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(p. 3) 1. The Study of Global Political Economy 

(p. 3) 1. The Study of Global Political Economy
(p. 3) 1. The Study of Global Political Economy

John Ravenhill

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date: 20 May 2019

Reader’s guide

The contemporary international economic system is more closely integrated than in any previous era. The Global Financial Crisis, a decade on, continues to exert a profound influence on the global economy. The crisis and its aftermath provide a clear illustration of the relationship between trade, finance, international institutions, and the difficulties that governments face in coping with the problems generated by complex interdependence.

Before 1945, the spectacular increase in economic integration that had occurred over the previous century was not accompanied by institutionalized governmental collaboration on economic matters. International trade patterns also changed very little over several centuries before 1945. The end of the Second World War marked a significant disjunction: global economic institutions were created, the transnational corporation emerged as a major actor in international economic relations, and patterns of international trade began to change markedly from the traditional North–South exchange of manufactures for raw materials.

Since the emergence of global political economy (GPE) as a major subfield of the study of international relations in the early 1970s, GPE scholars have generated an enormous literature that has employed a wide variety of theories and methods. Most introductions to the study of GPE have divided the theoretical approaches to the subject into three categories: liberalism, nationalism, and Marxism. This threefold typology is of limited utility today, given the overlap between many of the approaches classified in different categories, and the wealth of theories and methodologies applied in the contemporary study of global political economy.

(p. 4) Prologue: the Global Financial Crisis

A decade after its onset, the Global Financial Crisis or, in the terminology favoured by the International Monetary Fund, the ‘Great Recession’, continued to exert a profound impact on the global economy. In the eurozone, unemployment rates remained in the double digits while those in Greece and Spain were double that. Youth unemployment rates in most euro-area countries were double the national average ( By mid 2015, banks in the euro area still had €900 billion in non-performing loans (IMF 2016: 33). The Great Recession, as we will discuss in more detail, appeared to have set the global economy on a course of lower investment, lower growth, and lower trade.

The Global Financial Crisis was triggered in September 2008 when the American financial services firm, Lehman Brothers, filed for bankruptcy, the largest single bankruptcy in United States history. The news triggered a massive sell-off of shares on Wall Street, the Dow Jones Index shedding more than 500 points (4.4 per cent), the biggest fall since the terrorist attacks of September 11, 2001. The effects of the bankruptcy soon reverberated around the world, marking the start of what became known as the Global Financial Crisis. In 2009, world output fell by over 2 per cent, the first such fall since the 1930s; and world trade declined by close to 40 per cent. A similar decline occurred in inflows of foreign direct investment (FDI).

The fall in global output masked substantial differences in national and regional performance: the industrialized economies were among the worst hit, with output in the European Union (EU) falling by 4 per cent and that in the United States by 3.2 per cent. Among the less developed economies, some of the worst affected were those such as Singapore and Taiwan which were most dependent on international trade. Although China and India continued to grow strongly (at 8.7 and 5.6 per cent, respectively), the 36 per cent decline in the price of oil, and the 19 per cent decline in the prices of non-fuel commodities in 2008, a repercussion of the drop in world manufacturing output, had a severe impact on many less developed economies. Output in Mexico slumped by nearly 7 per cent, in Brazil by 0.4 per cent, while growth rates in Africa declined from the 2008 figure of 5 per cent to under 2 per cent (all data from IMF 2010b: Table 1.1). The dollar value of Africa’s exports shrank by one-third in 2009 (Miller 2010).

The problems of Lehman Brothers stemmed in large part from its involvement in the sub-prime mortgage market. Lehman Brothers, like many other financial services firms, had become a substantial player in securitizing these mortgages (see Box 1.1).

Box 1.1 Sub-Prime Lending and Securitization

Loans characterized as ‘sub-prime’ are those that are regarded by the market as carrying a higher-than-usual element of risk. Typically, they have been contracted with borrowers who, for a variety of reasons that might include limited experience in borrowing, poor credit history, or low or unreliable income, are regarded as more likely than average to default on their loans.

To offset the increased risks of lending in the sub-prime market, financial institutions took advantage of the practice of securitization, which had initially developed in the 1970s. Before that period, providers of mortgage finance typically held the loans they had made until borrowers repaid them: in other words, they bore all the risk of the lending and usually financed the loans from their own resources. As the demand for mortgage finance rose, however, and lenders became increasingly concerned about risk, they developed the practice (often with the assistance of other financial institutions) of pooling the loans; the pool was then split into shares that were on-sold to investors as tradeable securities (bonds) that carried either a fixed or floating interest rate. The investors in these securities thereby assumed much of the risk attached to the loans. The practice of ‘securitization’ spread from the United States to Europe in the late 1980s.

In the 1990s and the first decade of the current century, financial institutions developed ever more sophisticated means for pooling and on-selling loans. Individual securities were increasingly split into tranches, each of which carried a different level of risk: the higher tranches had the first claim on any income that the lender received; the lower tranches would be the first to absorb any losses. At the beginning of 2009, securitization accounted for approximately 28 per cent of outstanding credit in the United States: the figures for the UK and the eurozone were 14 and 6 per cent, respectively (IMF 2009b: box 1.2).

(p. 5) That problems that began in the home lending market in the United States could plunge the world into its worst recession since the 1930s is powerful testimony to the integration of the contemporary global economy. Difficulties originating in the US financial sector were quickly transmitted to financial institutions in other advanced economies and then to the ‘real’ economy when banks curtailed their lending (and, in many instances, had to be bailed out by their governments). Firms (and households) lacked the finance not only to invest for the future but even to conduct their daily operations. Finance for international trade dried up. The world economy quickly went into reverse. With the slowdown in production, the demand for and prices of raw materials fell substantially. Hit by falling prices for their exports and by a curtailment of inflows of public and private lending, output in many developing economies either went into reverse or declined below the rate of population growth. The World Bank estimated that the recession would increase the number of people living in poverty by 65 million (see Chapter 12 in this volume by Robert Hunter Wade), and further delay realization of the Millennium Development Goals (see Chapter 13 in this volume by Nicola Phillips).

The International Monetary Fund (IMF 2010: xii) suggested that the crisis-induced write-downs of bad loans by financial institutions cost around $2.3 trillion (including $230 billion in mortgage lending in the US alone)—imposing a potentially massive burden on the public purse for the recapitalization of these institutions. Because governments had to issue bonds to cover the costs of their bail-outs of financial institutions, risk was in effect transferred from private to public balance sheets. The bail-outs, coupled with the costs of the stimulus packages that most countries introduced to fight the recession, and with a steep reduction in tax revenues owing to the economic downturn, left public finances in most industrialized economies in a parlous state. The IMF anticipated that the average budget deficit in industrialized economies was 10 per cent of gross domestic product (GDP) in 2009, and 8.5 per cent in 2010. As a consequence, the ratio of public debt to GDP exceeded 100 per cent in many of the eurozone economies, the United States, and Japan (where it was in excess of 200 per cent in 2012) (IMF 2012a: Table 2.1). The steep increase in sovereign debt threatened the credit ratings of some countries, particularly those in southern and eastern Europe, and left all governments with a challenge as to how to reconcile income and expenditure in the future.

On several key dimensions, the downturn precipitated by the recession was sharper than that of the 1930s. In the first year of the recession, global output and global trade fell more rapidly than in the 1930s. Similarly, global stockmarkets fell more precipitously—by 50 per cent in the first 12 months (compared with only slightly over 10 per cent in the 1930s) (Eichengreen and O’Rourke 2010). How the recession most differed from the 1930s, however, was that the initial downturn was not so protracted—with recovery in global trade, output, and in stockmarkets beginning in the second half of 2009, this recovery in itself being a reflection of the effectiveness of concerted responses at the national and global levels (see later).

One reason for the severity of the recession that began in 2008 was that, unlike previous post-war downturns, all regions of the world were in economic decline simultaneously. The extent of the crisis provided evidence that not just a quantitative increase in interdependence had occurred in recent years but also a qualitative change. As the World Trade Organization (WTO) noted, the rapid spread of the recession worldwide was caused in part by the increasing presence of global supply chains in countries’ trade (see Chapter 7 in this volume by Eric Thun). With components crossing national frontiers many times before a manufactured product reaches its final destination, a decline in the major global markets for finished products quickly affects trade—and then employment—in other parts of the world. Moreover, the extent of the recession, and the rapidity with which all regions of the world were affected, posed both practical and conceptual challenges for national and international governance. For the global financial institutions (the International Monetary Fund, the World Bank), the cessation of private and public lending posed a severe challenge to their efforts to minimize the impact of the recession on developing economies (and exposed the inadequacies of the resources they had available to fight recession).

Few observers anticipated the recession (or, at least, the severity with which it would strike). The world economy had enjoyed a sustained long boom, continuing on an upward trajectory despite the bursting of the ‘’ bubble and the shock of the 2001 terrorist attacks. For students of global political economy, however, the possibility that the processes of globalization might be interrupted or even thrown into reverse should come as no surprise (see Chapter 10 by Anthony McGrew in this volume). The causes of (p. 6) the crisis were similar to those that have afflicted the world previously (albeit with some new twists, reflecting aspects of contemporary financial globalization).

