CHAPTER 3 Structuring the Global Economy

This chapter examines the major global economic structures. Similarities between the current
global capitalist system and a prior system which functioned between 1896 and 1914 are
analyzed. Turmoil beginning with WW I ended the earlier global capitalist system and set the
stage for the emergence of the current global capitalist system. One important view is that a
global economic system, specifically a global capitalist system, emerged in about 1896 and
reached something of a peak throughout the world by 1914. 1 There are some interesting
analogies between the growth of the global capitalist economy during that period and today
Frieden sees the development of economic globalization after WW II in the context of this prior
epoch of economic globalization, as well as its collapse because of WW I, the Depression, and
WW II. All these events had negative effects on almost all major economies (the US economy
was a major exception, at least in terms of the effect of the two world wars). Of particular
importance in the 1930s was the movement of many countries – notably fascist Italy and
Germany – in the direction of autarky, or the turn inward of a nation to create as much
economic self - sufficiency as possible. Such a turn inward is, of course, anathema to
globalization which requires that various entities – including nation - states – be outward -
looking, rather than inward - looking, not only in the way they view the world but in their actual
dealings with other parts of the world.
A key factor in the Depression was thought to be a lack of cooperation among nation - states.
That lack of cooperation was associated with high tariffs and other import restrictions and
protectionist practices, as well as the propensity of governments to devalue their currencies to
gain an edge in global trade over other countries. The latter also made exchange rate wars
among the nations involved more likely. Bretton Woods had its most powerful effects on global
trade, the global monetary order, and global investment. In terms of global trade, a key was the
idea of the unconditional most - favored - nation” which “required governments to offer the
same trade concessions [reductions in trade barriers, non - discrimination against a nation’ s
products] to all. Restrictions on international trade were reduced over the years through
various meetings under the auspices of GATT (General Agreement on Tariffs and Trade) and
later the WTO.
GATT was a system for the liberalization of trade that grew out of Bretton Woods and came into
existence in 1947. It operated until 1995 when it was superseded by the World Trade
Organization (WTO). While GATT focused on trade in goods, the WTO also took on
responsibility for the increasingly important trade in services. While GATT was simply a forum
for the meeting of representatives of countries, the WTO is an independent organization.
The WTO is a multilateral organization headquartered in Geneva, Switzerland, with, as of 2008,
152 member nations. Its focus on trade places it at the heart of economic globalization and has
made it a magnet for those opposed either to the broader process of trade liberalization and
promotion or to some specific aspect of WTO operations. The WTO encompasses much of what
was GATT’ s mandate but has moved onto other issues and areas such as services (General
Agreement on Trade in Services [GATS], intellectual property (TRIPS), and so on. Each member
state in the WTO has an equal vote. To a large extent, the WTO is the organization of these
member states and not (with some exceptions) a supranational organization. Agenda items to
be voted on generally flow from several more informal groups.
The goal of the IMF is macroeconomic stability for both member nations and, more generally,
the global economy. More specifically, the IMF deals with exchange rates, balances of
payments, international capital flows, and the monitoring of member states and their
macroeconomic policies. The IMF is a lightning rod for critics who see it as supporting
developed countries and their efforts to impose their policies on less developed countries. Its
supporters see it as key to the emergence and further development of the global economy.
The World Bank (officially the International Bank for Reconstruction and Development [IBRD]),
a specialized agency of the UN, is the most important element of the World Bank Group (WBG).
The IBRD (or the Bank) was established in 1944 at Bretton Woods and began operations in
1946. Membership is open to all member states of the IMF and as of this writing it includes 184
nations. It provides funds to government - sponsored or - guaranteed programs in so - called
Part II countries (member states that are middle - income or creditworthy poorer nations). It
also provides advice and analytical services to such states. Over the years the Bank has
expanded far beyond its original focus on projects involving physical infrastructure (e.g.,
transportation, telecommunication, water projects, etc.) capable of generating income. It now
deals with a broad range of issues related to economic development including “population,
education, health, social security, environment, culture … aspects of macroeconomic policy and
structural reform … [and] poverty alleviation”.
While many of the economic organizations discussed above remain in place and are of great
importance in the global economy, and many of those to be discussed below were at least
inspired by Bretton Woods, it can be argued that Bretton Woods itself died on August 15, 1971.
