The problem of globalization : international economic relations,national ecnomic management and the formation of trading blocs

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1 Economy and Society ISSN: (Print) (Online) Journal homepage: The problem of globalization : international economic relations,national ecnomic management and the formation of trading blocs Paul Hirst & Grahame Thompson To cite this article: Paul Hirst & Grahame Thompson (1992) The problem of globalization : international economic relations,national ecnomic management and the formation of trading blocs, Economy and Society, 21:4, , DOI: / To link to this article: Published online: 28 Jul Submit your article to this journal Article views: 513 View related articles Citing articles: 38 View citing articles Full Terms & Conditions of access and use can be found at Download by: [Open University] Date: 20 October 2015, At: 10:05

2 The problem of 'globalization': international economic relations, national economic management and the formation of trading blocs Paul Hirst and Grahame Thompson Abstract How can we characterize the present state of the world economy? Is there such a thing as a globalized economy? These are the questions considered in this paper. The paper attempts to define exactly what the term 'globalization of economic relations' means and then examines how far the present tendencies in the international economv meet this definition. The conclusion is that such a globalized economy does not ye;exist. In contrast we highlight the formation of tra$mg blocs, and the continued salience of 'national economic management' as structuring the international economy. As the most pertinent example of the formation of a trahmg bloc the paper considers the attempts to integrate the European Community into a cohesive economic management and regulatory entity. The political problems and obstacles to this are highlighted. Finally the paper looks at the impact of the present tendencies in the international economy for a range of secondary parties in that economy, like the LDCs, the 'Cairns Group' economies, the ex-soviet type economies, and China. Introduction How can we characterize the present state of the world economy? Is there such a thing as a globalized economy? These are the questions considered in this paper. A good deal of intellectual activity has been devoted to this issue in recent years and the term 'globalization' has become almost a by-word for heterodox analyses of the international economy and polity (Holland 1987; Gill and Law 1988; McGrew and Lewis (1992). It has also been used as a key concept in the discussion of cultural identity and difference (King 1991). And it is even to be found in the more avant-garde management literature Economy and Society Volume 21 Number 4 November Routledge /92/ $3.00/1

3 358 Paul Hint and Grahame Thompson (Ohmae 1990). In much of this literature the assumption is that a process of globalization is well under way in the contemporary world and that this represents a qualitatively new stage in the development of international capitalism. ' We interrogate the notion of 'globalization' as a new stage in international economic and political relationships. Our aims are to establish the present configuration of international economic tendencies, to highlight some of the policy implications that follow from such tendencies and, finally, to speculate on the future direction for the international economy. In the first section we try to define by means of two ideal types what the term 'globalization of economic relations' means. On the basis of this definition we elaborate the nature of the present tendencies within the international economy. In particular the importance of the development of major trading blocs within the international economy is highlighted. As the most salient example of such a bloc we examine the attempt to develop an integrated European Community (EC) economy and the dilemmas of its political regulation. The relationships between the three main trading blocs are considered and we ask how these blocs might affect the management or co-ordination of the 'world' economy overall. In addition we briefly analyse the effects this emergent system of blocs might have on a number of other parties in the international economy such as Eastern Europe/the ex-soviet Union, the 'Cairns Group' economies, and the Less Developed Countries (LDCs). Finally, the political problems and prospects facing an increasingly internationalized economy are considered in conclusion. Our overall theme in this analysis is the need to construct adequate political mechanisms to regulate and control international economic processes rather than for further economic integration per se. A globalized economy: what would it look like? In this section we construct the notion of a globalized economy almost from first principles. This will act as a framework in terms ofwhich we discuss and measure the trends in the actual international economy. It is intended to provide some conceptual clarification. The term globalized economy is used as an 'ideal type' - as a means of accentuating and thereby clarifying actual trends. In the discussion that follows this ideal type is contrasted to another, that of the world-wide economy, and the analysis begins by elaborating this. A world-wide international economy The world-wide international economy is one in which the principal entities are nation states, and involves the process of the growing interconnection between national economies. It involves the increasing integration of more