The recession was triggered by the bursting of an asset price bubble—in this instance, the inflated US housing market. The term ‘bubble’ was coined in the United Kingdom in 1720, following the crash of the South Sea Company, and the passing in that year of the so-called ‘Bubble Act’—more formally, ‘An Act to Restrain the Extravagant and Unwarrantable Practice of Raising Money by Voluntary Subscription for Carrying on Projects Dangerous to the Trade and Subjects of the United Kingdom’. As in previous crises, the collapse of the asset price bubble caused panic among investors, whose uncertainty over whether they could recoup the money they had paid, inter alia, for houses, caused them to flee the market (see Chapter 9 by Louis W. Pauly in this volume). Investor panic had significantly exacerbated the other major financial crisis to affect the global economy in the previous quarter of a century—that which afflicted East Asia in 1997/98 (Noble and Ravenhill 2000; Radelet and Sachs 2000). And, as with previous crashes, the bubble was associated with behaviour that was either outside the law or certainly contrary to its spirit—the 2,200-page report issued in March 2010 by Anton R. Valukas, an examiner appointed by the US Trustee to investigate the causes of the Lehman bankruptcy, for instance, found that Lehman had used accounting sleight of hand to conceal the extent of its bad loans (de la Merced and Sorkin 2010). The excesses of the ‘irrational exuberance’ of the financial sector in the run-up to the financial crisis have been memorably captured in numerous movies including Inside Job, The Big Short, and The Wolf of Wall Street.

The globalization of finance did introduce some elements to the financial crisis that had not been seen before. The growth of financial intermediation, of which an important aspect was the securitization of mortgage debt, had two important consequences. The first was that what began as a national problem (defaults on US mortgages) was quickly transformed into a global crisis. The new mortgage-backed financial instruments had been marketed globally by American and European investment banks—with the consequence that, once the bubble burst, various institutional investors, ranging from local councils in Australia and Norway to the London Metropolitan Police’s pension fund, suffered significant losses. In a low-inflation environment, these investors had been attracted to financial instruments that offered potentially higher rates of return than those available on more familiar investments and, in doing so, had either discounted or not understood the risks involved.

The second consequence was that the complexity of the new financial instruments exacerbated the problem of panic because of the uncertainty created in transactions among financial institutions (for a detailed discussion of the new ‘structured financial products’ see IMF 2008: ch. 2). Financial institutions found it very difficult to determine exactly what their liabilities were. Once panic set in, they were reluctant to lend to one another—and, here, another dimension of financial globalization entered the equation: the increasing dependence of bank-lending on funds borrowed in the international wholesale market, rather than on their own deposits or capital. The extreme case was that of Iceland, where the country’s banks had been the main source of its international debts, which were estimated in 2008 to amount to $276,622 for every resident. In 2008/09 alone, the three largest Icelandic banks had €11 billion of debt obligations maturing, a figure approaching the country’s total annual GDP (Brogger 2008). When no new financing was forthcoming, the banks collapsed. The debts were so great that the private banks could not be bailed out by the country’s central bank and the losses of the financial sector were expected to total $90 billion (Wade 2009b). Financial sector deregulation in Iceland had, in Robert Wade’s words, created an ‘accident waiting to happen’ (Wade 2009b: 14). The value of Iceland’s currency measured against the euro more than halved during 2008. Iceland may have been the extreme case but similar instances of reckless behaviour by financial institutions were commonplace in Europe (especially the UK) and the United States (financial institutions in most other regions of the world had been more conservative in their approach, in part because of better regulatory frameworks introduced in response to crises in the 1980s and 1990s).

The recession undermined triumphalist notions that governments had learned to master the factors driving business or economic cycles more generally, or that unregulated markets would generate optimal outcomes. A striking feature of the early governmental response to the recession was the acknowledgement of the inadequacies of previous policy approaches, particularly in the area of financial sector regulation (‘Major failures in the financial sector and in financial regulation and supervision were fundamental causes (p. 7) of the crisis’, admitted the Group of Twenty (G20) leaders in the communiqué from their London summit (G20 2009a: para. 13). One of the challenges faced by governments in the wake of the financial crisis was how to improve regulation of the financial system, and to decide whether this might best be pursued at the national, regional, or global level.

The recession prompted unprecedented policy interventions at the national and global levels, and produced significant changes in global economic governance—with the emergence of the G20 as the principal intergovernmental body for global economic management (Box 1.2). The crisis also saw the revitalization of the International Monetary Fund when the G20 agreed to make an additional $850 billion available to the international financial institutions (IFIs) and to endorse a more flexible response from the Fund to countries experiencing financial problems (see Chapter 8 by Eric Helleiner in this volume).

At the national level, most G20 economies implemented stimulus packages that the IMF estimated were equivalent to 1.5 per cent of their GDP in 2009 and 1.25 per cent in 2010. Half of the G20 countries cut personal income taxes; a third cut indirect taxes such as value-added taxes and excise duties. Three-quarters of the G20 members increased government expenditures on infrastructure, primarily on transportation networks (IMF 2009a: 18). Many also increased expenditures on programmes for the most vulnerable. The concerted international response was testimony to how the governance of the global economy had changed since the great depression of the 1930s. And although governments implemented measures designed to stimulate local industries, the widespread resort to beggar-thy-neighbour protectionist policies that characterized the 1930s was avoided. G20 leaders pledged repeatedly not to introduce protectionist measures or restrictions on investment. According to

Box 1.2 The G20

The Group of Twenty (G20) Finance Ministers and Central Bank Governors was established in 1999, following the financial crises that had primarily afflicted East Asia but which also spread to other developing economies, to bring together ‘systemically important’ industrialized and developing economies to discuss key issues in the global economy. The inaugural meeting of the G20 took place in Berlin, on 15–16 December 1999.

The membership of the G20 comprises Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, Mexico, Russia, Saudi Arabia, South Africa, Republic of Korea, Turkey, the United Kingdom, and the United States. The European Union, represented by the rotating Council Presidency and by the European Central Bank, is the twentieth member of the G20. To facilitate policy coordination with the global financial institutions, the Managing Director of the International Monetary Fund and the President of the World Bank, plus the chairs of the International Monetary and Financial Committee and Development Committee of the IMF and World Bank, also participate in G20 meetings on an ex officio basis.

The G20 remained a relatively low-profile and low-key grouping of finance ministers and central bankers until the 2008 recession, when an inaugural meeting of the political leaders of the G20 was held in Washington, DC, in November. The elevation of the G20 to summit status was recognition on the part of the leaders of the principal industrialized economies that their own grouping (the Group of Eight (G8)—see below) was not sufficiently representative to effectively manage the problems of an increasingly globalized economy. In particular, it was acknowledgement of the growing importance of the major developing economies—especially China, India, and Brazil. At their meeting in Pittsburgh in September 2009, the G20 leaders formalized the status of the grouping by designating ‘the G20 to be the premier forum for our international economic cooperation’ (G20 2009b: para. 19).

The Group of Seven (G7) industrialized countries had been established in 1975, the first of a series of annual meetings where politicians and officials from the world’s leading economies discussed issues relating to macroeconomic policy coordination, trade, and financial policies, and relations with developing countries.

Six countries were present at the initial meeting in Rambouillet in France: Britain, France, (West) Germany, Italy, Japan, and the United States. Canada joined the group in 1976, at its second meeting. In 1977, the group allowed participation by a representative of the European Community. From 1994 onwards, the G7 met with representatives of Russia at each of its meetings; at the Birmingham meeting in 1998, Russia was accorded full membership, transforming the G7 into the G8. On 24 March 2014, the original G7 nations voted to suspend Russia from the organization in response to the country’s annexation of Crimea. The G7 continues to exist alongside the G20.

For more details on the G20, see for the G7/G8, see

(p. 8) the WTO, trade restrictions imposed after the crisis affected only 4.1 per cent of global merchandise imports (cited in World Bank 2015c: 173). By 2011, the value of global trade and production (but not foreign direct investment) had recovered to its pre-crisis levels. This surprisingly rapid recovery, according to one commentator, demonstrated that ‘the system worked’ (Drezner 2014).

For some observers, however, particularly those in Europe and the United States, the global recession did reflect one dimension of beggar-thy-neighbour policies that were at least as important in contributing to the recession as were regulatory failures: the mounting imbalances in international trade and payments, which they attributed primarily to China’s determination to avoid a rapid appreciation of its currency against the US dollar. One of the missions with which the G20 has tasked the IMF is to analyse ‘whether policies pursued by individual G20 countries are collectively consistent with more sustainable and balanced trajectories for the global economy’ (G20 2009b: para. 7), a coordinating role that the IMF has singularly failed to perform since its foundation. With slow rates of growth lingering in many industrialized economies a decade after the onset of the crisis, governments in several major economies attempted to push down their exchange rates in an effort to stimulate demand for their exports—a worrying trend towards beggar-thy-neighbour policies that contributed to the severity of the Great Depression of the 1930s.

A decade after the onset of the Global Financial Crisis, there were increasing fears that it had produced a medium-term downward shift in global economic growth (Figure 1.1). Global GDP was more than 4.5 per cent below what it would have been had post-crisis growth rates been equivalent to the long-run pre-crisis average. After a sharp recovery in the immediate aftermath of the crisis, the growth in global GDP has been on a downward trend (Figure 1.2). The international financial institutions have repeatedly referred to the performance of the global economy in the years since the financial crisis as disappointing and ‘mediocre’. Figure 1.2 suggests a downward trend has also occurred in the growth of global trade.

