Download International political economy exam, january 2016

INTERNATIONAL POLITICAL ECONOMY
EXAM, JANUARY 2016
2. Globalisation has not entailed any significant
changes in the role of the state in the international
political economy. Critically discuss this assertion.
Rasmus Grand Berthelsen
140993-1827
B.Sc. International Business and Politics
Copenhagen Business School, 2016
STU count: 22,483 (9.8 standard pages)
“Globalisation has not entailed any significant changes in the role of the state in the international
political economy. Critically discuss this assertion,”
Introduction
There is hardly doubt that globalisation has influenced how states operate. Throughout the end of
the twentieth century and up until now, the changing role of states in determining the outcomes of
the global political economy has been a recurrent topic of interest. This paper will critically discuss
the statement that globalisation has not entailed any significant changes in the role of the state in the
international political economy. It will do so by examining key actors in the global political
economy after the breakdown of the Bretton Woods system, through the lens of especially neoGramscian approaches occasionally contrasted to neo-realist theory, and drawing upon recent
empirical developments. The paper argues that globalisation has led to a coalition between the
interests of a new transnational financial hegemon and the ruling classes of states, which has
changed the role of the state into being subordinate to the ideas of this new hegemon. Whereas
before the breakdown of the Bretton Woods system, states possessed the hegemonic capacity,
globalisation has played a key role in establishing new social relations, effectively making the use
of coercive state power obsolete.
This argument is developed by first defining how this paper perceives globalization, the state, and
within which timeframe it operates, as these concepts are crucial for establishing a frame of
reference. This is followed by an examination of the Bretton Woods institutions and their role in the
globalisation process in a neo-Gramscian perspective, opposed to a neo-realist one. Here, the paper
argues that the ideas of the IMF and the World Bank has been key in shaping states’ interests, and
developed a consensus across the global political economy, which has made states buy in to having
subordinate positions. The argument is further developed by investigating the 2008 global financial
crisis, where the globalisation process of increased commodification and capital movement created
a financial hegemon, which constrained the role of the state in determining the outcome of the
crisis. Moreover, by examining the contemporary offshore world, it is argued that since states are
now subordinate to a transnational financial hegemon, they are constrained in their use of coercive
state power to pursue their original purpose due to the dominance of international capital over
national capital.
A definition of globalisation and its scope is an analytical imperative for this assignment. First of
all, the continuing increase in global trade and cross-border financial transactions constitute main
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components of this phenomenon, as well as the commodification of capitalist social relations
(Wigan, 2015a). Since national economic policies undertaken must consider the effects of the
surrounding global economy, integration of national economies has led to the dominance of
international capital over national capital. For the purpose of this assignment, globalisation is thus
defined as a process of increasing capital mobility and commodification leading to the dominance
of international capital. Another analytical imperative is a definition of the state. For the purpose of
this assignment, the state will be defined more precise than just an entity that secures property right,
but one that also carries an organizational and facilitating role resulting from an original purpose to
exercise control over its own territory and provide stability and security for its citizens. Finally, in
order to assess whether the role of the state has changed, this paper takes a point of departure in a
global political economy just before the breakdown of the Bretton Woods system, where the role of
the state were undisputed as the most powerful actor in determining who gets what, when and how.
Establishing a transnational financial hegemon
The end of the Bretton Woods system led to global finance replacing publicly managed order.
Within the impossible trinity (The Mundell-Fleming Thesis of 1962), the Bretton Woods system
allowed fixed exchange rates (to the dollar, which was fixed at $35/ounce) and monetary policy
autonomy (central banks could manipulate money supply), but this meant that European countries
and Japan imposed capital controls in order to tame speculation (Wigan, 2015b). However, after the
breakdown of the Bretton Woods system in 1971 (effectively 1975), states went into negotiations
with the IMF over what should replace the gold-dollar standard, and floating exchange rates were
adopted. This meant that capital mobility was highly possible, and monetary policy autonomy were
preserved – although it was weaker, since governments now had to operate indirectly through
exchange rates. The IMF was initially established as a stabilisation fund, but within the new
international monetary system, it was granted the role of overseeing exchange rate policies of
members (Wigan, 2015b). Moreover, the World Bank, initially established to provide support for
post-conflict reconstruction through promotion of free trade and private investment, also played a
key role. Within this framework, the ideological coalition of Reagan and Thatcher in the 1980s, the
so-called Washington Consensus, pushed for deregulation and liberalisation of capital markets
through institutions such as the IMF and the World Bank. These are seen as forerunners of
globalisation, economic integration and economic liberalism (Broome, 2014), which resulted in a
financialisation of the international economy. As an example, according to McKinsey Global
Institute, in 1980 global GDP was $10.1 trillion, and financial assets were $12 trillion. In 2006,
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global GDP was $48.3 trillion, but financial assets had risen to $167 trillion (Wigan, 2015b).Taking
into account the role of these institutions and the Washington Consensus it becomes clear that
global finance has replaced the state-managed Bretton Woods-order.
