week 2: the study of global political economy. lecture plan the global financial crisis the world...

WEEK 2: The Study of Global Political Economy

Lecture Plan

• The Global Financial Crisis

• The World Economy–Pre-1914–Inter-War Period–Post-1945–Contemporary Period

• The Study of Global Political Economy

The Global Financial Crisis

– Implications for studying global political economy• Increased integration of the global economy• Susceptibility to financial crises• Growing importance of Private Sector Actors• Role of the G20 in Crisis Management

Periods of Modern World Economy

• Mercantalism ( 16th cent –18th cent.)• Extension of Global Markets until 1914• Economic Shocks in the Inter-War Period• “ Golden age of Capitalism” under the Gold

Exchange Standard of Bretton Woods (1950-1971)

• Extension Global Markets with Floating Exchange Rates ( 1971-?)

World Economy: Pre-1914 (1)

• Mercantilism– Political power equated with wealth, and vice

versa– For centuries, little change in overall global wealth

Mercantilism helped create trade patterns such as the triangular trade in the North Atlantic, in which raw materials were imported to the metropolis and then processed and redistributed to other colonies.

The laws are often considered examples of British mercantilism

The Anglo-Dutch Wars were fought between the English and the Dutch for control over the seas and trade routes in the 17th and 18th cent.

World Economy: Pre-1914 (2)

• Extension of global markets– Industrial revolution and technological advances– International division of labour– Tariffs were a barrier to goods trade– Capital and people moved relatively freely

GDP per capita at purchasing power parity in 1990 dollars for selected European and Asian nations showing the explosive growth of some European nations after 1800

World Economy: Pre-1914 (3)

• No significant institutionalization of international trade or finance

• Gold standard– Fixed exchange rate– Reduced uncertainty and risks with foreign exchange– Relied on the commitment of governments to play by

the rules of the game– Undermined by increasing democratization and

popular demands

Gold certificates were used as paper currency in the United States from 1882 to 1933. These certificates were freely convertible into gold coins.

World Economy: Inter-War Period

• Economic chaos– Economic interdependence disrupted by WWI– Governments disagreed on measures to restore

international economic stability– Gold standard broke down• Misalignment of currencies• Inconsistent adherence to ‘rules of the game’

Abandonment in 1931

– Beggar-thy-neighbour policies (increasing tariffs)

World Economy: Post-1945 (1)

• Unprecedented rates of economic growth– GDP grew at a faster rate than before 1945– World trade grew more rapidly than world

productionIncreasing importance of imports and exports in most

economies, which led to greater political support for liberalization

• Characterized by:– Embedded liberalism– Multilateralism

World Economy: Post-1945 (2)

• Embedded liberalism (Ruggie, 1992)– Compromise between meeting domestic

economic objectives and openness to international trade and investment

– International commitments in trade and finance embodied in IMF and GATT

World Economy: Post-1945 (3)

• Multilateralism– Institutionalization of international economic

cooperation

• Bretton Woods institutions (IMF, World Bank)

– ‘generalized’ principles of conduct• Gold Standart - 1 ons of Gold = 35 USD • most-favoured nation (MFN) principle

The idea of open markets was something that liberal visionaries and hard-nosed geopolitical strategists could agree upon. It united American postwar planners, and it was the seminal idea that informed the work of the 1944 Bretton Woods conference on postwar economic cooperation… The BW agreements allowed political leaders to envisage a postwar economic order in which multiple and otherwise competing political objectives could be combined. As Roosevelt said at the opening of the BW conference, “the economic health of every country is a proper matter of concern to all its neighbors, near and far.” (Ikenberry ,2001,p.163-214)

Per capita income 1000-1998 (US$)

That capitalism’s globalizing tendencies were revived after 1945 through the postwar “golden age” had a great deal to do with the way the capitalist states of Europe and Japan were restructured under the aegis of the American state. And although the economic turmoil of the 1970s demonstrated that capitalist crises were by no means a thing of the past, the degree of integration between the advanced capitalist states led them—in contrast to the 1930s—to promote the acceleration of capitalist globalization, rather than retreat from it.(Panitch&Gindin,2012,p.2)

Casino Capitalism Unregulated dynamics of global capital movements. It

began after the partial collapse of the BW system in the late 1970s and early 1980s. Thanks to innovations in the global financial world (e.g.options, futures, swaps),the financial system has become much more complex and uncontrollable. What is new is the speed with which money travels in search of profitable opportunities from speculative investments in the global financial system, whose original function had been to facilitate cross-border trade and investment.

Negative effects of the domination of financial capital

1) Providing economic incentives to speculate on financial investments, global finance capital diverts funds from long-term productive investments.

2) Encourages banks and financial institutions to maintain high interest rates, which significantly reduces the ability of productive industries to access credit.

3) Brings uncertainty and volatility in interest and exchange rates that is extremely harmful to various real economic sectors.

4) Undermines efforts by governments to support full employment and reduce inequality.

World Economy: Contemporary– Growing interdependence of countries– Integration of developing countries into global

production networks (or global supply chains)– Importance of global trade to economic growth– Globalization of production networks– Globalization of finance and complexity of new financial

instruments– Vulnerability of global financial systems to periodic

crises– Growing influence and importance of transnational

corporations (TNCs)

Thanks