The Global Financial Crisis may have produced a downward shift in growth rates for several reasons. Investment rates in many economies have been lower since 2008–9. Various factors underlie this decline. Businesses, especially small and medium-sized enterprises, in a number of economies have found it more difficult to raise capital because lenders have become more risk-averse. Conservatism in lending has also been encouraged by new international principles governing the capital adequacy of banks (the Basel III Accord—see Pauly, Chapter 9 in this volume), which require banks to hold a higher ratio of

Figure 1.1 Historical trend and recent growth of global GDP

Figure 1.1
Historical trend and recent growth of global GDP

Source: World Bank, Global Economic Prospects (January 2015: 169).

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Figure 1.2 Growth in global GDP and trade (%)

Figure 1.2
Growth in global GDP and trade (%)

Source: IMF, World Economic Outlook (October 2015: 18).

high-quality liquid assets to cash outflows than in the past. Businesses have become reluctant to invest in an environment of reduced consumer demand, itself exacerbated in some countries by fears of deflation (the expectation that prices will decline in the future). Foreign Direct Investment in aggregate remains substantially below its pre-financial crisis peaks (UNCTAD 2015b). Current lower levels of expenditure on research and development may lead to lower levels of innovation and productivity in the future. Unemployment may encourage some workers to leave the workforce permanently.

Much of the slowing of global trade has involved developing economies. Their recent economic performance, however, points to the role of factors other than the financial crisis itself in constraining their performance. Early optimism regarding developing countries’ speed of recovery from the crisis has turned to pessimism because of the slow growth in some of their principal markets (notably Europe and China), the withdrawal of funds from developing country capital markets, and the decline in commodity prices since mid 2011. Here, China has played a particularly important role, a reflection of notable changes in the distribution of economic influence discussed in the second part of this chapter. From 2003 to 2008, China’s metal consumption grew at an annual average rate of 16 per cent, accounting for fully 80 per cent of the increase in world demand. China now accounts for half of the world’s consumption of base metals and alone is fully responsible for one half of the world’s steel production (IMF 2015c: 41). The slowdown in China’s growth in the middle of the second decade of this century has affected the economies of developing economies both directly (through reduced demand for their exports) and indirectly (through suppressing the prices of commodities). The World Bank estimates, for instance, that a 1 per cent decline in China’s growth produces a 0.6 per cent decline in growth in Latin America and the Caribbean (World Bank 2015c: 78).

The Global Financial Crisis and the responses of the international community to it provide an excellent illustration of many of the themes of this book:

  • the growing interdependence of countries in a globalizing economy;

  • the vulnerability of the contemporary global financial system to periodic crises;

  • the speed with which developments in one part of the world economy are transmitted to others;

  • the increased significance of private actors in the contemporary global economy, especially in the financial sector;

  • the way in which crises prompt governments to seek collaboration to regulate international markets—but concurrently the difficulties that states have in coordinating their behaviours to take effective action;

  • the significant and evolving role of international institutions in responding to crises; and

  • the manner in which the increased severity of financial crises has had an impact on poverty and inequality.

(p. 10) Although, as will become evident in later chapters, contributors to this book hold a variety of perspectives on the question of whether there is such a thing as a ‘global’ economy, all would accept that we live in a globalizing economy that differs in some fundamental ways from anything that the world has previously experienced. The following section briefly sketches how the world economy evolved to reach its present state.

The world economy pre-1914

The ‘modern world economy’, most historians agree, came into existence in the late fifteenth and sixteenth centuries. It was in large part a response to a deepening economic crisis within feudal systems as agricultural productivity declined (Wallerstein 1974). This was a period in which despotic monarchs in Western Europe, seeking to consolidate their power against both internal and external foes, pushed to extend the boundaries of markets. In this era of mercantilism, political power was equated with wealth, and wealth with power (Viner 1948). Wealth, in the form of bullion generated by trade surpluses or seized from enemies, enabled monarchs to build the administrative apparatus of their states and to finance the construction of military forces. The new concentration of military power could be projected, both internally and externally, to extract further resources. The consolidation of the state went hand in hand with the extension of markets. Gradually, most parts of the world were enmeshed in a Eurocentric economy, as suppliers of raw materials and ‘luxury’ goods. Britain adopted domestic reforms largely pioneered by the Netherlands (which had the world’s highest per capita income in the seventeenth and eighteenth centuries) to supplant the Dutch in many world markets: armed conflict and the use of the Navigation Acts (1651–1849), which restricted the use of foreign vessels in British trade, enabled it to monopolize trade with its ever-expanding empire.

The era of mercantilism did not, however, bring a notable increase in overall global wealth. Before 1820, per capita incomes in most parts of the world were not significantly different from those of the previous eight centuries (they increased by less than an average of one-tenth of 1 per cent each year between 1700 and 1820). And despite the striking extension of the global market during the seventeenth and eighteenth centuries, the vast majority of commerce continued to be conducted within individual localities until the advent of the Industrial Revolution. The introduction of steam power in the first half of the nineteenth century revolutionized transportation, both internally and internationally. And in the second half of the nineteenth century, further technological advances—the introduction of refrigerated ships, the laying of submarine telegraph cables—contributed to a ‘shrinking’ of the world and to a deepening of the international division of labour. The value of world exports grew tenfold (from a relatively small base) between 1820 and 1870: from 1870 to 1913, world exports grew at an annual average rate of 3.4 per cent, substantially above the 2.1 annual increase in world GDP (Maddison 2001: 262, table B–19, and 362, table F–4).

Trade was becoming increasingly important to world welfare, yet the pattern of international commerce in 1913—indeed, even in 1945—was not dramatically different from that of the eighteenth century. The industrialized countries of the world—essentially a Western European core to which had been added the United States and Japan by the turn of the twentieth century—exported principally manufactured goods, while the rest of the world supplied agricultural products and raw materials to feed the industrialized countries’ workforces and to fuel their manufacturing plants (as a relative latecomer to industrialization, and an economy with significant comparative advantage in agricultural production, the United States was an exception to this generalization: cotton remained the single most important export for the United States in 1913, contributing nearly twice the value of exports of machinery and iron and steel combined; it was not until 1930 that machinery exports exceeded those of cotton, although by 1910 the US had become a net exporter of manufactured goods (data from Mitchell 1993: 504, table E3; and Irwin 2003)).

With the exception of the United States, trade among the industrialized countries in manufactured goods remained relatively unimportant. In 1913, for example, agricultural products and other primary products constituted two-thirds of the total imports of the United Kingdom. To be sure, some changes had occurred in the composition of imports. Although the ‘luxury’ imports of the previous centuries—sugar, tea, coffee, and tobacco—had become staples in the diet of the new urban working and middle classes, their aggregate importance in European imports had shrunk relative to other commodities, notably wheat and flour, butter and vegetable oils, and meat (Offer 1989: 82, Table 6.1).

(p. 11) For the early European industrializers, trade with their colonies, dominions, or with the other lands of recent European settlement, such as Argentina, was more important than trade with other industrialized countries. For the United Kingdom, a larger share of imports was contributed by Argentina, Australia, Canada, and India together than by the United States, despite the latter’s importance in British imports of cotton for its burgeoning textiles industry. These four countries also took five times the American share of British exports in 1913 (Mitchell 1992: 644, table E2). Similarly, Algeria was a larger market for French exports in 1913 than was the United States.

Tariffs continued to constitute a significant barrier to international trade, even in what is often termed the ‘golden age’ of liberalism before 1914. Most industrialized countries (the significant exceptions being the United Kingdom and the Netherlands) had actually raised the level of their tariffs in the last three decades of the nineteenth century to protect their domestic producers against the increasing import competition that had been facilitated by lower transport costs. In 1913, the average tariff level in Germany and Japan was 12 per cent, in France 16 per cent, and in the United States 32.5 per cent (Maddison 1989: 47, Table 4.4). The post-1870 increase in tariffs offset some of the gains from lower transportation costs. Lindert and Williamson (2001) estimate that nearly three-quarters of the closer integration of markets that occurred in the century before the outbreak of the First World War is attributable to these lower transport costs (see McGrew, Chapter 10 in this volume).

Governments continued to erect barriers to the movement of goods in the second part of the nineteenth century, but capital and people moved relatively freely across the globe, their mobility facilitated by developments in transportation and communication. From 1820 to 1913, 26 million people migrated from Europe to the United States, Canada, Australia, New Zealand, Argentina, and Brazil. Five million Indians followed the British flag in migrating to Burma, Malaya, Sri Lanka, and Africa, while an even larger number of Chinese are estimated to have migrated to other countries on the Western Pacific rim (Maddison 2001: 98). The opening up of the lands of ‘new settlement’ required massive capital investments—in railways in particular. By 1913, the United Kingdom, France, and Germany had investments abroad totalling over $33 billion: after the 1870s, Britain invested more than half its savings abroad, and the income from its foreign investments in 1913 was equivalent to almost 10 per cent of all the goods and services produced domestically (Maddison 2001: 100).

The spectacular growth in international economic integration was not accompanied by any significant institutionalization of intergovernmental collaboration. Even though the Anglo-French Cobden–Chevalier Treaty of 1860 had introduced the principle of most-favoured nation status (MFN) into international trade agreements (see Box 1.3), governments conducted trade negotiations on a bilateral basis rather than under the auspices of an international institution.