4 The problem of 'globalization' 359 and more nations and economic actors into market relationships. Trade relations, as a result, take on the form of national specialization and the division of labour. The importance of trade is however progressively replaced by the centrality of investment relations between nations, which increasingly acts as the organizing principle of the system. The form of interdependence between nations remains, however, of the 'strategic' kind. That is, it implies the continued relative separation of the domestic and the international framewarks for policy making and the management of economic affairs, and also a relative separation in terms of economic effects. Interactions are of the 'billiard ball' type; international events do not directly penetrate or permeate the domestic economy but are refracted through national policies and processes. The international and the domestic policy fields either remain separated as distinct levels of governance or they work 'automatically'. In the latter case adjustments are not thought to be the subject of policy by public bodies or authorities, but are a consequence of 'unorganized' or 'spontaneous' market forces. Perhaps the classic case of such an 'automatic' adjustment mechanism remains the Gold Standard (GS), which operated at the height of the Pax Britannita system from mid-century to Automatic is put in inverted commas here to signal the fact that this is a popular caricature. The actual system af adjustment took place very much in terms of overt domestic policy interventions. The flexibility in wages and prices that the GS system demanded (the international value of currencies could not be adjusted since these were fixed in terms of gold) had to be engendered by governments through domestic expenditure reducing policies to influence the current account and interest rate policy to influence the capital account. Great Britain acted as the undisputed political and economic hegemon and guarantor of this system. It organized the international economy, and particularly the financial system under its leadership and policed it. Until 1914 Great Britain could virtually dictate policy to the other countries in the system, who had to follow its lead as a consequence, because there was no equivalent centre of financial and commercial power in the world. The GS was under undisputed British hegemony. But this was a mixed blessing for the British economy. The GS involved a trade-off for British manufacturers. It tended to promote foreign demand in certain sectors but to depress domestic demand in others. One consequence was that after 1870 Britain became a financial and commercial power even more than a manufacturing one. By then it had lost its undisputed primacy as 'workshop of the world', though it remained the lynchpin of an open international economy: the City providing the financial and commercial services for world trade, British ships carrying that trade and the British navy policing the sea routes. This was part of the swing from manufacturing to finance and investment as the central aspect of Britain's relation to the world-wide economy. Britain by its policy of free trade underpinned this system, though at an increasing cost to its domestic manufacturers. As the

5 360 Paul Hint and Grahame Thompson major exporter of capital and the main creditor nation Britain had a distinct interest in monetary stability but also underwrote the expansion of the world manufacturing and trading system. In this respect Britain, as hegemon, carried the burden of the open international economy, much as the US was to do during the Bretton-Woods era. Thus it is important to recognize that the GS and the Pax Britannica system were merely two of the structures of the international economy in this century. Such structures were highly conditional upon major socio-political conjunctures. Thus the First World War wrecked the British hegemony, accelerating a process that would have occurred far more slowly merely as a consequence of British industrial decline. It resulted in a period ofprotectionism and national autarkic competition in the 1930s, followed by the establishment of American hegemony after the Second World War and the reopened international economy of the Bretton-Woods system. This indicates the danger of assuming that current major changes in the international economy are unprecedented and that they are inevitable or irreversible. The lifetime of a prevailing system of international economic relations in this century has been no more that years. Indeed, given that most European currencies did not become fully convertible until the late 1950s, the full post- Second World War Bretton Woods system only lasted upwards of thirteen to fourteen years. Such systems have been transformed by major changes in the politico-economic balance of power and the conjunctures that have effected these shifts have been large-scale conflicts between the major powers. In that sense, the world-wide international economy has been determined in its structure and the distribution of power within it by the major nation states. The period of this world-wide international economic system is also typified by the rise and maturity of the multinational corporation (MNC), as a transformation of the large merchant trading companies of a past era. From our point of view, however, the important aspect of these MNCs is that they retain a clear national home base; they are subject to the national regulations of the mother country, and by and large they are effectively policed by that home country. A globalized international economy A globalized international economy is a distinct ideal type from that of the world-wide economy and can be developed by contrast with it. In such a global system distinct national economies are subsumed and rearticulated into the system by essentially international processes and transactions. The worldwide economy, on the contrary, is one in which processes that are determined at the level of national economies still dominate and international phenomena are outcomes that emerge from the distinct and differential performance of the national economies. The world-wide economy is an aggregate of nationally-located functions. Thus while there are in such an economy a wide and

