SE-504 The Economic Dimension

LESSON OUTLINE:

Thesis: International economic issues occupy a central position in defining the relationships among international actors including nation-states, IGOs, NGOs, and MNCs (intergovernmental, non-governmental orgs. and multinational corps). With the end of the Cold War, relationships among global actors will increasingly be defined by the control of material resources, geographic commercial ties, and physical wealth.

Main Point I: Liberalism, mercantilism, and structuralism provide the dominant frameworks for examining the economic dimension.

a. Liberalist view emphasizes mutually beneficial exchange, profit, and pluralism.

b. Mercantilist view emphasizes protection of markets

c. Structuralist view emphasizes class struggle.

d. Papp presents two theories of economic development.

(1) Modernization theory.

(2) Dependency theory.

Main Point II: The United States' ability to command influence over the global economy has gradually weakened.

a. The Bretton Woods system originated as an attempt to manage the post-WWII global economy.

b. IMF, World Bank, and GATT were key components of the Bretton Wood system, originated to answer specific postwar needs.

c. The growing US trade imbalance led to abandonment of Bretton Woods.

Main Point III: Emerging trends in the global political economy offer both dangers and opportunities.

a. The emergence of trading blocs signals the possible return of mercantilism.

b. MNCs exert their power across nation-state boundaries.

c. Mexico demonstrates that capitalism is not a quick and easy solution.

d. Sources of potential conflict persist between the developed and developing world.

(1) Widening income gap.

(2) Resource issues.

(3) Environmental degradation.

LESSON OBJECTIVES:

504.1 Know the principal determinants of economic development. (Papp)

504.11 Identify the strengths and limitations of modernization and dependency theories in the context of economic development.

Modernization theory: Basic premise the belief that economic development requires the rejection of traditional patterns of behavior, value, and organization, and the acceptance of new patterns.

• To develop, states need:
  • An educated population
  • Widespread acceptance of science, technology, and the scientific method
  • Increased secularization and the decline of religious tradition
  • Urbanization
  • Division of labor in the productive sectors of societal law rather than edict
  • The development of a system of social and economic rewards based on merit rather than station of birth or place in Society
  • Greater social mobility between and among people and classes
  • A tolerance for diversity, innovation, and change as critical elements needed for economic development to take place and prosper.
• Not coincidentally, these are the same traits that are often viewed as required for the development of the capitalist market economies.
• There's widespread agreement among modernization theorists that for economic development to occur and prosper…
  • The percentage of the population engaged in agriculture must decline
  • Feudalist social and economic organization of society must be replaced
  • Arbitrary political decision-making must be eliminated, political decision-making must become less centralized.
    

Dependency theory:

• Modernization theorists miss two key points.
  • First, the late twentieth-century world bears no resemblance to the world in which economic development began and proceeded in its early phases in Europe, North America, and Japan (the model modernists use).
    • Industrialization began in these locations in the absence of external competition, whereas in today's world, countries that are attempting to industrialize and develop economically face immense external competition. This competition prevents economic growth in the Developing World.
    • The developmental experiences of the past are irrelevant to the world of today.
  • Second, the First World's economic development was underwritten by the inexpensive raw material and labor of the Developing World.
    • More extreme proponents of dependency theory even argue that industrialization in Europe and elsewhere as well could not have taken place without this exploitation.
    • The present-day international economic system remains heavily stacked in favor of the industrialized West, and that the industrialized West owes an immense debt to the Developing World.
• Exploitation has occurred and continues to occur on two levels.
  • Within individual businesses, where the owners exploit and profit from the Labor of their workers. (In many respects, this is similar to Marxist interpretations.)
  • Between states that are economically developed and those that are not. Many express this relationship between economically developed states and underdeveloped states as a relationship between "the periphery" and the "center."
• Critics of dependency theory maintain that it overemphasizes the role that the international system plays in constraining development, and under-emphasizes the impact that policies implemented in Developing World states have on economic development. Other critics note that it fails to explain why some states such as South Korea, Thailand, Malaysia, Singapore, and others are enjoying rapid economic growth, while others are not
  