The international financial system was similarly characterized by a lack of institutionalization. The rapid growth of economic integration was facilitated by the international adoption of the gold standard (see Box 1.4). The origins of the nineteenth-century gold standard lay in action by the Bank of England in 1821 to make all its notes convertible into gold (although Britain had operated a de facto gold standard from as early as 1717). The United States, though formally on a bimetallic (gold and silver) standard, switched to a de facto gold standard in 1834 and turned this into a de jure arrangement in 1900. Germany and

Box 1.3 Most-Favoured Nation Status (MFN)

Under the most-favoured nation (MFN) principle, a government is obliged to grant to any trading partner with which it has signed an agreement treatment equivalent to the best (‘most preferred’) it offers to any of its partners. For example, if France signed a trade treaty with Germany in which it reduced its tariffs on imports of German steel to 8 per cent, it would be obliged, under the most-favoured nation principle, if it signed a trade treaty with the United States, also to reduce its tariffs on imports of US steel to 8 per cent. The MFN principle is the foundation for non-discrimination in international trade, and is often asserted to be the ‘cornerstone’ of the post-1945 trade regime (see Capling and Trommer, Chapter 5 in this volume). The MFN principle makes a significant contribution to depoliticizing trade relations because: (a) countries are obliged to give equivalent treatment to all trading partners, regardless of their economic power; and (b) countries cannot discriminate in their treatment of the trade of certain partners simply because they do not like the political complexion or policies of the governments of these countries.

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Box 1.4 The Gold Standard

A gold standard requires a country to fix the price of its domestic currency in terms of a specific amount of gold. National money (which may or may not consist of gold coins, because other metallic coins and banknotes were also used in some countries) and bank deposits would be freely convertible into gold at the specified price.

Under the gold standard, because the level of each country’s economic activity is determined by its money supply, which in turn rests on its gold holdings, a disequilibrium in its balance of trade in principle would be self-correcting. Let us assume, for example, that Britain is running a trade deficit with the United States because inflation in Britain has made its exports relatively unattractive to US consumers. Because British exports do not cover the full costs of imports from the United States, British authorities would have to transfer gold to the US Treasury. This transfer would reduce the domestic money supply, and hence the level of economic activity in Britain, having a deflationary effect on the domestic economy, and depressing its demand for imports. In the United States, the opposite would occur: an inflow of gold would boost the money supply, thereby generating additional economic activity in the United States and increasing inflationary pressures there. Higher levels of economic activity would also increase the country’s demand for imports. Changes in the money supplies in the two countries brought about by the transfer of gold, therefore, would bring their demand for goods back into balance and lead to a restoration of the ratio of the two countries’ prices to that reflected in the exchange rate between their currencies.

In principle, the gold standard should act to restore equilibrium automatically in international payments. Central banks, however, were also expected to facilitate adjustment by raising their interest rates when countries were suffering a payments deficit (thereby further dampening domestic economic activities and making domestic investments more attractive to foreigners) and, conversely, to lower interest rates when their economies were experiencing a payments surplus. For most of the period from 1870 to 1914, the Bank of England played by the rules of the game fairly consistently. Other central banks—including those of France and Belgium—did not. They frequently intervened to attempt to shield the domestic economy from the effects of gold flows (to ‘sterilize’ their effects) by buying or selling securities (thereby reducing or increasing the volume of gold circulating in the domestic economy).

The gold standard was vulnerable to shocks, which were often transmitted quickly from one country to another. The discovery of gold in California in 1848, for example, led to an increase in the US money supply, domestic inflation, and an outflow of gold to its trade partners, which in turn raised their domestic price levels. Countries on the periphery were particularly vulnerable to shocks: interest-rate increases in the industrialized countries, for example, often drew capital from the periphery, leaving the peripheral countries with the major burden of adjustment.

For further discussion, see Eichengreen (1985) and Officer (2001).

other industrializing economies followed suit in the 1870s. Because every country fixed the value of its national currency in terms of gold, each currency had a fixed exchange rate against every other in the system (assume, for example, that the United States sets the value of its currency as $100 per ounce of gold, while the United Kingdom sets its value at £50 per ounce of gold: the exchange rate between the two currencies would be £1 = $2).

The great contribution of the gold standard to facilitating international commerce was that economic agents generally did not have to worry about foreign exchange risks: the possibility that the value of the currency of a foreign country would change vis-à-vis their domestic currency and thus, for example, reduce the value of their foreign investments. British investors in American railways could be confident that the dollars they had bought with their sterling investments would buy the same amount of sterling at the date their investment matured, and that the US Treasury would convert the dollars back into gold at this time. Meanwhile, they received interest on the sums invested. Confidence in the gold standard did not rest on any international institution but rather on the commitment of individual governments to maintain the opportunity for individuals to convert their domestic currencies into gold at a fixed exchange rate. Ultimately, the implementation of the gold standard rested on the assumption that governments had both the capacity and the will to impose economic pain on their domestic populations when deflation was needed in order to bring their economy back into equilibrium when experiencing trade deficits. These domestic costs became less acceptable with the rise of working-class political (p. 13) representation, and with the growth of expectations that a fundamental responsibility of governments was to ensure domestic full employment.

Key Points

  • The modern world economy came into existence in the fifteenth and sixteenth centuries.

  • Despite the significant changes that occurred in the three centuries before the outbreak of the First World War, the fundamental composition and direction of international trade remained unchanged.

  • Neither in the field of trade nor of finance was any significant international institution constructed in the years before 1914.

  • Advances in technology were the main driving force behind the integration of markets, and they facilitated the enormous growth in investment and migration in the nineteenth century.

  • The great merit of the gold standard was that it provided certainty for international transactions because it largely removed the risk of foreign exchange losses.

The world economy in the interwar period

The outbreak of the First World War was a devastating blow to cosmopolitan liberalism: it destroyed the credibility of the liberal argument that economic interdependence in itself would be sufficient to foster an era of peaceful coexistence among states. The war brought to an end an era of unprecedented economic interdependence among the leading industrial countries. As discussed in the chapters by McGrew and Hay in this book (see Chapters 10 and 11), for many industrialized economies, indicators of economic openness and interdependence did not regain their pre-First World War levels until the 1970s.

The war devastated the economies of Europe: subsequent political instability compounded economic disruptions. Economic reconstruction was further complicated by demands that Germany make reparations for its aggression, and that Britain and other European countries repay their wartime borrowings from the United States. The economic chaos of the interwar years was a sorry reflection of the inability of governments to agree on measures to restore economic stability, and of their resort to beggar-thy-neighbour policies in their efforts to alleviate domestic economic distress. Although the collapse of international trade in the 1930s is the feature of the interwar economy that figures most prominently in stories of this era, the most fundamental problem of the period was the inability of states to construct a viable international financial system.

The international gold standard broke down with the outbreak of war in August 1914, when a speculative attack on sterling caused the Bank of England to impose exchange controls—a refusal to convert sterling into gold and a de facto ban on gold exports. Other countries followed suit. Leading countries agreed to reinstate a modified version of the international gold standard in 1925. They failed to act consistently, however, in re-establishing the link between national currencies and gold. The United Kingdom restored the convertibility of sterling at the pre-war gold price, despite the domestic inflation that had occurred in the intervening decade. The consequence was that sterling was generally reckoned to be overvalued by at least 10 per cent, making British exports uncompetitive. It proved very difficult for the British government to establish an equilibrium in its balance of payments without imposing severe deflation domestically. Other countries—notably France, Belgium, and Italy—restored convertibility of their currencies at a much lower price of gold than had prevailed before 1914.

The resulting misalignment of currencies was compounded by higher trade barriers than had existed before 1914, the absence of a country/central bank with the resources and the will to provide leadership to the system, and by a failure of central banks to play by the ‘rules of the game’ of the gold standard. Their inclination to intervene to ‘sterilize’ the domestic impact of international gold flows was symptomatic of a more fundamental underlying problem: in an era when the working class had been fully enfranchised, when trade unions had become important players in political systems, especially in Western Europe, and when governments were expected to take responsibility for maintaining full employment and promoting domestic economic welfare, the subordination of the domestic economy to the dictates of global markets in the form of the international gold standard was no longer politically acceptable. Polanyi (1944) is the classic statement of this argument; on the misguided attempts by Britain to restore the convertibility of sterling at pre-1914 levels, see Keynes (1925).

(p. 14) The abandonment of the international gold standard followed another speculative attack on sterling in the middle of 1931. The Bank of England lost much of its reserves in July and August of that year, and Britain left the gold standard in September, a move that precipitated a sharp depreciation of the pound (testimony to its overvaluation in the brief period in which the gold standard was restored). Other countries again quickly followed in breaking the link between their currencies and gold. By then, the world economy was in depression, following the shocks to the world economy transmitted from the United States after the Wall Street collapse of October 1929. The gold standard almost certainly exacerbated the effects of the depression, because government efforts to maintain the link between their currencies and gold constrained the use of expansionary (inflationary) policies to combat unemployment and low levels of domestic demand (Eichengreen 1992).

The world economy was already in depression before the US Congress, in response to concerns about the intensification of import competition for domestic farmers, passed the infamous Smoot–Hawley Tariff of 1930. This raised US tariffs to historically high levels (an average ad valorem tariff of 41 per cent, although tariff rates were already very high as a result of the Tariff Act of 1922, the Fordney–McCumber Tariff). Retaliation from US trading partners quickly followed, with European countries giving preferential tariff treatment to their colonies. The value of world trade declined by two-thirds between 1929 and 1934, and became increasingly concentrated in closed imperial blocks.

