Questioning Globalization: The Possibilities of International Economics and Governance (Second Edition)

Author: Paul Hirst, Graham Thompson
Translators: Zhang Wencheng, Xu Baoyou, He Hefeng
Country: United Kingdom
Publisher:
Publishing Time: 2002-09-01
Features: The global economy is an ideal type different from the economy between nations and can be elaborated through a comparison with the economy between nations. In this global system, different national economies are included in and re-integrated into the international processes and exchanges. Conversely, the economy between nations is such an economy where processes determined at the level of national economies still dominate, and international phenomena arise from the unique and different manifestations of national economies. The economy between nations is a synthesis of various functions centered on the nation. Therefore, although there is an increasing international economic interdependence (e.g., in financial markets and trade in manufactured goods) in this economy, these interdependencies often present either opportunities or constraints for the role of the nation and its public regulators. The global economy elevates these nation-based interdependencies into a new force. As markets and production become truly global, international economic institutions also become autonomous and alienated from society. Now, domestic policies of both private companies and public regulators must typically take into account the major international factors affecting their business scope. As the interdependence of the system increases, the nation level is permeated and transformed by the international level. In this global economy, the challenge posed to different national government agencies is: how to construct a policy framework that coordinates and integrates their regulatory efforts to adapt to the systemic interdependence of their economic roles. Therefore, one of the main consequences of the global economy may be: fundamentally speaking, the governance of the global economy is problematic. A socially decontextualized global market is difficult to regulate, even if regulators cooperate effectively and their interests are completely aligned. The main difficulty is to construct both effective and unified national and international public policy models to address the forces of the global market. The interdependence of national and market economy systems does not necessarily lead to harmonious integration that can benefit world consumers from truly independent and efficiently allocated market mechanisms. On the contrary, it seems very reasonable that even the residents of advanced countries and regions that have achieved success will be dominated by autonomous and uncontrollable (because they are global) market forces. Interdependence can easily promote disintegration between regulatory agencies at different levels—i.e., competition and conflict. This conflict will further weaken effective public governance at the global level. Those who are enthusiastic about the efficiency of free markets and believe that corporate management is superior to public institutions will view this as a rational world order liberated from the constraints of outdated and inefficient state public intervention. Other less optimistic but globalizing people, such as Cerney (1998), view it as a world system in which there is no general or sustained public reinsurance for losses caused by adverse competitive outcomes or market failures in various places. We must largely take the gold standard as a benchmark in our discussion because, as an integrated economic mechanism and its significant characteristics, it holds a key position. The system has important ideological and theoretical significance because it is not only "voluntarily" joined by the parties involved (without a "treaty") but is also believed to establish "automatic" principles for operation and adjustment. According to the "orthodox" view, the other systems that emerged later were measured against the gold standard—it is something that must be emphasized but is often overlooked. The foundation of the system is the determination of an official gold price for each currency, and the import and export of gold are not restricted by the current account and capital account. To influence the domestic money supply of each country, gold can be continuously exported or imported in a country. Thus, the issuance of paper money and metal coins is directly linked to the level of gold reserves. The solution to any short-term liquidity crisis (i.e., gold outflow) is first to provide loans to the central bank at a premium ("lender of last resort"). If the gold price ("par value") must be suspended, this should only be temporary, and convertibility must be restored as soon as possible, supplemented by domestic contractionary policies if necessary. Here lies the key link between domestic and international conditions: domestic wages and prices/costs must be flexible to allow the nominal price level to be endogenously determined through the global supply and demand for gold. Thus, as it has actually functioned so far, the gold standard represents a model of an integrated economy, under which "national autonomy" is minimized. As expected, the gold standard never operated entirely in this automatic manner. The gold standard encountered great difficulties in proposing domestic contractionary indicators to reflect its operating conditions. This led to various "gold measures" to mitigate the severe impact of gold flows on the domestic economy, the most important of which was concealing changes in the exchange rate of domestic currency against gold to protect reserves or maintain the level of domestic economic activity (so-called "gold parity massage"). However, despite this, exchange rates remained within a relatively narrow range between 1870 and 1914. The system also required a considerable degree of cooperation between central banks because the system was to operate through various forms of discretion and action—much of the judgment required was actually inconsistent with formal rules. During the gold standard period, no currency could nominally support the money supply or price level, as the entire system and the supply and demand for gold supported them. No country, even Britain, bore the responsibility of supervising ("the key to the success of the system") "money supply." What supported the system and provided political support for its effective operation was Britain's commitment to free trade (and its ability to monitor it) and the depth of its London financial market. The economic weakness of the gold standard was its predetermined allocation of supply and demand shocks beyond the jurisdiction of any nation, which increased economic instability and made instability a persistent feature of the system. Additionally, excessive accumulation of gold reserves by any country, whether intentional or unintentional, could trigger a general deflation in the system. The instability between the two World Wars still plagued the international economic system and remains a major cause of the current instability and concern in international economic trends. The international community has always been worried about how to avoid the large-scale decline in international (and domestic) economic activity that has occurred at certain times (1929–1933, with foreign trade declining by two-thirds, leading to comprehensive capital controls, currency devaluation, and deflation). Even by 1938, total trade only accounted for 90% of that in 1929, despite the full recovery of world production. What followed was the rise of protectionist blocs to address the survival challenges of each country. Short-term