504.2 Know the concept of the "political economy" and the challenges a New World order may place on this concept. (Hughes)

504.21 Define the term "political economy" as it relates to emerging global economic trends.

Not specifically answered in the readings. However, drawing the articles together one can state that political economy is the relationship between political systems and economic systems… how politics affects economic growth. From this, political scientists and economists have formed varying philosophies on how these two entities work together. It's the old horse and cart, chicken and egg question: does one create the environment for the other to go in one way or another?

504.3 Comprehend the structuralist, liberalist, and mercantilist views of economic activity. (Hughes)

504.31 Discuss the strengths and limitations of the structuralist world view in describing the global economy (Hughes)

Structuralism is based on Marxist political philosophy, closely related to dependency theory.

• Rejects both the individual and the state as the appropriate basic unit of analysis. Two principal units of analysis emerge instead: the class, and the global political economy, or world system.
• History is a study of the ownership of the means of production, causing social conflict. These economic divisions condition political and social relationships, even values, morality, and religion. More specifically, the dominant economic class controls important institutions, including the state and the church, and uses them to reinforce its position within society.
• Class relationships change slowly, whereas the forces of production (and the technology underlying them) are quite dynamic. Sometimes the class relationships impede change in the forces of production, creating tensions or contradictions.
• Liberals portray individuals interacting in their self-interest, but doing so in a mutually beneficial milieu of market exchanges. Interactions are win-win or nonzero-sum; all can benefit. In Marxist analysis, however, the gains of one class generally come at the expense of another.
• Relationship between Marxism and imperialism a tenet of structuralism introduced by John Hobson. The concentration of income and wealth in the hands of a few, and the removal of income and consumption power from the workers, set up a situation of surplus production. He saw the principal outlet for this surplus in imperialism. Although Hobson believed that a better solution would be redistribution of income, what he saw around him was a use of government by capitalists to promote foreign interests and to export surplus labor and capital to more backward societies (creating the dependency relationship).
• Lenin linked such imperialism firmly to capitalism and saw it as the factor that explained the relatively good condition of workers in the more advanced capitalist states, in contradiction of the Marxist expectation that their condition should deteriorate. As the world became divided among capitalist states, so that outlets for the surpluses became scarce, he foresaw an inevitable clash among the imperialist states (like that of World War I, which erupted in 1914). In short, imperialism could prolong the era of capitalism but not save it.
• An important recent development that offers assistance in that enterprise is world systems theory. Although generally eschewing the Marxist label, and in fact often attacking contemporary Marxist thought, the world system theorists adopt much of the basic conceptual framework of Marxists.
• World systems theory recognizes the exploitative class basis of past and present development, seeks to offer a historical perspective and an analytical approach to the examination of the past, present, and future development of the whole world within a single modern world system.
• World system theorists see within it a core of states and economies that dominate the system and a periphery of subordinate economies. In fact, most world system theorists essentially portray what is essentially an international class structure, in which the development of the more advanced countries has occurred at the expense of the less developed. Frank calls it the "development of underdevelopment." This is an important and sharp contrast to Marx, who saw the spread of capitalism to the less developed countries as a progressive force promising the same advantages in those countries that it had given Europe.
• Another and complementary modern variant of structuralist theory is dependency theory. Dependency theory does not generally share the long-term horizon of world systems theorists. Instead, it focuses on the contemporary relationship of core and periphery states, and the asymmetrical dependence that the latter have on the former (or the penetration of the latter by the former). Dependency theorists question the mutual benefit of trade that liberal theorists associate with the logic of absolute and comparative advantage.
  