As in the pre-1914 period, international institutions played no significant role in the governance of international economic matters. The League of Nations had established an Economic and Financial Organization with subcommittees on the various areas of international economic relations. It enjoyed success in the early 1920s in coordinating a financial reconstruction package of £26 million for Austria. It also held various conferences aimed at facilitating trade by promoting common standards on customs procedures, compilation of economic statistics, and so on. But the economic and political disarray of the interwar period simply overwhelmed the League’s limited resources and legitimacy: the move to restore international economic collaboration awaited effective action by the world’s leading economy, the United States. This began with the passage by Congress in 1934 of the Reciprocal Trade Agreements Act (RTAA), which gave the president the authority to negotiate foreign trade agreements (without Congressional approval). The RTAA and the subsequent signature before 1939 of trade agreements with 20 of America’s trading partners laid the foundations for the multilateral system that emerged after the Second World War (the reasons why US trade policy changed so dramatically between 1930 and 1934 have been a focus of significant work in international political economy; see Hiscox 1999; Irwin and Kroszner 1997).

Key Points

  • Misalignment of exchange rates contributed to the problems of economic adjustment in the 1920s.

  • The world economy was already in recession before tariffs were raised in the early 1930s—but higher tariffs exacerbated the decline in international trade.

  • States did not negotiate any significant institutionalization of international economic relations in the interwar period.

The world economy post-1945

The world economy that emerged after the Second World War was qualitatively different from anything experienced before. John Ruggie, a leading theorist of political economy, has identified two fundamental principles that distinguish the post-war economy from its predecessors: the adoption of what Ruggie (1982), following Polanyi (1944), terms embedded liberalism, and a commitment to multilateralism (Ruggie 1992).

Embedded liberalism refers to the compromise that governments made after 1945 between safeguarding their domestic economic objectives, especially a commitment to maintaining full employment, on the one hand, and an opening up of the domestic economy to allow for the restoration of international trade and investment on the other. The ‘embedding’ of the commitment to economic openness—the liberal element—within domestic economic and political objectives was attained through the inclusion of provisions in the rules of international trade and finance that allowed governments to opt out, on a temporary basis, from their international commitments should these threaten fundamental domestic economic objectives. Moreover, an acknowledgement of the (p. 15) legitimacy of the principle that governments should give priority to the pursuit of domestic economic objectives was also written into the rules of the game. The adoption of the principle of embedded liberalism was a recognition by governments that international economic collaboration rested on their capacity to maintain domestic political consensus—and that international economic collaboration was, fundamentally, a political bargain. This recognition explains, for example, why the agricultural sector was for many years excluded from trade liberalization: the domestic political costs for governments of negotiating freer trade in agricultural products were judged to be so high as to jeopardize otherwise politically feasible trade liberalization in other sectors.

The institutionalization of international economic cooperation is another fundamental change in international economic relations in the post-war period. Neither in the period of relative stability of the pre-First World War gold standard era nor in the chaos of the 1930s did leading economies create significant international economic institutions. A commitment to multilateralism is one of the defining characteristics of the post-1945 order. For Ruggie (1992: 571), multilateralism is not merely a matter of numbers—it involves collaboration among three or more states, not necessarily all members of the system—but it also has a qualitative element in that the coordination of relations is on ‘the basis of “generalized” principles of conduct—that is, principles which specify appropriate conduct for a class of actions, without regard to the particularistic interests of the parties or the strategic exigencies that may exist in any specific occurrence’. A classic example is the most-favoured-nation principle, with its requirement that products from all trading partners must be treated in the same manner regardless of the characteristics of the countries involved. This principle for the conduct of trade contrasts, for example, with the largely bilateral trade agreements of the interwar years, where governments, rather than applying a generalized principle to their trade relations, discriminated in their treatment of individual trading partners.

The commitment to multilateralism that developed in the late 1930s and during the Second World War bore immediate fruit in the founding of the Bretton Woods multilateral financial institutions: the International Monetary Fund and the World Bank (see Box 1.5). Note, however, that these global or universal institutions, membership of which is open to all states in the international system, are just one form of multilateralism. For the whole of the period since 1945, but especially since the mid 1990s, regional institutions have also played an important role in international economic (as well as security) affairs (see Ravenhill, Chapter 6 in this volume). States have increasingly enmeshed themselves in a dense web of multilateral institutions.

The unprecedented rates of economic growth achieved in the years after 1945 attest to the success of the pursuit of multilateral economic collaboration in this period. Global GDP grew at close to 5 per cent in the period 1950–73. Although the recessions that followed the oil price rises of 1973–4 and 1979–80, and the debt crises that afflicted Latin America and Africa, contributed to a slowing of growth in the

Box 1.5 Bretton Woods

In 1944, the Western allies brought together their principal economic advisers for a conference at the Mount Washington Hotel in the village of Bretton Woods, New Hampshire, to chart the future of the international economy in the post-war period. The 44 governments represented at what was officially known as the United Nations Monetary and Financial Conference agreed on the principles that would govern international finance in the post-war years, and to create two major international institutions to assist in the management of these arrangements: the International Monetary Fund; and the World Bank (formally known as the International Bank for Reconstruction and Development). For details of the discussions at the conference, see van Dormael (1978) and Helleiner (2014a).

These institutions and the rules for managing international finance that were agreed became known collectively as the Bretton Woods regimes. In 1947, a United Nations Conference on Trade and Employment in Havana, Cuba, drew up a charter ( for an International Trade Organization (ITO), to complement the Bretton Woods financial institutions. The ITO never came into existence, however—see Capling and Trommer, Chapter 5 in this volume.

(p. 16) quarter-century after 1973, world GDP nonetheless grew at an average of 3 per cent per annum, a faster rate than during any period before 1945 (Maddison 2001: 262, Table 8–19). Moreover, world trade grew more rapidly than world production: world exports expanded by close to 8 per cent per annum in the years 1950–73, and by 5 per cent annually in the subsequent 25-year period (Maddison 2001: 362, table F–4). The internationalized sector consequently grew in importance in most economies, with important implications for the balance of domestic political interests on trade policy issues (see Hiscox, Chapter 4 in this volume).

Aggregate rates of growth, however, disguised substantial variations across different regions of the world economy. The gap between rich and poor widened substantially (see Figure 1.3). In 1500, little difference had existed in per capita incomes across various regions of the world. Incomes per head in the United States did not exceed those of China until the second quarter of the eighteenth century. By the third quarter of the nineteenth century, however, a marked gap had developed between incomes per capita in the United States and Western Europe on the one hand, and those of the rest of the world. Per capita incomes in Africa and in most parts of Asia stagnated (and in China actually regressed for a century). Despite the economic turmoil and slower rates of growth of the interwar years, the absolute gap between the industrialized economies and the rest of the world continued to widen: the divergence increased rapidly in the post-1945 era. Only a handful of previously less developed countries (LDCs), mostly in East Asia, made significant progress in closing the gap. Africa, meanwhile, became increasingly detached from the globalizing economy: its exports, measured in constant prices, barely expanded in the years between 1973 and 1990. The poor export performance contributed to falls in per capita income that occurred in the majority of years between 1973 and 1998. By the latter date, the average per capita income in Africa was no more than Western Europe had experienced in 1820 (all data drawn from Maddison 2001). Growing international inequality has been a fundamental part of the modern globalizing economy (see Wade, Chapter 12 in this volume).

Another defining characteristic of the post-1945 international economy was the growth in the number of transnational corporations (TNCs) (also referred to in some chapters of this volume as multinational enterprises). A growth of significant private economic

Figure 1.3 Per capita income, 1000–1998 (US$)

Figure 1.3
Per capita income, 1000–1998 (US$)

Source: Data in Maddison (1989, 2001).

(p. 17) enterprises with international operations had accompanied the emergence of the modern world economy in the fifteenth century. These, however, were primarily trading companies, such as the East India Company, specializing in moving goods between national markets. And when foreign investment took off in earnest, in the half-century before the First World War, the vast majority of it was portfolio investment—that is, investment in bonds and other financial instruments that did not give investors management control over the borrowing company. Companies that engaged in foreign direct investment—that is, the ownership and management of assets in more than one country for the purposes of production of goods or services (the definition of a TNC)—were relative rarities before 1945 (with some notable exceptions, such as the major oil companies and IBM). In the post-Second World War years, FDI took off, and has grown more rapidly than either production or international trade (see Thun, Chapter 7 in this volume).

The TNC has become the key actor in the globalizing economy. By 2009, it was estimated that there were 82,000 TNCs in operation, controlling more than 810,000 subsidiaries worldwide (UNCTAD 2009b: 18). By 2014, the global stock of FDI amounted to about $26 trillion, and the value added by TNC subsidiaries was equal to about 10 per cent of the world’s GDP. Moreover, sales by the subsidiaries of TNCs were nearly 50% more than the total value of world trade: an estimated $36 trillion (UNCTAD 2015b: 18). Whereas in the period before 1960, the vast majority of FDI and TNCs came from the United States, in subsequent years the American presence has been supplemented by corporations with their headquarters in Europe, Japan, Korea, and, increasingly, in less developed countries such as Brazil, China, and India (for further discussion, see Dicken 2015). Sovereign wealth funds have also become major sources of foreign investment.