loans were particularly problematic, as they differ from foreign direct investment in that they do not bring foreign technology or skills. If property rights are guaranteed and trade positions are solid, direct investors have no need to worry about foreign exchange controls or capital flow controls. Their main purpose is to take advantage of low wages in countries like Indonesia or favorable geographical locations in countries like Singapore. Some countries have short-term capital flow levels lower than foreign direct investment, and their impact seems less severe. Malaysia has a higher ratio of foreign direct investment to short-term loans than Thailand, and it experienced severe currency devaluation and large swings in the stock market, but it did not resort to the International Monetary Fund. Singapore's foreign investment is mainly foreign direct investment—in the period from 1988 to 1992, Singapore was the second-largest recipient of foreign investment after China. However, due to its very low level of short-term external debt, it withstood speculative pressure in 1997, allowing the Singapore dollar to depreciate against the U.S. dollar. Singapore's substantial foreign exchange reserves mean the government can intervene in the market without intervention, accepting some adverse effects on economic activity caused by rising interest rates. To address the changes in the international financial system mentioned above, three unique regulatory areas have developed. One area involves the coordination and regulation of monetary, fiscal, and exchange rate relations among the main participants of the three major groups. Broadly speaking, this is actually limited to issues such as determining the global money supply and exchange rate control, as the coordination of fiscal policy has not been the primary concern of economic policy since the late 1970s. As discussed in Chapter 2, efforts to control international liquidity through multilateral efforts failed after 1979. This created an important feature of the current period: highly uncoordinated governance activities. On one hand, the international nature of the financial system is increasing, while on the other hand, the "national" authority of the major central banks still dominates, and the regulatory mechanisms of financial markets and institutions are generally oriented toward the nation-state, creating a institutional gap between the two. How to bridge this institutional gap? From the three major groups to the G7 summit meetings, although they provide a venue to address major issues, they still lack an appropriate institutional foundation: these summit meetings do not have a permanent secretariat; they operate in an informal atmosphere without strict rules or a specific agenda; they do not bear appropriate external responsibilities for the decisions made; and even if a country does not implement an agreement, sanctions are ineffective. As a result, from the perspective of controlling international liquidity, the summit meetings have achieved only partial success and are often accidental. The "exchange of views" activities they embody have led to some targeted interventionist monetary initiatives rather than a permanent institutionalized system for regulation. Although the market-oriented international monetary system has not produced a formal international central bank, as discussed in Chapter 2, the task may still fall to a specific country and its central bank. Therefore, as we will see below, the U.S. Federal Reserve has always played a leading role in proposing initiatives related to governance and regulation. The second important aspect of governance in the market-oriented international monetary system, namely the characteristics of the international payment mechanism, is relatively well-developed institutional arrangements. The clearing and settlement systems for international financial transactions may not seem to be a particularly important aspect of the international monetary system, but whether they are organized by banks or securities markets, they are crucial for the continuation of all financial activities. This activity has the characteristics of a "public good"; it requires collective organization but suffers from severe free-rider problems. At the national level, central banks play a significant role in creating and supervising payment mechanisms, providing "lender of last resort" services as an important function of central banks. As long as central banks have not fulfilled this function at the international level, the risk of default may increase, and panic may be amplified throughout the system. In fact, once the problem is clearly recognized, it is not difficult to form a theory that European countries also lack a basis for taking some common action, despite conflicting national interests. Cooperation among EU countries is necessary to make the EU a powerful entity, and this cooperation can only be re-emphasized when there is some solid basis for collective action. It now appears that the European Monetary Union will launch as scheduled, and with a sufficient number of countries participating, it will be successful. However, it should be said that the EU has done well in looking outward at its external environment and negotiating. Disagreements among member states on these matters are far fewer than when the EU focuses on internal development. External considerations can also provide a basis for convergence, allowing member states to achieve a balance between cooperation and competition in promoting a strategy that encourages close cooperation among major participants in the world economy and moves toward common goals. However, disputes between members of international institutions such as the three major groups are too few in some aspects. The United States often achieves its objectives easily and often does so. For example, in concluding the Uruguay Round trade negotiations, the EU gave in too easily on some key issues, and the negotiations did not even involve issues of intellectual property and agricultural trade. If the EU had been firm, it could have fought for the interests of developing countries in the field of agricultural trade; it would have been particularly so, given that the EU is more sympathetic to developing countries and has closer ties with them. In that case, the international community could have had many "common bases" on economic issues. A certain degree of divergence will help to more clearly define the international economic system, more strongly advocate the special interests of the EU and related countries and regions, and further unify the EU's internal stance (because "external" conflicts increase pressure for integration). As conflicts within the three major groups increase, the EU can more distinctly exert its influence, which will help create political conditions for a more consistent internal decision-making process. At this point, the Rome Treaty has transferred most of the authority over foreign trade matters to the EU, which helps Europe maintain a strong presence in international trade, investment, and coordinated management discussions. This does not mean that the EU cannot speak out powerfully in these negotiations. Nor does it advocate wild conflicts, protectionism, or inaction. Rather, it calls for the EU to operate within the framework of supporting multilateralism while more clearly defining its unique external interests. These positions are not incompatible. The key to deepening the EU internally clearly lies in the various relationships it has demonstrated in its external image. For example, as a common voice shaping a new international governance agenda, it has played a role in the General Agreement on Tariffs and Trade