sexta-feira, 26 de dezembro de 2008

The dominant issues in the international economic system

1. International Trade System: from Bretton Woods to our days
The clash between liberalism and protectionism describes in an accurate manner the history of the international economic system in the 20th century. With the advances of the industrial revolution, trade became an increasingly important aspect of a nation`s welfare. The consolidation of economic theories during last century represented a victory for liberalism. At least in the field of theory, economists could make a very solid case for free trade and liberalism. The daily realities of politics, however, made the whole picture far less clear.

During the 1930s, a series of economic events brought about a serious depression in the world economy, the Great Depression. Scholars agree that protectionist trade policies played an instrumental role in these unfortunate developments. In fact, according to Spero & Hart “Protectionism and the disintegration of word trade in the 1930s created a common interest in an open trading order and the realization that states would have to cooperate to achieve and maintain that order” (Spero & Hart: 67). The need to promote economic welfare and foster growth led the international community to a concerted effort at establishing a system of governance in economic international relations during the pots-war period. Hart & Spero identify three phases in the development of this system of governance. The first stretches from 1945 to 1971 and is known as the Bretton Woods system; the second, which goes from 1971 to 1989, is called the Interdependence period; the third, from 1989 to the present days, is called Globalization.

According to Hart & Spero “the Bretton Woods system rested on three political foundations: the concentration of power in a small number of states, the existence of a cluster of important interests shared by those states, and the present of a dominant power willing and able to assume a leadership role” (Spero & Hart: 2). At Bretton woods the foundations of the modern monetary and economic post-war order were laid down by the victors in World War II, led by England and the U.S. The Bretton Woods agreements also created the most important institutions of the international economic order: the International Monetary Fund - IMF, the World Bank and the General Agreement on Trade and Tariffs - GATT, the precursor of the World Trade Organization - WTO.

Through the International Monetary Fund, a system of monetary stabilization and crisis prevention in the area of the balances of payments was envisaged. The World Bank should provide assistance in the reconstruction of Japan and Europe and in the development of developing nations. The General Agreement on Trade and Tariffs was meant to foster trade via the elimination of barriers to trade, and thus generate welfare. For Spero & Hart, “The Bretton Woods system enabled Europe and Japan to recover from the devastation of the war, established a stable monetary system, encouraged more open trade, finance, and investment, and in turn led to a period of rapid economic growth” (Spero & Hart: 4).

A central feature of the system was the gold standard, by which the American Federal Reserve accepted to exchange U.S. Dollars for gold at 35 U$$ an ounce. The Bretton woods system represented the hegemony of the U.S. in the international economic order and the dollar replaced the British pound as the world currency. According to Spero & Hart “the rules of Breton Woods, set forth in the articles of the agreement, provided for a system of fixed exchange rates” (ibid. 14).

In terms of trade, the Bretton Woods system most important accomplishment was the creation of the GATT. Spero and Hart assert that “the GATT reflected two components of the prevailing agreement on open trade: the economic consensus that open trade would allow countries to specialize according to the principle of comparative advantage and thereby achieve higher levels of growth and well-being, and the political consensus that a liberal trading regime would promote not only prosperity but also peace” (Spero & Hart: 69).

The GATT agreement intended to prohibit the use of quantitative restrictions to trade (quotas) and established the most-favored-nation principle, which stipulated that any trade advantage should be granted to all nations. The GATT also established the principle of multilateral trade negotiations (Rounds), which eventually became the principal method of trade management in the post war period (Spero & Hart: 70).

In the 1970s, the Bretton Woods system was replaced by another international economic system characterized by interdependence (Spero & Hart: 69). Due to the relative decline of the U.S. in terms of international trade and to its chronic trade deficits, by the end of the Bretton Woods system the United States had lost its preeminence in the international economic arena and started pursuing a policy of “benign neglect”, allowing the Dollar to float. Spero & Hart argue that “in this period, the EU emerged as the world`s largest trading bloc”, after successfully establishing a customs union, a common external tariff and a common agricultural policy (Spero & Hart: 78).

Furthermore, Spero & Hart maintain that “the reduction of barriers to trade and capital as well as the revolution in information technologies enabled an expansion in international economic interaction among the market economies: larger international capital flows, the growth of international trade, and the development of international systems of production” (Spero & Hart: 5).

These developments led to an ever growing interdependence between national economies, which became more sensitive to events at the international level. By the end of 1971, the convertibility of the Dollar, a central feature of the Bretton Woods system, was abolished by President Nixon. A system of fixed exchange rates (Bretton Woods) was therefore replaced by a system of floating rates (interdependence) and this shift characterized the new economic world order, which would be marked by severe financial and economic crises during the 1980s, acutely felt in developing nations. The 1980s eventually became known as the lost decade and the world experienced a phenomenon called stagflation, the perverse combination of inflation with stagnation. As a result, the world also experienced a surge in protectionist policies, particularly in developed countries, in the form of nontariff barriers and other impediments to trade.