President Richard Nixon took the US off the gold standard, resulting in a devaluation of the
dollar and the end of the standard by which the currencies of other nations operated. IMF staff
circulated the following notice: “R.I.P. We regretfully announce the not unexpected passing
away after a long illness of Bretton Woods, at 9 P.M. last Sunday. Bretton was born in New
Hampshire in 1944 and died a few days after his 27th birthday”.
In the twenty - first century, the organizations that were spawned by Bretton Woods – the
World Bank, the International Monetary Fund, and the World Trade Organization – are
undergoing dramatic changes. A former US Secretary of Treasury commented: “The Bretton
Woods system has become outmoded. … It has served us very well for a long time, but these
institutions haven’ t changed with the times. They need to be rethought and restructured”.
Recent changes in the organizations are traceable to several major forces including
globalization (a concept and a process not even dreamt of in 1944), major trade disputes, and
the increasing power and ambition of growing economic powers, especially in Asia. In terms of
the latter, the World Bank has been loaning large sums of money to countries whose
economies did not need such loans (e.g., China; including $710 million in early 2009 to help
rebuild areas hit by a 2008 earthquake). In fact, of the Bank’ s $23 billion in loans in 2006, $13
billion went to “middle - income” countries rather than to poor countries. Even in terms of the
funds that do go to poor countries, the World Bank is an increasingly small player in comparison
to various international and private aid organizations. As a result, one professor said: “… it’ s
hard to see what good it [the World Bank] has done anywhere”. The Bank argues it is helping
large numbers of the poverty - stricken in less developed countries, while its critics say it is the
opening of markets there, and not bank loans, that has helped in poverty reduction.
The Organization for Economic Cooperation and Development (OECD) 8 is a broad group of,
now, 30 developed nations. The OECD is “the most encompassing ‘club’ of the world’ s rich
countries”. While the OECD has little formal power, it is highly influential. The European Union
(EU) is a product of the post - WW II era, as well as the Bretton Woods era, and now
encompasses 27 member states. It is the largest domestic market in the developed world (soon
to be surpassed by China), with over 500 million citizens. The Euro Zone encompasses those
nations in Europe that have adopted the euro as their basic currency. Most, but not all, nations
using the euro are members of the EU. Some Western European nations (e.g., Great Britain,
Sweden, and Denmark) have never accepted the euro, and retain their traditional currencies.
There is also growing opposition to the euro in some of the nations that have accepted it (Italy,
France, the Netherlands), on a variety of grounds (e.g., it is believed to have led to an increase
in prices and to have depressed economic growth rates because of the policies of the European
Central Bank which sets policies for Euro Zone nations). The criticisms of the euro are mounting
and as I write it is being threatened by economic problems in Greece and looming difficulties in
Portugal and Spain.
By most accounts the other major player – strong actor – in economic globalization (beyond the
nation - state and the organizations discussed above) is the multinational corporation (MNC).
Also of importance are transnational corporations (TNCs). 9 While TNCs involve operations in
more than one country, MNCs operate in more than two countries. We will generally use the
term MNC in this book to encompass both MNCs and TNCs. There are many who believe that
the MNC has grown more powerful, perhaps much more powerful, than the nation - state 10
and any of the organizations described above that are based on nation - states. “We have to get
used to the fact that, thanks to the globalization process, companies rather than states will be
the leading actors in the world economy.”
All the above (as well as what is to come in the next chapter) points to the growing importance
of economic globalization. While that is the predominant view, as well as the one adopted here,
there are those who do not accept it. For example, Paul Hirst and Grahame Thompson famously
argue that globalization, especially economic globalization, is a myth. They argue that such a
highly internationalized economy, although it may not have been labeled “global,” is not
unprecedented. In fact, the current world economy may well be less open than the world
economy during the period 1870 to 1914.
economic globalization. Also analyzed is another significant economic player – the multinational
corporation (MNC). Many believe the MNC has grown more powerful than the nation - state.
MNC activity is measured in terms of foreign direct investment and portfolio investment. MNCs
employ various mechanisms such as greenfield investments, mergers and acquisitions, and
strategic collaborations. There are those who argue that economic globalization is a “myth.” For
example, they contend that the world economy is less open than in earlier epochs. The position
taken here is that the world economy is much more global than is argued by such critics.