pols 374 foundations of global politics the origins of the global economic system lecture date:...

POLS 374 Foundations of Global Politics

The Origins of the Global Economic System

Lecture Date: October 11, 2005

Origins of the Global Economic SystemOrigins of the Global Economic System

The authors begin the story with Henry Ford and the system of production he helped to create.

What was this system?

Simple answer: Fordism


Fordism: A system based on mechanized, highly efficient assembly line production. In Ford’s system, the assembly line was manned by workers who Henry Ford also saw as potential consumers. Ford is famous for paying his workers what was, at the time, an unprecedented sum of money: $5.00 a day! (he also provided housing and other social amenities). The term “Fordism” was originally coined by our friend, Antonio Gramsci.


The assembly line increased labor productivity tenfold and permitted stunning price cuts in Ford cars: from $780 in 1910 to $360 in 1914. Fordism thus involved standardizing a product and manufacturing it by mass means at a price so low that the common man could afford to buy it.

Fordism displaced predominantly craft-based production in which skilled laborers exercised substantial control over their conditions of work (that is, Fordism “de-skilled” labor). Fordist production also entailed an intensified industrial division of labor and increased mechanization and coordination of large scale manufacturing processes. (Source: http://www.vanderbilt.edu/AnS/Anthro/Anth101/taylorism_and_fordism.htm)


Some pictures of Ford’s original factory and assembly line.

Origins of the Global Economic System

Fordism was a revolution in production. But it was not one without its own in-built contradictions, the most important of which was simply and ironically that it was too productive.

That is, it gave capitalists the ability to produce far, far more than they could actually sell (a point we’ve discussed several times already)


Simple equation: Too much production + too little demand = depression

One consequence of the depression: Massive unemployment in the U.S., reaching 25~30%.


The Great Depression affected every major economy of the world, and was, almost certainly, a proximate cause of World War II. On this point, it is important to understand that worldwide economic problems were exacerbated by the increasingly interdependent nature of capitalism. One country’s problem often--though not necessarily--became every other countries’ problem. This was one of the lessons learned after WWII.


After the war, there was a strong desire on the part of the economic and political elite in the US and other major countries to prevent a reoccurrence of both the Depression and the war.

This spurred them to try to create a new type of rule-governed, but consent-based international economic system, which also happened to be based on the American form of capitalism and especially Fordism.


Originally, this Americanized form of world capitalism included a large role for the government through spending programs and the like. This was called Keynesianism, based on the ideas of John Maynard Keynes, one of the most prominent economists of the time.

Other elements of this new system included the IMF, the World Bank, GATT, the United Nations, NATO and a host of smaller, regionally-based international institutions.


A Primer on the International Monetary Fund

Quick Description: The IMF is the central institution of the international monetary system. The organization was conceived in 1944 and established in 1945.


The impetus for the IMF, as I already noted, was the Great Depression of the 1930s. Its founders believed that the only way to avoid a repetition of this economic catastrophe was to build a foundation for broad based international economic cooperation.

Background: During the 1930s, as economic activity in the major industrial countries weakened, countries attempted to defend their economies by increasing restrictions on imports; but this just worsened the downward spiral in world trade, output, and employment. To conserve dwindling reserves of gold and foreign exchange, some countries curtailed their citizens' freedom to buy abroad, some devalued their currencies, and some introduced complicated restrictions on their citizens' freedom to hold foreign exchange. These fixes, however, also proved self-defeating, and no country was able to maintain its competitive edge for long. Such "beggar-thy-neighbor" policies devastated the international economy; world trade declined sharply, as did employment and living standards in many countries.


The IMF's original statutory purposes included promoting the balanced expansion of world trade, the stability of exchange rates, the avoidance of competitive currency devaluations, and the orderly correction of a country's balance of payments problems.

These basic purposes haven’t changed much since, although the IMF has taken on an increasingly pervasive role over time. Today, for example, the IMF is heavily involved in oversight of member countries' economic policies.


What are the implications of the IMF’s oversight? Most generally, it means that the IMF is concerned with the performance of an economy as a whole—often referred to as macroeconomic performance.

Also oversees financial sector policies, including the regulation and supervision of banks and other financial institutions. Most saliently, perhaps, the IMF pays careful attention to structural policies that affect macroeconomic performance—including labor market policies that affect employment and wage behavior.

Unlike the past, the IMF plays an active role in “advising” each member state on how its policies in these areas may be improved to allow the more effective pursuit of goals such as high employment, low inflation, and sustainable economic growth—that is, growth that can be sustained without leading to such difficulties as inflation and balance of payments problems.