The activities of TNCs, in turn, have fundamentally transformed the nature of international trade. Both the composition and direction of trade have changed dramatically since 1945. Whereas in the interwar years the composition of trade differed little from that of the previous centuries—that is, it was based on the exchange of raw materials and agricultural products for manufactured goods, since the post-war reconstruction of Europe and Japan, the principal component of trade has been the international exchange of manufactured goods. At first, this trade was primarily among the industrialized countries. In many instances, it involved intra-industry trade, that is, the international exchange of products from the same industry. For example, intra-industry trade occurs when Sweden exports Volvo cars to Germany and imports BMW vehicles from Germany. As this example suggests, product differentiation by brand name often provides the basis for intra-industry trade, and bears little resemblance to the comparative advantage-based explanation for trade that underlies conventional economic theory. In the last quarter of a century, the growth in intra-industry trade has occurred not so much in the exchange of finished products but of components that are often moved across several national boundaries before assembly and then exported to their final markets—a process that economists have termed the ‘fragmentation’ of production.

Since the 1980s, in particular, less developed countries have also been integrated into the international production networks led by TNCs (see Thun, Chapter 7 in this volume). Many developing countries have changed the structure of their tariffs to give preference to the processing and assembling of components that are subsequently exported. The World Trade Organization estimates that at the turn of the century such processing activities accounted for more than 80 per cent of the exports of the Dominican Republic, close to 60 per cent of the exports of China, and nearly 50 per cent of the exports of Mexico (WTO 2000a). This participation in global production networks is the most significant factor in a dramatic change in the commodity composition of the exports of less developing countries. Contrary to some popular impressions, by the end of the 1990s manufactured exports constituted 70 per cent of the total exports from the developing world. The share of manufactures in their exports had increased threefold since the end of the 1970s (UNCTAD 2001: xviii).

Reference to these less developed economies provides a timely reminder of another dramatic change in international economic relations since 1945—a huge augmentation in the number of independent states in the system. As noted in Box 1.5, only 44 countries were represented at the Bretton Woods conference, which was dominated by the industrialized countries of Europe and North America, but also included a few of the long-independent countries of Central and South America. Within two decades, almost all of the colonies of the European countries had gained their independence. This development (p. 18) had profound implications for the international system. One was simply the consequence of an increase in both the number of states and in the diversity of the international community: the number of states in the system more than doubled. Collaboration in international economic relations and the management of various dimensions of this collaboration became increasingly complex, illustrated very clearly in the trade sphere by the difficulties in negotiating the Uruguay and Doha Rounds of WTO talks (see Capling and Trommer, Chapter 5 in this volume, for details of these discussions; and Aggarwal and Dupont, Chapter 3, for a discussion of the problems that larger numbers pose for collaboration). The growth in the number of less developed countries also brought institutional changes, most notably in the foundation of the United Nations Conference on Trade and Development (UNCTAD) in 1964. And the new arithmetic in the international system generally, and particularly within the United Nations system, contributed to a change in international norms with the adoption, first, of decolonization (Jackson 1993), and then of development as core norms of the modern system.

Another defining characteristic of the contemporary system contributed to the enshrining of the development norm—the vast expansion in the number of non-governmental organizations (NGOs), many of which were focused on the alleviation of poverty (for further discussion of this topic, see the chapters in this volume by Wade and Phillips). NGOs have also been prominent in global environmental affairs (see Dauvergne, Chapter 14 in this volume) and, increasingly, in international trade. Relations between industrialized and less developed countries, and issues relating to global poverty and inequality, emerged as an important dimension of the study of international political economy, the evolution of which is discussed in the next section of this chapter.

Key Points

The post-war international economy was qualitatively different from anything that preceded it, on several dimensions:

  • states made a commitment to multilateralism, reflected in the construction of institutions at the global and regional levels;

  • the world economy grew at unprecedented rates after 1945—the internationalized component of economies became more significant as trade and foreign investment grew more rapidly than production;

  • TNCs and FDI emerged as key agents in the process of internationalization;

  • the composition and direction of international trade changed dramatically, with intra-industry trade among industrialized economies constituting the majority of aggregate world trade; and

  • the number of countries in the international system rose substantially.

The study of global political economy

The emergence of global political economy as a distinct subfield

Global political economy (GPE) developed as a significant subfield in the study of international relations in the 1970s. As has so often been the case in political science, the emergence of a new subject area was a response both to real-world changes and to trends in theorizing within and outside the discipline (see Box 1.6).

In the early 1970s, the global economy entered a period of turbulence following an unprecedented period of stable economic growth. The ‘long boom’ from the early post-war years through to 1970 benefited developed and less developed economies alike. Because of the comparative stability of this period, it was commonplace to regard international economic relations as a relatively uncontentious issue area that could be left to technocrats to manage. All this changed in the late 1960s, however, when the US economy encountered increasing problems because its commitment to a fixed exchange rate constrained its policy options at a time when domestic inflation was being fuelled by high levels of government expenditure—domestically, on social programmes, and internationally on the pursuit of the Vietnam War. In August 1971, a new era of instability in the global economy was ushered in when the Nixon administration unilaterally devalued the dollar (for further discussion, see Helleiner, Chapter 8 in this volume). In doing so, it set in train events that (p. 19)

Box 1.6 What’s in a Name? International Versus Global Political Economy

When international relations scholars began to examine economic issues in depth, the new subfield inherited the rather misleading adjective ‘international’ as the leading word in its title. Commentators have often pointed out that ‘international’ relations is a misnomer for its subject matter in that it confuses ‘nation’ with ‘state’, and fails to acknowledge the significance of private actors in global politics. But labels, like institutions, are often ‘sticky’—once adopted, it is difficult to displace them, even if a better alternative is available. The abbreviation, IPE, has become synonymous with the field of study. Even though we prefer ‘global political economy’ for the title of the book because it reflects more accurately the contemporary subject matter of this field, many of the contributors follow conventional usage in employing the abbreviation IPE and in referring to ‘international’ political economy.

While the study of global political economy achieved a new prominence in the 1970s, a variety of work in what would now be recognized as the field of GPE was published much earlier than this. A prominent example is Albert Hirschman’s (1945) study of asymmetries in Germany’s economic relations with its East European neighbours. Much of the work in the field of development economics that blossomed in the post-war period included a significant focus on political and international components. And the Marxist tradition of political economy remained vibrant, particularly in Europe.

To confuse matters, the study of economics was known in the eighteenth and nineteenth centuries as political economy (see, for example, John Stuart Mill’s (1970), Principles of Political Economy [first published in 1848]). The titles of some leading journals in the field of economics—for example, the Journal of Political Economy, first published in 1892—reflect this older usage.

were to end the system of fixed exchange rates, one of the pillars of the Bretton Woods financial regime.

The new instability in international finance reinforced perceptions that the global economy was about to enter an era of significant upheaval. Commodity prices had risen substantially in the early 1970s; Western concerns about the future availability and pricing of raw materials were compounded by the success of the Organization of the Petroleum Exporting Countries (OPEC) during the Arab–Israeli war of 1973 in substantially increasing the price of crude oil. Less developed countries believed that they could use their new-found ‘commodity power’ to engineer a dramatic restructuring of international economic regimes, a demand they made through calls at the United Nations for a New International Economic Order (NIEO) (see Phillips, Chapter 13 in this volume). Industrialized economies were already having difficulty in coping with a surge in imports of manufactured goods from Japan and the East Asian newly industrializing economies (NIEs), causing them to revert to various discriminatory measures to protect their domestic industries, in disregard of their obligations under the international trade regime. In trade and finance regimes alike, new pressures were causing governments to seek to rewrite the rules governing international economic interactions.

At this time of the greatest instability in international economic relations since the depression of the 1930s, interstate relations in the security realm, which had been the principal focus of the study of post-war international relations, appeared to be on the verge of entering a new era of collaboration. The United States was winding down its involvement in Indo-China; Henry Kissinger was negotiating détente with the Soviet Union; and President Nixon’s visit to China in 1972 appeared to presage a new epoch in which China would be integrated peacefully into the international system. For many scholars of international relations, the traditional agenda of the discipline was incomplete and the preoccupation of the dominant, realist approach with security issues and military power seemed increasingly irrelevant to the new international environment (Keohane and Nye 1972; Morse 1976).

The new turbulence in international economic relations prompted political scientists to take an interest in a subject matter that had previously been left largely to economists. It was not, as some commentators suggested, that international economic relations had suddenly become ‘politicized’. Politics and asymmetries in power had always underlain the structure of global economic relations, seen, for example, in the content of the various financial regimes negotiated at Bretton Woods. Rather, what was novel was that the turbulence of the early 1970s suggested that the fundamental rules of the game were suddenly open for renegotiation.

(p. 20) Political scientists’ new interest in international economic relations also coincided with the abandonment by the economics profession of what had previously been taught and researched as institutional economics. As the discipline of economics aspired to more ‘scientific’ approaches through the application of statistical and mathematical models, so it increasingly abandoned the study of international economic institutions. Political scientists discovered a vacuum that they quickly filled: the field of global political economy was born.

What is GPE?

Global political economy is a field of enquiry, a subject matter whose central focus is the interrelationship between public and private power in the allocation of scarce resources. It is not a specific approach or set of approaches to studying this subject matter (as we shall see, the full range of theoretical and methodological approaches from international and comparative politics has been applied to the study of international political economy).