2. The Uruguay Round and the WTO
Due to the challenges posed during the 1980s, including the resurgence of protectionist policies, the GATT launched in 1986, in Punta de Este, the Uruguay Round of trade negotiations. According to Spero & Hart “The Uruguay round negotiations, which began in 1987, marked a new effort by the developed countries to devise new rules and institutions for managing the new global trade system” (Spero & Hart: 97). The Uruguay Round was concluded with the signing of the Marrakesh Agreement, establishing the World Trade Organization - WTO to replace the old GATT and cutting tariffs by over one-third. A General Agreement on Trade in Services, an agreement on safeguards, the Multi-Fiber Arrangement and an agreement on Subsidies and Countervailing measures were also signed. For Spero and Hart, these agreements became the foundation for further globalization of world trade (Spero & Hart: 101).

As it happened within the GATT, no significant progress was obtained in agriculture during the Uruguay Round. Agricultural production remained heavily subsidized and trade in agricultural goods remained heavily distorted. Other differences persisted (services, telecommunications, intellectual property, antidumping and nontariff barriers) and, in order to address these problems, the ongoing Doha Round was established in 2001.

From the times of the arrangements of Bretton Woods to our days, international trade has expanded enormously and the world economy has become truly integrated. The management of these changes required a continuous process of institution building to cope with the new challenges. The Word Trade Organization embodies, with all its flaws and deficiencies, the best achievements in terms of trade liberalization and trade management. The difficulties in the ongoing Doha round illustrate how challenging the road ahead is. Progress in terms of promotion of free rules to trade and stability for the world trading system to function properly should not be underestimated, however. Despite all its difficulties, the gigantic expansion of trade after World War II generated immense welfare for humanity, albeit unevenly distributed. Today more than ever the findings of Adam Smith and David Ricardo hold true: commerce does indeed benefit all, even when it also creates winners and losers.

Spero, J. E. and Hart, J. A. (2003), the Politics of International Economic Relations (USA: Thomson - Wadsworth).

The invisible hand vs. the political mind

There is a very important connection between politics and economics. One of the most difficult issues in this area is the job market. Economic gains are not always tied to increased jobs, and it is better to have more citizens employed and less welfare, than a lot of welfare with a lot of unemployed people.

Job protection has been used, in fact, as a major argument for protectionist policies. This is particularly true in job intensive sectors such as textile, steel, or automotive. This is why the GATT excluded textiles from tariff reductions with the Long-term Textile Arrangement of 1962 and the Multi-fiber Arrangement of 1974.

Overall economic gain is rarely the main objective in global decisions, but rather who gets what. Quite often, everyone stands to lose because of some who refuse to make concessions. This is the case of the current Doha round of trade negotiations. The Common Agriculture Policy of the EU has been one of the major impediments to the success of the round, which according to estimates from the World Bank could generate immense wealth if successfully concluded.

Not more than 3 million Europeans farmers profit from the Common Agricultural Policy of the European Union, but they are not concerned about the overall gains of commerce. Their understandable goals, albeit selfish, are to hold on to their not-so-small advantages.

The important lesson from both the GATT and the WTO is that politics will, as well as they should, always exist. However, they should not be allowed to jeopardize the entire trading system as happened in the 1930s.

It seems, therefore, that the problem is not politics, which are legitimate, but rather exaggerated populist protectionism, which can have serious impacts on trade patterns that are detrimental to all.

China has always been a major concern to all relevant trading players. However, China’s entrance to the WTO in 2001 did not force all countries to recognize the Chinese economy as a market economy. A whole series of safeguards were implemented to allow countries to protect their economies from Chinese imports.

In spite of all the problems posed by China’s entry into the WTO, politicians worldwide took advantage of the “Chinese threat” to justify protectionist measures, similar to what happened with Japan in the early 1980s. As it turned out, the voracious Japanese monster eventually lost stamina and stopped devouring the market shares of other countries.

The bottom line is: once China gets richer, its workers will start demanding their rights and things such as 50 dollar salaries will eventually disappear.

The problem will be, rather, how to satisfy the consumption needs of 1.3 billion Chinese who now have much more than 50 dollars to spend, without inflationary risks. The marketplace should be prepared for some avid bidding for commodities, goods, and services. Protectionists should not forget the huge opportunities this represents for big business.

The Five Wars of globalization

In an interesting article, Naim Moises discusses how transnational organized crime has recently been defying traditional notions of sovereignty.

The emergence of a global marketplace tends to redefine the very notion of sovereignty, similar to the rise of the bourgeois marketplace, which connected different regions and cities and redefined the traditional feudal concept of allegiance to land and lord.

Feudalism was unable to compete with the powerful market forces that emerged once commerce started integrating whole regions in Europe and beyond. Once a chain of production, distribution, and supply had been established, connecting faraway distant regions, the feudal system became too small for the needs of the new economic system that was about to conquer the world: capitalism.

Karl Marx once famously remarked that, “men make their own future, but not as they please”. For Marx, economic structures shape the way society works. According to this view, the rise of the capitalist system represented a major blow to the old feudal political system. The main aspect of Marxist economic theory is that new systems of production tend to demand new forms of political organization, for they make old forms obsolete.