Who Makes Decisions at the IMF?

The IMF is accountable to its member countries, although the day-to-day work of the IMF is carried out by an Executive Board, representing the IMF's 184 members, and an internationally recruited staff under the leadership of a Managing Director and three Deputy Managing Directors—each member of this management team being drawn from a different region of the world.

The Executive Board consists of 24 Executive Directors, with the Managing Director as chairman. The Executive Board usually meets three times a week, in full-day sessions, and more often if needed, at the organization's headquarters in Washington, D.C.

The IMF's five largest shareholders —the United States, Japan, Germany, France, and the United Kingdom—along with China, Russia, and Saudi Arabia, have their own seats on the Board. The other 16 Executive Directors are elected for two-year terms by groups of countries, known as constituencies.



In addition to the executive board, there is a Board of Governors, on which all member countries are represented. This is the highest authority governing the IMF. It usually meets once a year, at the Annual Meetings of the IMF and the World Bank.

Each member country appoints a Governor—usually the country's minister of finance or the governor of its central bank—and an Alternate Governor. The Board of Governors decides on major policy issues but has delegated day-to-day decision-making to the Executive Board.

Key policy issues relating to the international monetary system are considered twice-yearly in a committee of Governors called the International Monetary and Financial Committee



Unlike some international organizations that operate under a one-country-one-vote principle (such as the United Nations General Assembly), the IMF has a weighted voting system. This means that the larger a country's quota in the IMF—determined broadly by its economic size and contributions—the more votes it has.


Where Does the IMF Get Its Money?

IMF's resources come mainly from the quota (or capital) subscriptions that countries pay when they join the IMF, or following periodic reviews in which quotas are increased. Countries pay 25 percent of their quota subscriptions in Special Drawing Rights or major currencies, such as U.S. dollars or Japanese yen.

Quotas also are the main determinant of countries' voting power in the IMF.


Where Does the IMF Get Its Money?


Who can borrow from the IMF?

Any member country can turn to the IMF for financing if it has a balance of payments need-that is, if it needs official borrowing to be able to make external payments and maintain an appropriate level of reserves without taking “measures destructive of national or international prosperity.”

Such measures might include restrictions on trade and payments, a sharp compression of demand in the domestic economy, or a sharp depreciation of the domestic currency. Without IMF lending, countries with balance of payments difficulties would have to adjust more abruptly or take such other measures damaging to national and international prosperity. Avoiding such consequences is among the IMF's purposes.


The Largest Borrowers


What happens when a country asks for a loan?

When country approaches the IMF for financing, it is usually in a state of economic crisis or near-crisis, with its currency under attack in foreign exchange markets and its international reserves depleted, economic activity stagnant or falling, and bankruptcies increasing.

To return the country's external payments position to health and to restore the conditions for sustainable economic growth, the IMF assumes that some combination of economic adjustment and official and/or private financing will be needed.


What happens when a country asks for a loan?

When IMF provides the country's authorities with “advice” on the economic policies that may be expected to address the problems most effectively.

For the IMF to provide financing, it must agree with local authorities on a program of policies aimed at meeting specific, quantified goals regarding external viability, monetary and financial stability, and sustainable growth. Details of the program are spelled out in a ‘letter of intent” from the government to the Managing Director of the IMF.

A program supported by IMF financing is designed by the national authorities in close cooperation with IMF staff, and is tailored to the special needs and circumstances of the country. This is essential for the program's effectiveness and for the government to win national support for the program. Such support—or "local ownership"—of the program is critical to its success.


Once the IMF decides to provide a loan, the next step is to decide on the proper “facility” to use. Currently, there are three main types:

First, Stand-By Arrangements form the core of the IMF's lending policies. First used in 1952, they are designed to deal mainly with short-term balance of payments problems.

Second, medium-term extended arrangements under the Extended Fund Facility are intended for countries with balance of payments difficulties related to structural problems, which may take longer to correct than macroeconomic weaknesses.

Third, the long-term arrangement is known as a concessional facility, or the Poverty Reduction and Growth Facility (PRGF).


Other important aspects of IMF lending.

First--and to repeat a key point--all IMF lending is conditional. This is the greatest source of tension today between the rich countries that control the IMF and the poorer countries that need to borrow from the IMF.

Second, all IMF funding is temporary and short-term. Loans must be paid back.

Third, For the most part, borrowing countries--except the poorest of the poor--are required to pay market rates for their borrowing.

Fourth, the IMF rarely provides full funding, but, instead, serves a catalytic role.


What is the WTO?