Like other branches of the discipline, GPE seeks to answer the classic questions posed in Harold D. Lasswell’s (1936) definition of politics: who gets what, when, and how? This definition explicitly identifies questions of distribution as being central to the study of politics. It also points implicitly to the importance of power—the concept that is at the heart of the study of political science—in determining outcomes. Power, of course, takes various forms: it is classically defined in terms of relationships—the capacity of one actor to change the behaviour of another (Dahl 1963). But power is also exercised in the capacity of actors to set agendas (Bachrach and Baratz 1970; Lukes 1974), and to structure the rules in various areas of international economic relations so as to privilege some actors and to disadvantage others (Strange 1988).

Consider, for example, the international financial regime. As the world’s largest economy (and single most important market for many other countries in the global system), the United States has been able, over the years, to exercise relational power: to force changes in the behaviour of other countries—notably, to accept changes in their exchange rates (as, for example, in the Nixon administration’s breaking of the fixed exchange rate between the dollar and gold, and the forced appreciation of the North-East Asian currencies against the dollar following the Plaza Accord). The rules of the international financial regime have also been structured so that they privilege the more economically developed states in the system: not only do the wealthy industrialized economies enjoy more votes within the IMF and the World Bank under the weighted voting system employed in the two major international financial institutions (IFIs) (Box 1.7), but the industrialized economies (in part because of arrangements they have negotiated among themselves) have also largely escaped the discipline imposed by the IMF on countries that run persistent balance of payments deficits. Until the recession of 2008–9, no industrialized country had sought assistance from the IMF since Britain and Italy did so in 1976. Despite running huge deficits in its balance of payments, the United States has not been subject to IMF discipline because it can take advantage of the international acceptability of the dollar to print more money to finance its trade deficits.

Besides a focus on questions of distribution and of power, two of the fundamental concerns of political science, students of global political economy have also been preoccupied with one of the central issues in the study of international relations: which conditions are more favourable for the evolution of cooperation among states in an environment where no central enforcement agency is present? For many observers, this problem of ‘cooperation under anarchy’ is even more pertinent in the economic than in the security realm. This is because greater potential exists in the economic sphere, particularly under conditions of interdependence, for cooperation on a win-win basis, but states have a considerable temptation to ‘cheat’ by attempting to exploit concessions made by others while not fully responding in kind (see Aggarwal and Dupont, Chapter 3 in this volume).

Much of the early GPE work in the 1970s and early 1980s, particularly in North America, married two of these central concerns—the distribution of power within the global economy, and the potential for states to engage in collaboration. Conducted at a time when many perceived US economic power to be waning, this work focused on the link between hegemony and an open global economy (see Box 1.8).

Approaches to the study of global political economy

Following the publication of Robert Gilpin’s (1987) magisterial overview of the then emerging field of (p. 21)

Box 1.7 Voting in the International Financial Institutions

When the allied powers decided at Bretton Woods to create two international financial institutions, they agreed on a formula for voting rights that represented a compromise between the principle of sovereign equality and the realities of markedly unequal economic power. Members’ voting power has two components: ‘basic votes’, assigned equally to all members; and (a much larger number) of weighted votes that are linked directly to the money members subscribed to the two institutions. Quotas have been adjusted over the years as the membership of the institutions has expanded, but the G7 industrialized countries still control 43 per cent of the votes in the IMF, while more than 40 African countries together have less than 5 per cent of the total votes.

Eight countries—China, France, Germany, Japan, Russia, Saudi Arabia, the United Kingdom, and the United States—have their own representative on the 24-member IMF Executive Board, which is responsible for the day-to-day running of the institution. Others are arranged in various groups, with a single executive director casting their collective votes. The same countries have their own executive directors on the 26-member World Bank Board of Directors: the remaining seventeen directors represent the Bank’s other 180 member states; the Bank’s President is also a member of the Board of Directors.

In the IMF, ‘Ordinary’ Decisions require a simple majority, whereas ‘Special’ Decisions require an 85 per cent ‘supermajority’. The United States, with 16.67 per cent of the total votes at the IMF, can unilaterally block ‘Special Decisions’, such as changes in the IMF’s Charter or use of its holdings of gold. Voting, however, is relatively rare, with most decisions being carried by consensus.

Criticisms of the failure of IMF quotas and voting rights to reflect the growing significance of developing economies were increasingly voiced after the East Asian financial crises of 1997–8. This criticism led to proposals to reform quotas and to increase the number of basic votes assigned to each country. The first stage was an ‘ad hoc’ increase in the quotas of China, Korea, Mexico, and Turkey (ranging from about a 20 per cent increase for Turkey to about 80 per cent for Korea), which took effect in 2007. In the wake of the financial crisis and the G20’s decision to double the resources available to the IMF, the Fund’s Executive Board approved far-reaching reforms. The increase in quotas would be distributed in a manner such that the share of emerging market and developing economies would double. Voting power in the Fund would more closely reflect the relative size of countries in the global economy. The ten largest members of the Fund would be the United States, Japan, the four largest European economies (France, Germany, Italy, and the United Kingdom) and Brazil, China, India, and the Russian Federation. China would be the single largest beneficiary of the redistribution, with its voting rights increased by 50 per cent. The United States, whose weight in the global economy is actually under-represented in its IMF voting rights, would retain its veto power (for details of the new quotas and voting rights see The Executive Board would also be restructured with all Executive Directors being elected; two European seats would disappear to be replaced by two Directors from emerging economies. The changes, which require approval of countries with 85 per cent of the Fund’s voting rights were introduced in January 2016.

By convention, since the foundation of the two IFIs, the United States has nominated the president of the World Bank, and (West) European countries the managing director of the IMF. In an unusual move in 2000, however, the Clinton administration in the US vetoed the German government’s first-choice nominee for the post of managing director of the IMF. Although the appointment of the nominees is subject to a formal vote within the Fund and the Bank, other members have only the option of either voting for or against the nominated candidate rather than proposing alternative names. The dominance of the US and Europe in choosing the CEOs of the IFIs has increasingly been contested; in the process that led to the appointment of Christine Lagarde as Managing Director of the Fund in June 2011, however, developing economies were unable to reach agreement on an alternative candidate.

The Washington, DC location of the two IFIs facilitates US influence over their operations. For more detailed discussion of the representativeness and accountability of the IFIs, see Woods (2003) and Xu and Weller (2015).

Unlike the IFIs, the Geneva-based World Trade Organization operates on the principle of one member, one vote, but its members have never voted: decision-making is by consensus, see Capling and Trommer, Chapter 5 in this volume.

global political economy, most introductions to the subject have identified three principal categories of theoretical approaches to GPE. In Gilpin’s original terminology (he changed some of his labels in the updated version of his book: Gilpin 2001), these were liberalism, nationalism, and Marxism. Of these three labels, only liberalism has been used universally in other categorizations. Other writers have substituted statism, ‘mercantilism’, ‘realism’, or ‘economic nationalism’ for nationalism. The approaches that (p. 22)

Box 1.8 Power and Collaboration

The theory of hegemonic stability suggests that international economic collaboration in pursuit of an open (or liberal) economic order is most likely to occur when the global economy is dominated by a single power (because this country, the hegemon, will have both the desire and the capacity to support an open economic system—the dominant economy is likely to benefit most from free trade; moreover, its relatively large size will give it leverage over other states in the system). Theorists pointed to the experience of the mid-nineteenth century when Britain was the hegemonic power, and to the period of US dominance from 1945 to 1971, as demonstrating the relationship between hegemony and an open world economy. In contrast, the interwar period, when no single country enjoyed equivalent pre-eminence, was characterized by a breakdown in international economic collaboration. The decline in the relative position of the US economy in the 1960s, following the rebuilding of the Western European and Japanese economies, appeared to coincide with renewed closure (a rise in protectionism in response to imports from Japan and the East Asian NIEs) and the general turbulence in global economic regimes noted above.

Subsequently, however, the hegemonic stability argument was undermined both by trends in the real world and by new theoretical work. In the 1990s, countries extended their collaboration on international economic matters, especially in trade, despite a relatively more even dispersion of economic power in the global system.

For statements of the hegemonic stability argument, see Kindleberger (1973) and Krasner (1976); for alternative theoretical perspectives see Keohane (1984, 1997), Snidal (1985b), and Pahre (1999). For further discussion, see Aggarwal and Dupont, Chapter 3 in this volume.

Gilpin subsumed under the label Marxism have variously been identified as ‘radical’, ‘critical’, ‘structuralist’, ‘dependency’, ‘underdevelopment’, and ‘world systems’.

In itself, the use of a variety of labels points to one of the problems with the ‘trichotomous’ categorization of approaches to the study of GPE: the (sometimes misleading) lumping together of substantially different perspectives within a single category. Moreover, the trichotomous categorization does not capture the wealth of methodological and theoretical approaches used in the contemporary study of GPE, or provide an accurate signpost to the breadth of fascinating questions that currently preoccupies researchers in the field. For these reasons, we do not use such conventional categorization in this book. So common is the trichotomy in introductions to GPE, however, that it is worth investing a little time in understanding the underlying foundations of the categorization. Matthew Watson’s chapter in this volume examines the historical origins and subsequent intellectual lineage of the principal theoretical perspectives on GPE (see Chapter 2).