Something similar seems to be happening nowadays, in the age of globalization. The market place has successfully connected the entire globe and modern globalized production depends on this global supply chain to succeed. Without raw materials from Brazil, knowledge from the US, cheap labor from China, and the free movements of goods around the globe, for example, much of the products we take for granted would simply not be available. Globalization has created a powerful stimulus for transnational activities.

In this regard, Moises’s assumption that “governments need to recognize that restricting the scope of multilateral action for the sake of protecting their sovereignty is often a moot point” seems to be quite reasonable. In fact, illegal trade in drugs, weapons, intellectual property, people, and money poses a major challenge to traditional concepts of sovereignty, as much as the environment or non-proliferation issues do.

Furthermore, Moises asserts that, “the fundamental changes that have given the five wars new intensity over the last decade are likely to persist. Technology will continue to spread widely; criminal networks will be able to exploit these technologies more quickly than governments that must cope with tight budgets, bureaucracies, media scrutiny, and electorates.”

In order to overcome these shortcomings, Moises proposes developing more flexible notions of sovereignty and devising new mechanisms and institutions. He also asserts that governments should move from repression to regulation.

These strategies seem to offer a reasonable alternative to the problems posed by inefficient traditional notions of sovereignty.

As a new system of production evolves, new forms of political organization will be required.

A new age of global political integration is dawning. Capitalism made the old feudal system look awkwardly obsolete. Likewise, globalization will certainly eventually alter the way we understand sovereignty today. How we shape those outcomes ought to be the question, not its relevance or inevitability.

Naim, Moises, “The Five Wars of Globalization”, Foreign Policy, Jan/Feb2003, Issue 134.

sexta-feira, 12 de dezembro de 2008

Substantial change is taking place in the economic landscape of the world

According to a recent study, the “National Intelligence Council - 2020: Mapping the Global Future” report, substantial change is taking place in the economic landscape of the world. This change is the increased weight of developing nations in terms of the combined size of the world economy.

To be sure, developed countries have been growing at robust rates recently, but the performance of developing nations has far outstripped them. China has been growing more than 10 percent a year for over two decades, a phenomenon only comparable to the Japanese miracle of the 1970s. China has accumulated a massive 2 trillion dollars worth of foreign reserves in the last couple of years. This amount is far larger than the total invested in rebuilding Europe after WW II during the Marshal Plan. With exports that surpass those of the United States and Germany, China is bound to become the world’s leading exporting nation by 2008. Brazil and Russia have also accumulated huge foreign reserves (200 and 500 billion respectively) in recent years and have become net creditors in the world economy.

India is growing fast, and so are Russia and Brazil. The so-called BRIC group (Brazil, Russia, India and China) is expected to surpass the G7 industrialized countries in terms of GDP by the middle of the century, according to Goldman and Sachs. This massive shift of wealth is altering the political and economic landscape of the world. In fact, according to a recent report by The Economist, this shift represents a return to an old pattern of wealth distribution.

In ancient times, nations such as China accounted for a significant proportion of world wealth. This pattern changed after the industrial revolution took hold in Europe and in the US, and the end of World War II established a very uneven pattern of wealth distribution with industrialized western nations accounting for an unusually large share of wealth. Therefore, it seems the world economy today is returning to a more balanced distribution of wealth.

Developing countries tend to gain much more leverage during this process. A new economic age is dawning which will require increased cooperation between developing and developed nations. The first symptoms of this new age are already evident: food and oil prices are soaring due to the unprecedented demand shock from millions of Chinese who are getting out of poverty. As more and more people in China, India, and other developing nations make their way out of poverty, the demand for raw materials, food, oil and other products will increase considerably. In a situation of constant or slow growing supply, inflation is the inevitable outcome. Oil prices had hit all time highs (before the current financial turmoil) and so had commodities prices. With demands expected to rise further and with no imminent supply relief in sight, inflation seemed to have become a leading concern. It is still unclear which effects will the recent financial woes of the world economy have on prices, whether inflationary or not.

In political terms, Brazil, India, Japan, and Germany (G4) are already demanding a permanent seat in the UN Security Council. Being large contributors to the UN budget and representing almost half of the entire world population, the G4 claim is starting to gather momentum. The US has signaled it is willing to accept the proposal and has offered enhanced cooperation with nations such as Brazil. The G7 is considering expanding to incorporate Brazil, China and India, after Russia was included in it (G8). As wealth becomes more evenly distributed, the pressure for more equal distribution of power will mount. The world is no longer the way it was in 1945, when almost half of the world populations (including China, India and almost all of Africa) still lived under colonial rule.

The recent gathering of the G-20 represents a seminal event in this process of change. Amidst the worst financial crisis since the great depression, all eyes turned to developing countries, which are expected to account for almost all growth in world output this year. Undoubtedly, new financial relations between developed and developing are taking hold. The Bretton Woods post war financial architecture has proven incapable of handling the complex challenges posed by finances in the age of Globalization. It is clear that substantial change is taking place in the economic landscape of the world.