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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 shortsighted and perverse conceptions of the ‘national
interest’.
 against mercantilism (the dominant trade practice at in
the early 1800s).
Two important limitations of markets:
 Built-in inequality of participants.
 Periods of irrational behavior and speculative
excess (market inefficiencies particularly in financial
markets).
The great depression: led to the economic
collapse of 1929-1934:
There are important similarities with the current
crisis:
 The banking crises so crippled credit markets that lending
virtually stopped.
 Depositors would not keep money in banks fearing that
banks would close. So a run on the banks developed at
the first sign of difficulties.
The US federal government dramatically
increased its role during the New Deal:
 It imposed significant controls on trade.
 There was a decreased reliance on markets and more on
state regulation and state-induced consumption (large
public projects, etc.)
 Regulated economy.
 Demand-side economics (associated with British economist
John Maynard Keynes)
Markets are imperfect
 International economic order is imperfect.
 All markets operate within a political framework.
 To the extent to which international power structures are
supportive of global markets, global markets are likely to be
sustained.
 But international power structures are fragile and prone
to instability, which often undermines the stability of
markets.
Summary from the last time:
Markets are efficient but need some regulation because of
inherent limitations. How much regulation is subject to political
debate.
Stable currency values are necessary in order to have trade.
Political arrangement to underline a stable international monetary
system (corresponding to the political structures of power).
There were two such important political arrangements over the
last 150 years: the gold standard and the Breton Wood system.
In order to have international trade you need
to have stable monetary relations:
 The Gold standard (the period of classical
liberalism, the first attempt to expand
international trade; roughly between 1860s and
1914) Created a system of fixed exchange rates
(and helped both investment and trade).
The Bretton Woods System after WW2
 created the IMF, the World and the GATT (the set or
rules, norms and values);
 system created the gold-dollar regime (fixed
exchange rate system).
International Monetary Fund
 Its primary role was to prevent the global economic crisis that
engulfed the world during and after the Great Depression of the
1930s:
 1. Monitor a new system for valuing national currencies, the dollargold standard.
 2. Make short-term loans to countries experiencing balance-of-payments
problems;
 3. Compile an annual report on each member country's economy.
Originally, the IMF was:
 1. based on a recognition that markets often did not
work well – that they could result in massive
unemployment and might fail to make needed funds
available.
 2. founded on the belief that there is a need for
international pressure on countries to have more
economic policies that promote expansion.
The triumph of the Keynesian (“demandside economics)…
 over the laissez faire economics (both
domestically and internationally).
IMF:
 1. Monitor a new system for valuing national
currencies, the dollar-gold standard.
 2. Make short-term loans to countries experiencing
balance-of-payments problems;
 3. Compile an annual report on each member
country's economy.
International monetary relations stabilized,
international trade was liberalized:
 The liberalization of world trade was the most important
achievement of the Bretton Woods system.
 After six months of negotiations, the original GATT members
signed over a 100 agreements, affecting more than 45
thousand tariffs that covered about half of world trade.
 This was a shift in the direction of global liberalization of
trade.
The Bretton Woods system delivered the
goods:
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economic growth,
low unemployment (Unemployment averaged just 3
percent in the main OECD countries, compared to 5
percent during the gold standard and 8 percent in the
interwar years).
stable prices.
relatively free trade,
stable currency values,
and high levels of international investment (but mostly
across the Atlantic).
Postwar (1950-1973) economic growth
was extraordinary everywhere:
 The advanced capitalist nations as a whole grew three
times as fast as in the interwar years and twice as fast as
before World War One.
 In the glory years of classical liberalism before 1914 world
trade volume doubled every 20 to 25 years.
 After 1950 world trade volume doubled every 10 years.
This was a political arrangement.
 It was a compromise dictated by the needs of the day.
 Back then the US was dominant and there was a common
threat around which to unite. (Even with those conditions, it
took the US almost four full years from the end of World War
II until Marshall Plan money really started making its way into
Europe).
 It took a depression, the Second World War, and the
beginning of the Cold War to motivate real rather than
symbolic actions concerning the creation of a functioning
international community, at least the western branch of
such a community.
Some examples of the political
arrangements involved:
 In monetary relations, European countries tightly
controlled their currencies, strictly limiting the degree to
which private citizens could convert national money into gold
or dollars.
 The US removed most of its trade barriers but accepted
European and Japanese protection.
 The US provided significant funds through the Marshal
plan.
Post WW2 alternative models of
economic development:
 1. Import Substitution Industrialization (ISI): government
involvement (like that in W. Europe and North America in the
19th century) relied on trade barriers to stimulate national
industry -- in response to the first limitation of free
markets, namely, inequality of participants)
 2. More radical: state intervention but also redistribution of
wealth and virtual elimination of private ownership -- largely
addressing the second limitation of free markets,
excesses in financial markets).
Two trends, undermined the Bretton
Woods system:
 1. the restoration of international finance in the
course of the 1960s;
 2. the increasing pressure on the American
dollar.