6 The problem of 'globalization' 361 increasing range of international interactions (financial markets and trade in manufactured goods, for example) these tend to function as opportunities or constraints for nationally-located economic actors and their public regulators. The global economy raises these nationally-based interactions to a new power. The international system becomes autonomized, as markets and production become truly global. Domestic policies, whether of private corporations or public regulators, now have routinely to take account of the international determinants of their sphere of operations. As systemic interdependence grows, the national level is permeated by and transformed by the international. In such a globalized economy the problem this poses for public authorities is how to construct policies that co-ordinate and integrate their regulatory efforts in order to cope with the systematic interdependence between their economic actors. The first major consequence of a globalized economy would thus be the fundamental problematicity of its governance. Global markets are difficult to regulate, even supposing effective co-operation by the regulators and a coincidence of their interests. The difficulty is to construct both effective and integrated patterns of public policy to cope with global market forces, since to work such policies would need to be co-ordinated from the level of international regulatory agencies down to key regional governments. The interdependence of states and markets would by no means necessarily result in a harmonious world integration in which world consumers benefit from truly independent allocative mechanisms. On the contrary, it is more than plausible that the populations of even successful and advanced states and regions would be at the mercy of autonomized and uncontrollable, because global, market forces. Interdependence would then readily promote disintegration - i.e. competition and conflict - between regulatory agencies at different levels. Such conflict would further weaken effective public governance at the global level. Enthusiasts for the efficiency of free markets and the superiority of corporate control of public agencies would see this as a rational world freed from the shackles of obsolete and ineffective national public interventions. Others, less sanguine but convinced globalization is occurring, may see it as a world system in which there can be no generalized or sustained public reinsurance against the costs imposed by market distributions or market failures on localities. Even if one does not endorse the concept of globalization, this ideal type can help to highlight some of the importance of greater economic integration within the major regional trade blocs. Both the EC and NAFTA (North American Free Trade Area -comprising the USA, Canada and Mexico) will soon be highly integrated markets of continental scale. Already in the case of the EC it is clear that there are fundamental problems of the integration and co-ordination of regulatory policies between the different public authorities of Community, national and regional level. It is also clear that this ideal type highlights the problem of weak public governance for the major corporations. Even if such companies were truly

7 362 Paul Hirst and Grahame Thompson global, they will not be able to operate in all markets equally effectively and like governments will lack the capacity for reinsurance against unexpected shocks from their own resources alone. Governments would no longer be available to assist as they have been for 'national champions'. Firms would, therefore, seek to share the risks and opportunities through intercorporate investments, partnerships, joint ventures, etc. Even in the current internationalized economy we can recognize such processes emerging. A second major consequence of the notion of a globalizing international economy would be the transformation of MNCs into Transnational Corporations (TNCs) as the major players in the world economy. The TNC would be genuine footloose capital, without specific national identification and with an internalized management, and at least potentially willing to locate and relocate anywhere in the globe to obtain either the most secure or the highest returns. In the financial sector this could be secured at the touch of a button and in a truly globalized economy would be wholly dictated by market forces, without reference to national monetary policies. In the case of primarily manufacturing companies they would source, produce and market at the global level as strategy and opportunities dictated.?he company would no longer be based on one predominant national location (as with the MNC) but would service global markets through global operations. Thus the TNC, unlike the MNC, could no longer be controlled or even constrained by the policies of particular national states. Rather it could escape all but the commonly agreed and enforced international regulatory standards. National governments could not thus effectively adopt particular regulatory policies that diverged from these standards to the detriment of TNCs operating within their borders. The TNC would be the main manifestation of a truly globalized economy. Julius (1990) and Ohmae (1990) both consider this trend toward true TNCs to be well established. Ohmae argues that such 'stateless' corporations are now the prime movers in an Inter-linked Economy (ILE) centred on North America, Europe and Japan. He contends that macro-economic and industrial policy intervention by national governments can only distort and impede the rational process of resource allocation by corporate decisions and consumer choices on a global scale. Like Akio Morita of Sony, Ohmae argues that such corporations will pursue strategies of 'global localization' in responding on a world-wide scale to specific regionalized markets and locating effectively to meet the varying demands of distinct localized groups of consumers. The assumption here is that TNCs will rely primarily on foreign direct investment and the full domestication of production to meet such specific market demands. This is in contrast to the strategy of flexibly specialized core production in the company's main location and the building of branch assembly plants where needed or dictated by national public policies. The latter strategy is compatible with nationally-based companies. (To anticipate later discussion, the evidence from Japanese corporations, which are the most effective operators in world markets, favours the view that the latter strategy is predominant. Japanese companies appear to have been

