requiring them to include Chinal leader (and others) in a global emergency committee (the G20 Fuelling Chinat se in global economic governance is the country's economic growth and its shift in growth strategy away from low-tech export-led growth towards more high-tech consumption-led growth China) own domestic interest groups are beginning to push for their interests to be reflected in global rules Equally, Chinas expert participation in international organi zations is increasing as Chinese economists and lawyers rise up to positions such as Deputy Managing Director of the IMF, Secretary to the IMF Board, and Chief Economist in the World Bank in the WTO, China has sat as an observer in every single dispute-settle ment case Chinas rise has produced a mixed reaction in the United States and in Europe, China is regularly accused of cheating in the international trade and monetary regimes discussed in this chap tor. China is said to be tealing intellectual property although such allegations can be (and are) formally made by any country against another) and definitely adjudicated by the World Trade Organization Equally, China is accused of manipulating its cur rency to retain export competitiveness. This latter claim has been assessed by the IMF, although the stahs of es aseuament is nowhere near as strong as an adjudication of the WTC not least because the United States will not delegate such power to the IME Beyond accusations of cheating the rise of China is seen by many as a challenge to US hegemony in the United States this leads to contradictory exhortations that China should assume t responsibilities as a great power, and fear about China ever doing such a thing for its part, China has no intention of replacing US hegemony yet. It frames its new policy of engagement in global economic governance as a search for harmonious relations with the rest of the world and as a way to represent and further the interests of other developing countries. 256 NGAIRE WOODS World Bank, they are part of an ongoing dialogue that affects states in several ways. The international attention to these issues places them on the agenda of international meetings and organizations. It also puts pressures on political leaders and encourages interest groups and pressures to form within the state. As a result, the beliefs, ideas, and conceptions of interest in international relations change, and this can shift the attention, nature, and functions of international insti- tutions. On this view, globalization is not just a process affecting and managed by states. Several other actors are involved, both within and across societies, includ- ing international institutions, which play a dynamic role. The governance or management of globalization is shaped by a mixture of interests, beliefs, and values about how the world works and how it ought to be. The existing institutions doubtless reflect the interests of powerful states. However, these interests are the Conclusion Globalization increases the challenges faced by all actors in the world economy: states, firms, trans- national actors, and international organizations. Strong states are trying to shape institutions to man- age financial crises, powerful NGOs, and globalizing firms. Weak states are trying to survive increasingly precarious and changeable economic circumstances. Common to all states is the search for greater stabil- ity and predictability, although governments disagree over how and where this should be achieved. One layer of governance this chapter has not examined is that of regional organizations and institutions (see Ch. 26). The fact that in recent years virtually every state in the world has joined at least one regional trade grouping products of the way states interact and are subject to reinterpretation and change. Key Points . Institutionalists argue that international institutions will play an important and positive role in ensuring that globalization results in widely spread benefits in the world economy. Realists and neo-realists reject the institutionalist argument on the grounds that it does not account for the unwillingness of states ever to sacrifice power relative to other states Constructivists pay more attention to how governments, states, and other actors construct their preferences, highlighting the role that state identities, dominant beliefs, and ongoing debates and contestation plays in this process. underscores the search for new ways to manage global- ization. At the same time, regionalism highlights the scepticism of many states about international institu- tions, and their fears that institutions are too dominated by powerful states, or unlikely to constrain them. The result is an emerging multi-layered governance in the world economy. At each level (international, regional, and state) the core issues debated in this chapter arise. These include: Whose interests are served by the insti- tution? What forces are shaping it? Who has access to it? Whose values does it reflect? Globalization casts a spotlight on these arrangements since the transforma- tions occurring in the world economy are being power- fully shaped by them.