504.32 Discuss the strengths and limitations of the classical liberal world view in describing the global economy. (Hughes)

Although (classical) liberals emphasize the importance of maintaining a separation between politics and economics, they simultaneously believe that the nature of the economic system affects the political system. Many liberals argue that a freely functioning economy generates a wide range of competing economic and social entities that translate their interests into political and social competition. That is, liberal economies create political pluralism. Producers, distributors, consumers, employees, financial institutions, and other economic actors have interests that set them in conflict with each other.

Since World War II many have been convinced that a highly integrated but simultaneously pluralistic global economy, based on freely functioning markets, was fundamental to the support of democracy and to the maintenance of long-term peace.

There is an emphasis on the individual. Liberalism developed as a challenge to the feudal order of the late Middle Ages

Liberal thinkers include:

Thomas Hobbes who developed of the realist world view.

John Locke who based his argument on a belief that God created humanity, thus people have certain natural rights, including self-preservation of one's own person. He extrapolated those rights into the right to sell one's own labor and to own additional property, justifying a capitalist society. He also made a strong case that the government should not interfere with the exercise of these rights.

Adam Smith argued that it was human nature to "truck, barter, and exchange" and that individuals act rationally to pursue their self interests in trade.

Liberals identify three forces that operate within market economies and that give rise to economic growth and increased welfare.

• The first important force underlying growth in liberal economic theory is reinvestment by producers of a portion of their profits (earnings minus expenses) in such a way as to increase production efficiency, volume, and future profit. That is, they accumulate capital. Physical capital, largely production machinery and the buildings housing it, is a key factor of production
• Second force is special advantage in the production process. Adam Smith recognized that producers have differential access to raw materials, capital, technology, labor, or other inputs to the production process. They therefore advantageously specialize in the production of that which they can produce most efficiently and trade for that which they cannot so easily produce.
• Third important force for growth is division of labor in the production process. Adam Smith used a pin factory as an example: individuals producing entire pins could not produce as many as when they specialized-one drawing out thin wire, another cutting it, another producing pin heads, and so on. Today we can see division of labor at work both within factories and across country borders. For instance, factories around the world produce parts for the Ford Escort.
  

504.33 Discuss the strengths and limitations of the mercantilist world view in describing the global economy. (Hughes)

Mercantilism extends the concepts and theories of realism into economics. For mercantilism, as for realism, states are central actors and operate in an anarchical state system. They use power in the pursuit of security.

• The philosophy of mercantilism grew up with the modern state and state system, and it dominated political-economic thought during the 16th and 17th Centuries.
• Domestically it led to state support for the manufacturing sector and the exports of it (which could secure bullion). For instance, a leading French mercantilist, Jean Baptiste Colbert (1619-1683), with the ear of the king, used subsidies and tariff protection to encourage industry, while simultaneously building a large navy in support of commerce and colonization.
• Externally, mercantilism required the development and protection of markets. For instance, the British Navigation Act of 1651 forbade importation of many goods unless carried in British ships. Subsequent acts required, for example, that all goods shipped to the American colonies go through British ports. Parliament did not repeal these acts until 1849. The linkages between classic mercantilism and imperialism are apparent. The typical colonizing country demanded that the colonies trade only with them.

Classical mercantilism emphasized acquisition and retention of bullion as a store of wealth for the state. States could obtain bullion by maintaining trade surpluses with other countries, by plundering, and through exploitative relationships with colonies. Today we more open view gold and silver as sterile and maintain wealth in the form of productive investments such as factories.

"Neomercantilism is a trade policy whereby a state seeks to maintain a balance-of-trade surplus and to promote domestic production and employment by reducing imports, stimulating home production and promoting exports". Neomercantilism, like realism, views the world in zero-sum terms, and its manifestations therefore give rise to conflict among states. The primary source of tension between the United States and Japan.