8 The problem of 'globalization' 363 reluctant to locate core functions like R&D or high valued-added portions of the production process abroad. Thus national companies with an international scope of operations currently and for the foreseeable future seem more likely than the true TNCs.) A third consequence of globalization would be the further decline in the political influence and economic bargaining power of labour. Globalized markets and TNCs would not be mirrored by an open world labour market. Thus while advanced companies might well continue to locate in the advanced countries, with all their advantages, rather than merely seek low wages, the trend of the global mobility of capital and the national fixity of labour would favour those advanced countries with the most tractable labour forces and the lowest social overheads relative to the benefits of labour competence and motivation. 'Social democratic' strategies of enhancement of working conditions would thus only be viable if they assured the competitive advantage of the labour force, without constraining management prerogatives, and at no more overall cost in taxation than the average for the advanced world. Such strategies would clearly be a tall order and the tendency of globalization would be to favour management at the expense of even moderately organized labour, and, therefore policies sympathetic to the former rather than the latter. This would be the 'disorganized capitalism' of Lash and Urry (1987) with a vengeance, or rather it could be seen as placing a premium on moderate and defensive strategies where organized labour remains strong (Scharpf 1991). A final and inevitable consequence of globalization is the growth in fundamental multi-polarity in the international political system. The hitherto hegemonic national power could no longer impose its own distinct regulatory objectives in either its own territories or elsewhere, and lesser agencies (whether public or private) would thus enjoy enhanced powers of denial and evasion vis a vis any aspirant 'hegemon'. A variety of bodies from international voluntary agencies to TNCs would thus gain in relative power at the expense of national governments and, using global markets and media, could appeal to and obtain legitimacy from consumers/citizens across national boundaries. Thus the distinct disciplinary powers of national states would decline, even though the bulk of their citizens remained nationally bound. In such a world, national military power would become less effective as the rationality of the objectives of 'national' state control in respect of the economy evaporated. The use of military force would be increasingly tied to non-economic issues, such as nationality and religion. A variety of more specific powers of sanction and veto in the economic sphere by different kinds of bodies (both public and private) would thus begin to compete with national states and begin to change the nature of international politics. As economics and nationhood pulled apart the international economy would become even more 'industrial' and less 'militant' than it is today. War would be increasingly localized and irrationalized, anywhere it threatened powerful global economic interests it would be subject to devastating economic sanction. We have spent a great deal of time elaborating this idea of a globalized