The push for the New Economic
International Order
 international economic regimes that would REGULATE
rather than entirely ABOLISH national interventions;
 greater access to OECD markets.
 for aid similar to what the US had given to Europe;
 higher prices for exports.
The end of the Breton Woods system:
 The Breton Woods System eventually broke down because
of a decline in the power and influence of the US.
 The end of the B-W system marked the end of the rules dear
to the US and opened up the room for the reconstruction of
the economic order.
 This decline led to the switch to a regime of floating
exchange rates from 1971.
What happened to alternative models?
1. The typical ISI economy went through periodic balance of
payments crises.The government restricted imports but
there was an ongoing need for imported goods. Spending
chronically outpaced government revenue, and these
budgets deficits were usually covered by printing money.
2. The communist world also faced increased difficulties:
Economic growth in the centrally planned economies
slowed continually over the late 1960s and early 1970s.
The push for the New Economic
International Order:
 The U.S. imagined postwar international economic institutions as
progressively abolishing national restrictions.
 States that had been wealthy before the War (colonial powers)
went along because the US gave the previously rich market
states the opportunity to reconstruct their economies (through
the Marshall Plan).
 Latin American and the independent and colonial areas in Asia
and Africa accepted the system, because they had no choice
(and were not politically organized at the time).
 Third World governments felt cheated out of the tradeinduced growth that the rich nations enjoyed in the 1950s and
the1960s.
Group 77
 It pressed for changes in the rules of the international economic system
to make it easier for poor countries to participate).
 Third world countries such as Argentina, Brazil, India, and Lebanon argued for:
international economic regimes that would REGULATE rather than
ABOLISH national interventions;
greater access to OECD markets;
for aid similar to what the US had given to Europe.
 This set of proposals (put forth over the 1970s) came to be known as the New
International Economic Order (NIEO).
Things were getting complicated for the
US…
 On top of this political pressure from the Third World
countries…
 Individual oil producers and, later OPEC as a whole, jumped
on the industrial West’s growing oil dependence.
 The problem was political.
Two important material changes:
 First: the rise of the high-tech companies (Hewlett Packard,
Microsoft, ATT) increasingly interested in global markets.
 Second: there was growing popular concern about high
unemployment, slow growth, and inflation, which left voters
and others open to new policies.
The rise of “the supply-side” economics:
 All of these factors combined pushed a pendulum away from
Keynesian economics and towards freer markets.
 Milton Friedman and his followers: Their approach came
to be called "market fundamentalism," since it saw
"freer" markets as the solution for every economic
problem.
 You jump-start the economy by privatizing (UK), cutting
taxes, and deregulating.
Reagan came into office in 1981 with
several objectives:
 Domestic level: antiinflationary policy.
 International level: the push in the direction of regional
trade agreements. The larger blocs: made exports cheaper
to produce, allowed firms to grow, made it easier to attract
foreign investment, and encouraged the consolidation of
banks and corporations. Regional integration (the EU,
NAFTA, Mercosur) in the 1990s became an important
component part of the overall process of economic
globalization.
The Reagan administration tried to:
 1. undermine the Third World alliance;
 2. undermine the UN system;
 3. privilege institutions that encourage market
discipline on Third World development policies.
During the 1990s the issue was decided in
favor of supporters of global integration.
 From an economic point of view N. America and W. Europe
defined the world’s course (1/10 of the population but half
the world economy and 2/3 of world trade).
 There was hardly universal agreement on free trade, but
official policy came to accept it as a matter of course.
The Washington consensus:
 the use of international financial institutions (the IMF
and the World bank) to promote free markets and the
supply side economics.
International financial institutions
 promoted economic liberalization in the developing
world (things such as trade and capital markets) with
a corresponding deregulation of all aspects of the
economy.
IMF (and the WB) structural adjustment
programs required governments to:
 1. eliminate uncompetitive nationalized industries;
 2. cut subsidies to consumers and eliminate services
(essential food-stuffs, steep reductions in spending
on health, education, and other social services).
 3. lift restrictions on capital movement.
The direction of financial globalization
will change in three important ways:
 First, Western finance is going to be regulated.
 Second, the balance between state and market is
going to change in other economic areas.
 Third, the US is likely to lose its economic clout and
intellectual authority.
International trade negotiations:
 The advanced industrial countries push the opening of
the markets in the developing countries to their industrial
products.
 At the same time, they continue to keep their markets
closed to the products of the developing countries, such as
textile and agriculture.
 While they preach that developing countries should not
subsidize their industries, they continue to provide billions
in subsidies to their own farmers.
Official trade negotiations:
 The last time official trade negotiations were successful was
in 1994 the year when the World Trade Organization was
created: 125 nations agreed to a significant drop in trade
barriers.
 In 1999, the attempt to launch a new round of trade
negotiations crashed in Seattle.
 In 2001, the trade ministers met again in Doha, Qatar, and
decided to initiate a new round that, they agreed, would be
concluded in four years.
Regionalism and Global Trade:
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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.