Simply put: the World Trade Organization (WTO) deals with the rules of trade between nations at a global or international level. But it’s also a number of other things …


First, it is an organization for liberalizing trade. Second, it is a forum for governments to negotiate trade agreements. Third, it is a place to settle trade disputes. Fourth, it operates a system of trade rules.


Trade liberalization. The organization’s overriding purpose is to help trade flow as freely as possible — so long as there are no undesirable side-effects. That partly means removing obstacles or restrictions to trade. It also means ensuring that individuals, companies and governments know what the trade rules are around the world, and giving them the confidence that there will be no sudden changes of policy. In other words, the rules have to be “transparent” and predictable.


Negotiating forum. “Essentially, the WTO is a place where member governments go, to try to sort out the trade problems they face with each other. The first step is to talk. The WTO was born out of negotiations, and everything the WTO does is the result of negotiations. The bulk of the WTO's current work comes from the 1986-94 negotiations called the Uruguay Round and earlier negotiations under the General Agreement on Tariffs and Trade (GATT). The WTO is currently the host to new negotiations, under the ‘Doha Development Agenda’ launched in 2001”


System of trade rules. At its heart are the WTO agreements, negotiated and signed by the bulk of the world’s trading nations. These documents provide the legal ground-rules for international commerce.

These agreements are essentially contracts, binding governments to keep their trade policies within agreed limits. Although negotiated and signed by governments, the goal is to help producers of goods and services, exporters, and importers conduct their business, while allowing governments to meet social and environmental objectives.


Dispute settlement. Trade relations often involve conflicting interests. Agreements, including those painstakingly negotiated in the WTO system, often need interpreting. The most harmonious way to settle these differences is through some neutral procedure based on an agreed legal foundation. That is the purpose behind the dispute settlement process written into the WTO agreements.


Brief History of the WTO

Formally established in 1995, but origins go back to the end of WWII, with the creation of the General Agreement on Tariffs and Trade (GATT). The GATT was originally set up to provide a framework of a series of trade negotiations among major economies

It did not take long, however for this to lead to an unofficial, de facto international organization. Over the years GATT evolved through several rounds of negotiations.

The last and largest GATT round, was the Uruguay Round, which lasted from 1986 to 1994 and led to the WTO’s creation.


Other issues and points

Today, the WTO has about 150 members.

Decision-making is ostensibly consensual, and takes place through its top-level decision making body, the Ministerial Conference, which meets at least once every two years.

The Fifth MC was held in Cancun, Mexico in September 2003. The previous M.C.s were in Doha, Qatar, and Seattle, WA. The next MC is scheduled for December 2005 in Hong Kong, China.

Below MC is the General Council, followed by the Goods Council, Services Council and Intellectual Property Council.

WTO also has a permanent secretariat based in Geneva, but the secretariat has not decision-making role; it mainly provides technical support and legal assistance.


To truly understand the WTO, however, we need to look below the surface, and while there are many things on which we can focus, the most important, perhaps, is the nature of the decision-making process within the WTO.

Critics have charged that the decision-making process is fundamentally undemocratic, with rules that privilege the wealthy over the poorer countries of the world, and which privilege corporate rights over the rights of ordinary citizens.


The post-war system, undergirded by the IMF, the World Bank, GATT (and later the WTO), proved to be very effective, at least for awhile. But by the 1960s, things were starting to look a little less promising: rising global production meant the saturation of markets, increasing global competition meant more pressure on profits, and so on.

The elite understood that, to keep capitalism going, some dramatic changes were required. Thus began a period of intensive thinking and rethinking about what needed to be done to “save” capitalism.


There were several possibilities:

War and/or military buildup New means of production Reorganization of the relations of production (e.g., offshoring, transnationalization of production, weakening of labor) Planned obsolescence and similar strategies Differential production (i.e., producing “niche” luxury goods)


The authors contend that all five strategies were tried, but the most significant was the reorganization of the relations of production into something now called global neoliberalism.

What is neoliberalism?


The authors summarize basic practices and principles of neoliberalism as follows: investment should be based on a country’s comparative advantages in the context of an international division of labor. Such advantages include low

labor costs and taxation, limited social and environmental regulation, domestic political and economic stability, and well-developed infrastructure governments must not imposed undue restrictions on investment or forbid investors to send profits abroad government spending must be constrained to maintain the value of the currency. This means reductions in expenditures on health, education, and

welfare and increases in spending that facilitate investment and production governments can impose only those restrictions on imports and exports permitted by international agreements


Let me summarize global neoliberalism more succinctly:

Freer trade, fewer regulations and obstacles to the flow of capital (both within and across borders), maximum opportunity to earn profits, and government support for all these things (but not for others).

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