The international institutions established during the Bretton Woods era remains key in determining
the outcomes of the global political economy. These institutions might have reflected the power
relations when they were created, but they tend to encourage the reproduction of collective ideas
(Cox, 1981). Here, Overbeek (2013) delivers a very thoughtful inside drawing on Stephen Gill’s
work on internationalisation of authority: The collapse of the Soviet Union introduced the
expansion of global transnational capital, leading economic policy to reflect the new power of
investors. The OECD, the IMF, the World Bank the WTO, etc. were “engaged in the legal and
political reproduction of this disciplinary neo-liberalism and ensure[d] through a variety of
regulatory, surveillance and policing mechanisms that neo-liberal reforms [were] locked in”
(Overbeek 2013, p. 172, emphasis original). Hence, these hegemonic ideas provide a coalition of
interests in following the agenda of the Washington Consensus. The neo-realist approach would
oppose this statement by claiming that since international institutions in this view are simply arenas
for states to promote their own pre-given interests, the United States and the UK purposively
created a liberal international economy through these institutions to promote their own interests
(Gilpin, 2001). However, this paper does not see hegemony as a relationship between states, but
rather as a form of class rule. Thus, the ideas of the Bretton Woods institutions (especially the IMF
and the World Bank) are important in forming actors’ interests in the global political economy.
The hegemonic role of the IMF and the World Bank has facilitated the coalitions of interests
between the ruling classes of states and the transnational financial hegemon. Following the
globalisation process after the breakdown of the Bretton Woods system, there has been an
increasing commodification and dominance of international capital over national capital. This has
led the social relations of production to become international, and on top of this structure is what
Robert Cox (1981) calls the “transnational managerial class”. However, since finance capital now,
for instance in the US, creates more corporate profits than manufacturing (Wigan, 2015a), this
paper operates with what it terms the transnational financial hegemon. Opposing that “states, and
other powerful actors as well, use their power to influence economic activities to maximize their
own economic and political interests.” (Gilpin, 2001, p. 102), this paper operates with the
hegemonic concept as founded not only upon the regulation of conflict between states, but also
upon what powerful actors perceive as a global civil society (Cox, 1981). In this sense, the ideas of
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the Bretton Woods institutions played a key role in determining the interests of the ruling classes of
states, and hence they have developed a consensus across the global political economy, which
makes states buy in to having subordinate positions.
Here, Antonio Gramsci’s assertion of ideas constituting a factor in developing a transnational ruling
class presents a very qualified insight. Starting from Marxist theories of the economic base (the
social relations of production) determining the superstructure (culture and civil society), Gramsci
modifies the deterministic relationship between the economic base and the superstructure into a coconstitutive relationship, since he sees the superstructure as having an independent causal effect
(Wigan, 2015d). Classical Marxism accepts that the superstructure presuppose capitalism, but is
otherwise not concerned with ideology (Overbeek, 2013). Here, the neo-Gramscian approach
emphasises that social relations and institutions are constantly reproducing and legitimising the
ideas of the existing hegemony. In this sense, there is not only a struggle between interests, but also
a struggle between social forces promoting particular sets of ideas in the global political economy.
With the change of the economic base into a commodification of capitalist social relations
following globalisation (as defined above), the superstructure has changed. As this paper argues, the
establishment of the IMF and the World Bank in an increasingly global political economy has
changed the role of the state from being the dominant actor in the global political economy to being
subordinate to the ideas of the new transnational financial hegemon.