9 364 Paul Hint and Grahame Thompson international economy and contrasting it to that of a world-wide one. This is to try to clarify exactly what would be involved in making the strong claim that we are either firmly within a globalizing economy, or that the present era is one in which there are strong globalizing tendencies. To answer these questions is a rather difficult task. It is made doubly so, and the answer quite uncertain, because of a number of changes in the international economy in the post-first World War period. Chief amongst these have been first the change in hegemonic leadership during the inter-war period and then the decline and possible collapse of the Pax-Americana in the post-1970s period. The Pax-Americana as it established and consolidated itselfin the immediate post-1945 period heralded the beginning of the liberal multilateral market system that supported the international economy during the long-boom. Comprising a number of innovative institutional mechanisms for managing the international economy - the Bretton Woods semi-fixed paper dollar standard for exchange rates; the World Bank and IMF (International Monetary Fund) for monetary discipline and liquidity; and the General Agreement on Tariffs and Trade (GATT) mechanism for multilateral trade negotiation - this international economic regime is sometimes thought to have straddled the transition from the world-wide economy to the 'global' one of today. It did this first under American hegemony and then in the context of the break-up of this hegemony and the emergence of the totally floating exchange rate period after This analysis is made doubly difficult by the fact that hegemony displays a number of dimensions. Militarily it is arguable that the US is still hegemonic. This was clearly displayed in the context of the Gulf War. What other country could have organized such a military adventure? In addition the US still serves as the power house of world demand, and acts as the guardian of the world open trading economy. But it no longer displays monetary hegemony. It would seem no other power or combination of powers can yet challenge this residual hegemonic power that the US displays. It may not be able to command the tight loyalty of the other western powers that it did during the period of the Cold War, but it still retains considerable genuinely hegemonic strengths. Both of these developments - the change and then the undermining (though not total destruction) of the hegemonic order, accompanied by the totally floating rate regime - provided the conditions in which the previous logic of the 'world-wide economy' might be thought to have been undermined. They led first to the abandonment of exchange controls, and the liberalization and then deregulation of international financial markets. The floating exchange rate regime then began to exhibit quite perverse 'overshooting'. It was accompanied by the supply-side shock of the oil price hikes, with consequent massive increases of both the liquidity of the OPEC countries and the desire to borrow (given negative real interest rates) by the Third World countries to finance their current account deficits, leading to the so-called 'Third World Debt' problem. These features also initiated a serious recession in the international economy more generally, with a concomitant increase in government indebtedness. A chronic structural problem of the balance of

10 Theproblem of 'globalization' 365 payments between the US and Japan in particular also emerged as the US became a massive capital importer to finance its deteriorating trade balance. The totally floating rate period did not last for long. In 1979, for instance, the EC set up the European Monetary System (EMS) to provide a zone of stability for the main European currencies (except the UK pound) against the vagaries of the US dollar. In addition, the Louvre and Plaza accords between the Group of Seven (G7) countries in the 1980s set in motion an attempt to monitor and 'manage' fundamental disequilibrium in the exchange rates between its members. Thus explicit policy co-ordination at the world level was initiated in this case. This has not reversed the main trend which has been to further undermine the old post-war multilateral order. The latest manifestation of this continuing trend being the virtual collapse of the Uruguay Round of GATT talks aimed at multilateral liberalization of trade in agricultural products, financial services and intellectual property rights. All this is well known, we reiterate it here to register the purely contingent nature of a lot of these events which have often been used to argue for a structural transformation in the international economy. As we shall argue in a moment, many of these trends could be reversed or interrupted as the international economy evolves, though not all of them are likely to be. This goes to make the point, then, that we should be cautious in ascribing too much significance to what might be temporary changes, dramatic though some of them have been. The strong concept of a globalized economy that we have been describing here acts as an ideal type against which we can measure the actual trends within the international economy. This globalized economy has been contrasted to the notion of a world-wide economy in the above analysis in order to distinguish its particular and novel features. The opposition of these two types for conceptual clarity conceals a potential messy combination, in fact, which would make sifting the available evidence very difficult to determine trends. These two types of economies are not necessarily mutually exclusive, rather in certain conditions the globalized economy would encompass and subsume the world-wide economy. The globalized economy rearticulates many of the features of the world-wide economy; it transforms them as it reinforces them. There would thus be a complex combination of features of both types of economy present within the present conjuncture if this combined phenomenon were to occur. The problem in determining what is happening is to identify the dominant trends: that is the growth of globalization or the continuation of the existing world-wide patterns. We now try to summarize and assess the main current trends. The present international economy Here we examine the main trends in the international economy and comment on them in terms of how they fit with the globalization thesis. We identifl five main trends that are discussed in turn.

