Financial globalization and international trade

Financial Globalization and International Trade The classical liberal political economy of England and Scotland:  In the long run, it is beneficial to all if markets are allowed to operate freely with each other Why is the market good?  As the most efficient means of organizing human production and exchange (an ‘invisible hand’ guiding and coordinating economic activity) Some of the advantages of international markets over national markets:  trade across national borders, which in turn generates wealth and brings about prosperity;  opportunities for economic co-operation that brings about interdependence among states;  International capital markets, allocate money more efficiently than local ones The argument in favor of free markets speaks:  against protectionism, which, from a liberal perspective, is a consequence of states acting according to short-sighted and perverse conceptions of the ‘national interest’  against mercantilism (the dominant trade practice at in the early 1800s) Two important limitations of markets:  Built-in inequality of participants  Periods of irrational behavior and speculative excess (market inefficiencies particularly in financial markets) The great depression: led to the economic collapse of 1929-1934: There are important similarities with the current crisis:  The banking crises so crippled credit markets that lending virtually stopped  Depositors would not keep money in banks fearing that banks would close So a run on the banks developed at the first sign of difficulties The US federal government dramatically increased its role during the New Deal:  It imposed significant controls on trade  There was a decreased reliance on markets and more on state regulation and state-induced consumption (large public projects, etc.)  Regulated economy  Demand-side economics (associated with British economist John Maynard Keynes) Markets are imperfect  International economic order is imperfect  All markets operate within a political framework  To the extent to which international power structures are supportive of global markets, global markets are likely to be sustained  But international power structures are fragile and prone to instability, which often undermines the stability of markets Summary from the last time: Markets are efficient but need some regulation because of inherent limitations How much regulation is subject to political debate Stable currency values are necessary in order to have trade Political arrangement to underline a stable international monetary system (corresponding to the political structures of power) There were two such important political arrangements over the last 150 years: the gold standard and the Breton Wood system Group 77  It pressed for changes in the rules of the international economic system to make it easier for poor countries to participate)  Third world countries such as Argentina, Brazil, India, and Lebanon argued for: international economic regimes that would REGULATE rather than ABOLISH national interventions; greater access to OECD markets; for aid similar to what the US had given to Europe  This set of proposals (put forth over the 1970s) came to be known as the New International Economic Order (NIEO) Things were getting complicated for the US…  On top of this political pressure from the Third World countries…  Individual oil producers and, later OPEC as a whole, jumped on the industrial West’s growing oil dependence  The problem was political Two important material changes:  First: the rise of the high-tech companies (Hewlett Packard, Microsoft, ATT) increasingly interested in global markets  Second: there was growing popular concern about high unemployment, slow growth, and inflation, which left voters and others open to new policies The rise of “the supply-side” economics:  All of these factors combined pushed a pendulum away from Keynesian economics and towards freer markets  Milton Friedman and his followers: Their approach came to be called "market fundamentalism," since it saw "freer" markets as the solution for every economic problem  You jump-start the economy by privatizing (UK), cutting taxes, and deregulating Reagan came into office in 1981 with several objectives:  Domestic level: antiinflationary policy  International level: the push in the direction of regional trade agreements The larger blocs: made exports cheaper to produce, allowed firms to grow, made it easier to attract foreign investment, and encouraged the consolidation of banks and corporations Regional integration (the EU, NAFTA, Mercosur) in the 1990s became an important component part of the overall process of economic globalization The Reagan administration tried to:  undermine the Third World alliance;  undermine the UN system;  privilege institutions that encourage market discipline on Third World development policies During the 1990s the issue was decided in favor of supporters of global integration  From an economic point of view N America and W Europe defined the world’s course (1/10 of the population but half the world economy and 2/3 of world trade)  There was hardly universal agreement on free trade, but official policy came to accept it as a matter of course The Washington consensus:  the use of international financial institutions (the IMF and the World bank) to promote free markets and the supply side economics International financial institutions  promoted economic liberalization in the developing world (things such as trade and capital markets) with a corresponding deregulation of all aspects of the economy IMF (and the WB) structural adjustment programs required governments to:  eliminate uncompetitive nationalized industries;  cut subsidies to consumers and eliminate services (essential food-stuffs, steep reductions in spending on health, education, and other social services)  lift restrictions on capital movement The direction of financial globalization will change in three important ways:  First, Western finance is going to be regulated  Second, the balance between state and market is going to change in other economic areas  Third, the US is likely to lose its economic clout and intellectual authority International trade negotiations:  The advanced industrial countries push the opening of the markets in the developing countries to their industrial products  At the same time, they continue to keep their markets closed to the products of the developing countries, such as textile and agriculture  While they preach that developing countries should not subsidize their industries, they continue to provide billions in subsidies to their own farmers Official trade negotiations:  The last time official trade negotiations were successful was in 1994 the year when the World Trade Organization was created: 125 nations agreed to a significant drop in trade barriers  In 1999, the attempt to launch a new round of trade negotiations crashed in Seattle  In 2001, the trade ministers met again in Doha, Qatar, and decided to initiate a new round that, they agreed, would be concluded in four years Regionalism and Global Trade:      The Asia-Pacific Economic Co-operation forum; The Association of South-East Asian Nations EU, NAFTA Mercosur A surge in trade despite the failure of WTO negotiations for two reasons:  Technological innovations—from the Internet to cargo containers—lowered the costs of trading  Political environment more tolerant of openness ... liberalism, the first attempt to expand international trade; roughly between 1860s and 1914) Created a system of fixed exchange rates (and helped both investment and trade) The Bretton Woods System... Washington consensus:  the use of international financial institutions (the IMF and the World bank) to promote free markets and the supply side economics International financial institutions  promoted... organizing human production and exchange (an ‘invisible hand’ guiding and coordinating economic activity) Some of the advantages of international markets over national markets:  trade across national