504.4 Comprehend the characteristics and potential conflicts in the emerging global economy. (McCrabb)

504.41 Explain the influence of multi-national corporations on the global economy.

Not specifically answered in the readings, however one can draw out from these that MNCs have been spawned by liberalist political economic practices, and have created a more porous state relationship. Example: one author cites the Ford Escort has parts made in a variety of countries. This creates an interdependence between those states to ensure more Ford Escorts are sold. MNCs also create internal political pressure that prompts states to enter into relationships beneficial to the MNC (thus beneficial to the states in which the MNC has factories). Example: trading pacts like NAFTA and the EU.

Other points:

Developmental policies: Most developed countries are engaged in foreign aid for a variety of reasons (economic investment, political aggrandizement, altruism…). A possible threat to developed countries that developing countries may bear include…

Loan defaults: Imagine the turmoil that would occur in Western financial markets if Developing World states defaulted on a sizable percentage of the loans outstanding to them. Probably because of this, Fidel Castro in 1986 urged Latin American leaders to default on their loans.

Resource cartels modeled after OPEC's influence over international policy recognize that industrialized nations depend on developing nations' resources.

Modernist views are held mostly by industrialized states, who generally stress the need for change in Developing World states in order to attain economic development. There must be proper market-oriented policies in Developing World states; changes in attitudinal, organizational and operational methods. Economic assistance from the industrialized West would play an important role in assisting these changes, but the primary force behind economic development and the eventual reduction of the economic gap between rich and poor would be the effort of the people of Developing World states themselves.

Dependency views are held mostly in Developing World states. Although not opposed to such efforts, they argue that the prevailing international economic order, as well as past and present exploitation, frustrates all but the most fortunate among them from realizing economic growth that would, over time, reduce disparities in wealth. Therefore, many Developing World states seek radical changes in the international system to achieve economic development and a more balanced distribution of wealth. Some advocate direct transfers of wealth from rich states to poor states to make up for past exploitation and to speed future development; creation of a new international economic order to end present inequities and prevent future ones; debt relief, repayment delay, or debt forgiveness.

The McCrabb article does not specifically answer any of the objectives, but offers some food for thought on potential sources of conflict. She argues:

Despite the projections of other political scientists that armed conflict between the industrialized nations is highly unlikely, three issues pose at least some possibility for conflict between these countries. (She does not, however, believe these will actually lead to armed conflict.)

The lowest probability of hostile conflict centers on disagreements over resource access. Two phenomena are occurring that may cause resource access to become an irritant which could contribute enough heat to ignite a spark. One phenomenon is user-supplier agreements where firms attempt to secure for themselves guaranteed access to raw materials. An example of this is Japanese firms who, through direct foreign investment to build or modernize extraction facilities, secure supplies of ores for smelting plants in Japan and third-party countries. Another phenomenon is more direct conflict over resources. An example is the sporadic outbreaks of fish wars, where fishermen of one country have been fired upon by boats and naval craft of another country over alleged poaching on national fishing grounds.

A medium probability of conflict is over market access. The two biggest concerns in this area are the rise of regional trading blocs (NAFTA vs. the EU) and the increasing use of nontariff trade barriers (trumped up "inspection rules" are an example).

The third area provides the catalyst for the previously mentioned two phenomena. The economic slowdown of 1990-94 injected enormous stress into the liberal economic arena that was manifested in various ways: high unemployment in Europe, stagnating wage growth in the US, and drastically reduced growth rates in Japan.5 All result in demands for government action by the populace. Additionally, all, to one degree or another, call into question the open trading system that has existed since the end of World War II. Perhaps the clearest example of this questioning is the rising protectionist movement in the US, especially over a belief that the large and growing trade surplus with Japan (and China) is the result of "unfair" trading practices. 6 developing world in the next century focus on widening income flaps, resource issues, and environmental degradation. North-south income disparities likely will be manifested primarily through migration issues. Potential trouble areas range from North Africa to Western Europe, from Eastern Europe to Western Europe, and from Latin America and Asia to the US and Canada.