11 366 Paul Hint and Grahame Thompson (1) Within the contemporary international economy the important relationships remain those between the more developed economies, the members of the Organisation of Economic Cooperation and Development (OECD). Indeed, these economies have increased in their relative importance over recent years in terms of their share ofworld trade and investment. In 1989 over 80 per cent ofworld trade was conducted between the OECD economies, and this rose to 85 per cent if the ex-eastern European and Soviet economies were included. The Group of Five (G5) main economies accounted for 75 per cent offoreign direct investment. Thus for all practical intents and purposes it is the advanced industrial economies that constitute the membership of the 'global' economy, if that entity can be said to exist. The LDCs, and even the NICs, still constitute a very small part of the international economy, however regrettable or disappointing that may be. The primary producers are more or less totally dependent upon the MDCs for markets and investment, which is a position that has not significantly changed for many decades. (2) There is little doubt that there has been progressive internationalization of money and capital markets since the 1970s, and this was a marked change in relation to the post-1945 period. As suggested above many have seized upon this as a sign of the radical change towards a globalizing economy in the post-1970s period. It has led to the argument that national economies are no longer governable because they have become increasingly penetrated by 'international financial capital'. This inability to control capital flows is claimed to undermine any remaining credibility of policies of national macro-economic management. But the implications of this internationalization of financial markets are not unambiguous. For instance Tornlinson (1988) presents data showing that the international financial penetration of the UK and other economies (in terms of openness to capital flows) was greater between 1905 and 1914 than it was between 1982 and 1986 (and similar results emerge for foreign trade as a percentage of GDP). Thus it is important to remember that the international economy was hardly less integrated before 1914 than it is today. Financial and other major markets were closely integrated once the system of international submarine telegraph cables was in place and in a way not fundamentally different from the satellite-linked and computer-controlled markets of today. Indeed, the difference between an international economy in which market information travelled by sailing ship and one in which it is transmitted by electricity is really one of kind. Commentators sometimes forget that today's open world economy is not unique. Moreover we must be careful to elaborate the reasons for the admittedly phenomenal recent growth of international financial flows and liquidity. Here we need to emphasize: (a) the floating of exchange rates; (b) the oil price hike and consequent Third World Debt problem; (c) the unexpected emergence of vast and mobile OPEC funds; (d) the international recession and the growth in government debt through the 1970s; (e) the emergent structural imbalances in the balance of payments for a number of large economies; and finally (f) the

12 Theproblem of 'globalization ' 367 Figure 1 Foreign trade, seasonally adjusted Source: OECD, Main Economic Indicators (April) 1991 :24 liberalization and deregulation of financial markets by national governments. All these features went to increase the extent of international capital flows. If we were to single out one central feature it would surely be the floating of exchaage rates. Many of the other features followed as a consequence of this (e.g. the integration of trading on currency and equity markets which is a new feature of the present period). This demonstrates how many of these changes may be temporary. They are not irreversible. Volatility on the international currency markets could diminish (indeed has diminished) as the EMS and the G7 monitoring system was installed. All the major international currencies are now more or less 'managed' currencies, which has seriously cut speculative activity (a factor that promoted volatility and exchange rate uncertainty). Secondly, after an initial enthusiastic embrace of market liberalization and deregulation the authorities are recognizing that there are undesirable consequences of this and the trend now is for reregulation. Thirdly, there are signs that the structural imbalances on the payments accounts are at last beginning to ease. Figure 1 indicates that since 1987/8 the trade imbalances of the chronic deficit countries (the US and to a lesser extent the UK) and those of the large surplus countries (Germany and Japan) are beginning to converge towards a more balanced outcome; similarly with the rate of growth of government fiscal imbalances. The trends here are that, while the steady fall in general government financial deficits seen throughout the 1980s came to an end in 1989 (as the UK, and in