Much of the best work in global political economy in recent years has been less concerned with prescription than with explanation—for example, how differences in political institutions shape policy decisions, and why some sectors of the economy are more successful than others in seeking protection (see Hiscox, Chapter 4 in this volume); why it is easier for states to collaborate on some issues rather than others (see Aggarwal and Dupont, Chapter 3 in this volume); why states have increasingly pursued trade agreements at the regional instead of the global level (Ravenhill, Chapter 6 in this volume); why states have been unable to agree on an effective regime for dealing with international debt (Pauly, Chapter 9 in this volume); and why some global environmental regimes are effective while others are not (Dauvergne, Chapter 14 in this volume). Of course, policy prescriptions often follow from such theoretically informed analysis, and they are far more specific than those of the ‘get the state out of the market’ variety.

Since the early 1980s, the study of global political economy has been enriched by the application of a diverse array of theoretical and methodological approaches, but neither their subject matter nor the methodologies employed allow easy categorization. Take, for example, the role of ideas in shaping policy agendas, in helping states to reach agreement in various international negotiations, and in legitimizing current economic, political, and social structures. Ideas have been the central focus of work firmly within the Marxist tradition, which builds on the arguments of the former Italian communist party leader, Antonio Gramsci, on how ideas help ruling classes to legitimate their domination (Cox 1987; Gill 1990). But ideas have also been pivotal to quite different (p. 23) approaches, drawing on the work of the German sociologist, Max Weber. Work from this perspective examines the role that ideas play in defining the range of policy options that governments consider, and in providing a focal point for agreement in international negotiations (Hall 1989; Goldstein and Keohane 1993; Garrett and Lange 1996). Also derived from Weberian analysis are constructivist approaches, which emphasize the significance of ideas in constituting actors’ perceptions of their interests and identities, rather than taking these for granted—examples of the application of constructivist analysis to IPE include Colin Hay (Chapter 11 in this volume), Haas (1992), Burch and Denemark (1997), Hay and Rosamond (2002), Abdelal, Blyth, and Parsons (2010). And cross-fertilization has occurred across different approaches—for example, the Gramscian idea of hegemony has been used by writers from a non-Marxist perspective, such as Ikenberry and Kupchan (1990), and finds resonance in Joseph Nye’s (1990) concept of ‘soft’ power.

Likewise, turning to methodology, we find similar methods employed by scholars from dramatically different theoretical traditions. Consider rational choice approaches, for example. Since the mid 1990s, rational choice has dominated many areas of the study of political science, particularly in universities in the United States. Its origins lie in economic theory; the focus is primarily on individuals, the factors that lead them to choose preferred courses of action, and how strategic interaction generates uncertainty. In GPE, rational choice analysis has been prominent in the recent study of the determinants of trade policy preferences, and why international institutions, including the European Union, take particular forms, what the effects of institutions are, and why some institutions survive longer than others (Frey 1984; Martin 1992; Garrett and Weingast 1993). Vaubel (1986, 1991) has applied rational choice analysis in an examination of the behaviour of the officials of the IMF. Such work is very much in the mainstream of contemporary political science. But rational choice methods have also been applied by theorists working within the Marxist tradition—for example, Roemer (1988), and Carver and Thomas (1995).

Although rational choice methods have become dominant in some circles within North American political science, a large number of scholars of GPE would find it difficult to accept the argument made at the turn of the century by one proponent of rational choice methods that GPE ‘is today characterized by growing consensus on theories, methods, analytical

Box 1.9 Epistemology, Ontology, and Methodology

Epistemology is the study of knowledge and justified belief. It is concerned with questions about the necessary and sufficient conditions of knowledge, the sources of knowledge, and how knowledge is created. Ontology is the study of being and of what ‘exists’. It is concerned with the identification of the core objects of study, their characteristics, and their relationships to other objects. Methodology refers to a procedure or set of procedures used to study a subject matter.

frameworks, and important questions’ (Martin 2002: 244). Diversity in ontology, epistemology, and methodology continues to characterize the international study of global political economy (see Box 1.9). Many scholars find this rich mix of theories and methodologies a cause for celebration rather than concern. This is certainly the view of the contributors to this volume, which reflects much of the current lively debate in the study of GPE.

Key Points

  • The field of global political economy emerged in the early 1970s in response to developments in the world economy, in international security, and in the study of economics and international relations.

  • GPE is best defined by its subject matter rather than as a particular theory or methodology.

  • Approaches to the study of GPE have conventionally been divided into the three categories of liberalism, nationalism, and Marxism.

  • This trichotomous division is of questionable contemporary utility because of the variation in approaches included within each of the three categories.

  • The contemporary study of GPE is characterized by the application of a wealth of theories and methodologies.

  • Most of the contemporary work in GPE focuses on positive theory: that is, attempting to explain why things happen, rather than on policy prescription.

(p. 24) The first part of this volume looks at some of the approaches that have addressed the key concerns of theorists of GPE: what conditions are most conducive to the emergence of collaborative behaviour among states on economic issues, and what are the determinants of the foreign economic policies of states? It then examines the evolution of trade relations, first at the global and then at the regional level. Chapter 8 reviews the development of the global financial regime since 1944; the following chapter addresses the causes of financial crises and the reasons why international collaboration to date has been ineffective in devising strategies to combat them.

The chapters in the second part of the book examine various aspects of the debate about globalization: whether in fact the contemporary economy is global and whether it differs, qualitatively or quantitatively, from previous eras of economic interdependence; and the extent to which enhanced globalization constrains the policy options available to states. In the last part of the book, we examine the impact of globalization on world poverty and inequality; how globalization has changed the relations between industrialized and less developed economies; and the impact of globalization on the environment.


  1. 1. What were the principal factors that determined the severity of the recession of 2008–9?

  2. 2. In what ways did the recession of 2008–9 change global economic governance?

  3. 3. What were the principal features of the classical period of mercantilism?

  4. 4. What were the reasons for rapid economic growth in the nineteenth century?

  5. 5. How did the gold standard operate automatically to bring the payments position of countries into equilibrium?

  6. 6. What were the principal reasons for the breakdown of international economic relations in the interwar period?

  7. 7. What are the defining characteristics of the post-1945 world economy?

  8. 8. What factors led to the emergence of GPE as a significant field of study?

  9. 9. What is GPE?

  10. 10. What are the main weaknesses with the traditional threefold categorization of approaches to GPE?

Further reading

Cohen, B. J. (1977), Organizing the World’s Money: The Political Economy of International Monetary Relations (New York: Basic Books). The first major study from a GPE perspective of global financial relations.Find this resource:

Cohen, B. J. (2008), International Political Economy: An Intellectual History (Princeton, NJ: Princeton University Press). The most detailed examination of the development of contemporary international political economy.Find this resource:

Cooper, R. N. (1968), The Economics of Interdependence (New York: Columbia University Press). A pioneering work that laid the foundations for the emergence of GPE as a significant field of enquiry in the 1970s.Find this resource:

Crane, G. T. and Amawi, A. (eds) (1997), The Theoretical Evolution of International Political Economy: A Reader, 2nd edn (New York: Oxford University Press). An excellent compilation of selections from classical and contemporary writing on global political economy.Find this resource:

Gilpin, R. (1987), The Political Economy of International Relations (Princeton, NJ: Princeton University Press). The most theoretically sophisticated of the early introductory books on GPE.Find this resource:

(p. 25) Hirschman, A. O. (1945), National Power and the Structure of Foreign Trade (Berkeley and Los Angeles, CA: University of California Press). A pioneering study of the relationship between power and foreign economic relations, focusing on the interwar experiences of Nazi Germany.Find this resource:

Keohane, R. O. (1984), After Hegemony: Cooperation and Discord in the World Political Economy (Princeton, NJ: Princeton University Press). The most thorough assessment of the relationship between the distribution of power and collaboration among states on international economic matters.Find this resource:

Maddison, A. (2001), The World Economy: A Millennial Perspective (Paris: Development Centre of the Organisation for Economic Co-operation and Development). Excellent source of historical statistics on the development of the world economy.Find this resource:

Palan, R. (ed.) (2013), Global Political Economy: Contemporary Theories, 2nd edn (London: Routledge). The most comprehensive survey of contemporary theoretical approaches to global political economy.Find this resource:

Paul, D. E. and Amawi, A. (eds) (2013), The Theoretical Evolution of International Political Economy: A Reader, 3rd edn (New York: Oxford University Press). An excellent compilation of selections from classical and contemporary writing on global political economy.Find this resource:

Schwartz, H. M. (2010), States versus Markets: The Emergence of a Global Economy, 3rd edn (London: Macmillan). Provides an unusual historical perspective on the contemporary global economy by tracing its development since the 1500s, with emphasis placed on the links between the emergence of the modern state and the modern global economy.Find this resource:

Strange, S. (1971), Sterling and British Policy: A Political Study of an International Currency in Decline (London: Oxford University Press). A pioneering work on the relationship between politics and international financial policies.Find this resource:

Strange, S. (1988), States and Markets (London: Pinter). An idiosyncratic introduction to global political economy that is organized around the theme of structural power.Find this resource:

Wallerstein, I. (1974), The Modern World-System (New York: Academic Press). The first volume of a multi-part work examining the emergence of the modern world economy.Find this resource:

Weblinks University of Toronto G8 Information Centre. International Monetary Fund. World Bank. United Nations Conference on Trade and Development (UNCTAD). Organization of the Petroleum Exporting Countries. Gold Standard—EH.Net Encyclopedia. Glossary of economic terms.

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