As the role of states in the global political economy becomes subordinate to the ideas of the
transnational financial hegemon, states consent to a defining aspect of globalisation: capital
mobility. This feature has enabled the global capitalist class to expand into the international realm,
constituting a major actor in shaping the outcomes of who gets what, when and how in the global
political economy. The fact that governments had less interventionist economic tools following the
breakdown of the Bretton Woods system and the following process of globalisation and financial
market deregulation, has made them unable to influence the size and scope of capital in- and
outflows from the domestic economy (Broome, 2014). This constraint is key to understanding the
changing role of the state. In the following section, this paper will draw on the empirical events of
the 2008 financial crisis and the contemporary settings of the offshore world in order to show how
the transnational financial hegemon has changed the role of the state in the international political
economy.
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The global financial crisis
The extensiveness of the global financial crisis of 2008 was a result of the globalisation process.
The subprime mortgage bubble in the United States combined with the use of financial engineering
to create asset-backed securities such as collateralised debt obligations (CDO’s), which were then
pooled in order to reduce the risk of default into asset-backed securities sold to investors (Broome,
2014) were key drivers in triggering the global financial crisis. Banks all over the world acted as
both borrowers and lenders in the mortgage market, and in a world where finance capital is
massively bigger than global GDP, the logic of what extra credit does in the world economy
becomes blurred. When the artificially high property prices in the United States began to fall,
investors struggled to sell their CDO’s, and credit rating agencies downgraded the ratings of these at
the same time, worsening the effect. This led to a liquidity crisis in the financial markets, and even
though the ECB injected €95 billion and the Fed injected $24 billion into credit markets (Broome,
2014, p. 190), on September 15, the US investment bank Lehman Brothers declared bankruptcy.
This was the trigger that turned the liquidity crisis into a global financial crisis due to the
dominance of international capital over national capital. The global financial crisis shows that
globalisation in the form of commodification of every aspect of human life (including risks) in
combination with increasing capital mobility led to severe damages to the states, which they
themselves could do little to prevent.
The ideas of the transnational financial hegemon permeated the global political economy to an
extend that constrained the role of the state in determining the outcome of the global financial crisis.
The originate-to-distribute model of borrowing in global banking constitutes a key feature here.
Following the revisions of Basel I in 1996 to incorporate market risks, the regulation of global
banking became a matter of private risk management, and the creditworthiness of borrowers were
no longer among the core strengths of major banks. This meant that the real risks carried by banks
became obscure, since risky assets escaped regulation (Wigan, 2010). Following Basel II in 1999,
large and sophisticated banks were able to transfer credit risks through e.g. credit default swaps
(CDS), while credit rating agencies were given the role of guaranteeing market integrity and
verifying financial innovations (Wigan, 2010). The combination of banks pooling mortgages into
CDO’s and the incentives for credit rating agencies to rate these AAA, was a major factor in
destabilising the international economy leading to the global financial crisis. If the states signing
Basel I and II really knew, that they were giving up so much control of the financial markets, why
did they do it? The answer is best found by looking at the coalition of interests between the global
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financial hegemon and the ruling class of the state. Alan Greenspan (then Chairman of the Fed)
stated in 2003: “Financial innovation will slow as we approach a world in which financial markets
are complete in the sense that all financial risks can be efficiently transferred to those most willing
to bear them” (quoted in Wigan, 2015d). Here, it becomes clear that the ideas of the transnational
financial hegemon has influenced state interests to conform into a subordinate role in the
international political economy.
The subordinate role of the state becomes clear when looking at the aftermath of the global financial
crisis. The embeddedness of large financial institutions in the global political economy combined
with the enormous risks, which were no longer systematically linked to responsibility (Wigan,
2015c), left states forced to accept the innovations of financial engineering. In this sense, states
gave so much power to the financial sector, allowing it to build up an unstable situation of fragile
derivatives, without having the ability to control the outcome. Ultimately, the organizational and
facilitating role still belongs to the state, why the responsibility of preventing total chaos in the
global economy fell upon the states. Governments around the world quickly responded through a
mix of monetary activism, fiscal stimulus and not least recapitalisation of banks. By injecting
liquidity into the financial system through recapitalising distressed financial institutions,
governments effectively became major stakeholders in these (Broome, 2014). The IMF also plays a
key role in managing the crisis, since it has coordinated sovereign bailout loans in exchange for the
implementation of certain policies. The world has seen the ruling class of states deciding to insure
the financial system by pouring endless amounts of money into maintaining it. The bailout
programmes undertaken by states underlines the reproduction of the transnational financial
hegemon, following the change of the role of the state in the global political economy.
The offshore world
Another effect of globalisation in terms of increasing capital mobility is the offshore world. This
term encompasses a combination of juridico-political phenomena within lightly regulated sovereign
states (Palan, 2003). The term was first used to describe the Euromarket set up by the British after
the breakdown of the Bretton Woods system in order to attract international financial activity.
Essentially, the Euromarket is an offshore arrangement, which is enabled and constrained by the
principles of sovereignty, and the most important of these financial centres is London. Although the
British government acted out of pure interests of attracting capital when they purposively created
this offshore arrangement, “as time has passed and the Euromarket has grown in size and
complexity, attempts to re-regulate it have become increasingly dangerous as they risk disrupting
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the entire financial system” (Palan, 2003, p. 32). Moreover, as the United States tried to re-regulate
the Euromarkets in 1979 and failed, the U.S. Treasury came to the conclusion that the United States
would gain more by encouraging its own offshore centres (such as international banking facilities in
New York), instead of fighting other offshore centres (Palan, 2003). These actions show how
globalisation in the form of increased capital mobility has facilitated the emergence of offshore
finance, an important element of the social formation of the transnational financial hegemon.
States are now subordinate to the ideas of the transnational financial hegemon, and therefore they
have to compete in order to attract capital. The establishment of an offshore world following the
merging of interests between the ruling classes of the states and the financial hegemon (as with the
creation of the offshore centre in London) has reached such a capacity that states are no longer able
to constrain offshore markets, since this carries obvious consequences (Palan, 2003). Instead, due to
the dominance of international capital over national capital resulting from globalisation, states are
caught in a race to the bottom of providing low taxes, few regulations and favourable business
environments to global corporations. From a neo-realist perspective, it might be argued that states
here acts as rational egoists and voluntarily chooses not to regulate, in order to maximise their own
gains, as long as this is in their interest. However, this interest is only constituted due to the states
themselves reproducing the ideas of the transnational financial hegemon. As defined earlier, the
state carries an organizational and facilitating role, which requires it to collect taxes rather than
paving the way for corporations to avoid these. Hence, the ideas of the financial hegemon has
constrained state interests into competing with others in attracting capital instead of serving its main
organizational and facilitating purpose. Taking these mechanisms to the extreme, we reach the
creation of tax havens.
Tax havens are sovereign states almost exclusively operating with the purpose of attracting
international capital. They are often small islands like the Cayman Islands or Bermuda, and
normally follow provisions of secrecy regarding banking, commercial and professional activity; few
restrictions regarding financial transactions; and political and economic stability (Palan, 2003). At
the end of 2000, banks in the Cayman Islands had $782 billion worth of external assets, holding
more than both Swiss and French banks ($740 billion and $640 billion respectively) (Palan, 2003).
States, facilitating and organizing civil life, need to raise government revenue, but the expenses of
dealing with tax avoidance are too high due to the extreme capital mobility resulting from
globalisation. Hence, states are effectively unable to capture global capital, due to their territorial
and economic nature being bound, and taxes are levied on personal income and consumption rather
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than business and capital gains (Broome, 2014). In this sense, the use of coercive state power
becomes obsolete, since the states are unable to change the financial capitalist social relations, but
are simply reproducing and legitimising the ideas of the transnational financial hegemon.
Conclusion
This paper has examined whether the role of the state in the international political economy has
changed following globalisation. It concludes that, after the breakdown of the Bretton Woods
system (where states possessed the hegemonic capacity), the role of the state is now subordinate to
a new transnational financial hegemon, and that globalisation has played a key role in establishing
these new social relations, effectively making the use of coercive state power obsolete. It is argued
that the ideas of the IMF and the World Bank played a key role in determining the interests of the
ruling classes of states, developing a consensus across the global political economy, which has
made states buy in to having subordinate positions. The ideas of the new transnational financial
hegemon constrain states into playing a less significant role in determining who gets what, when
and how in the global political economy. This is shown in recent developments of the 2008
financial crisis, where major bailout programmes given to the financial sector implies the
reproduction of the ideas of this new hegemon, following the process of increased commodification
and capital mobility. The effect of globalisation in creating an offshore world is also a clear
indicator of these new social relations. Here, states are no longer able to pursue their main
objective, but due to the extreme capital mobility entailed by the ideas of the financial hegemon,
they are constrained to compete for attracting the dominant international capital.
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