13 368 Paul Hirst and Grahame Thompson particular Germany, increased their deficits once again), these are small increases compared to the recent past and they are expected to stabilize by Overall the fiscal stance of the important economies has moved into a position of 'structural improvement' (OECD, Economic Outlook 50 (December) 1991: 32-7). All these trends will help to 'cool the Casino' more or less automatically, without further major structural changes in international governance. (3) There has been an increasing volume of trade in semi-manufactured and manufactured goods between the industrialized economies. Most markets for major industrial products are now international and major economies both import and export significant volumes of such goods, whereas before the 1960s home sourcing was dominant and export markets were more specialized. This has had an inevitable impact on the ability of individual economies to exercise national macro-management strategies. But it is important to recognize that apart from the European Community countries, the other large economies still only export or import between 10 and 15 per cent of their GDP (see below, Fig. 3). For the main individual European economies this is higher, between 25 and 30 per cent, but for the Community as a whole it is similar to the US and Japan, at around the per cent mark. (4) One of the main concomitants of the growth in interdependent trade relations, restricted though these may still be, is the progressive development of internationalized companies. This also involves foreign direct investment. The potential role of the TNCs in undermining national government's conduct of an independent economic policy has already been raised. But again the extent of these developments is questionable (Ostry 1992). Most international companies still only operate in a small number of countries, or at most regionally. In other words there are few truly TNCs. The MNC form continues to dominate. The few exceptions to this do not yet make the rule. In addition, most MNCs adapt passively to governmental policy rather than continually trying to undermine it. The real question to ask of MNCs is not why they are always threatening to up and leave a country if things seem to go bad for them there, but why the vast majority of them fail to leave and continue to stay put in their home base and major centres of investment? MNCs are very reluctant to uproot themselves because they get entrenched in specific national markets, and with local suppliers and dealers. This makes it both difficult and expensive to leave given national markets unless there are fundamental structural disincentives, rather than conjunctural difficulties or specific policy constraints imposed by national governments. Nor is direct investment as important as is often believed. Take the case of Japan for instance, which is often thought to be heralding a new global assault on both the industrial and undeveloped world with its investment strategies. A recent study tries to examine the character of Japanese direct foreign manufacturing investment (Williams et al. 1992); it is fairly small scale compared to the total volume of Japanese capital abroad, it is mainly aimed at providing transplants that have a high import content from Japan. In relation

14 Theproblem of 'globalization' 369 to Japanese trade growth the aggregate growth of direct investment is small. Moreover, it is no more efficient or profitable than indigenous manufacturing. (Some of these conclusions might be altered, however, if a more disaggregated view were taken of Japanese FDI.) In general the most successful industrial nations (e.g. Germany and Japan) have shown a great reluctance to invest and develop core manufacturing activity abroad; they keep the bulk of their ualue-adding capacity at home. In both cases this is for a variety of reasons not all of which can be summed up in market efficiency or balancesheet terms. German and Japanese financial capital remains 'nationalistic', committed to its domestic manufacturing sector in a way Anglo-American capital is not. German and Japanese firms have a strong commitment to highly skilled and motivated labour forces, and a national 'deal' between labour and capital to sustain prosperity is a core part of their post-1945 politico-economic settlements. In both countries there would be a massive political price to pay were a major part of manufacturing to be shipped abroad and the prosperity of recent decades to falter. (5) Perhaps the most significant post-1970s development, and the most enduring, is the formation of supra-national trading and economic blocs. It is with these that we are mainly concerned in the rest of this paper. One initial question, however, is exactly how to specifl these blocs. Clearly the EC and the NAFTA can be considered genuine blocs, or proto-blocs, without too much controversy. But are there any others? One obvious candidate is Japan, but this hardly constitutes a bloc. Usually Japan is seen as the centre of a proto-bloc encompassing much of the SE Asian Pacific rim countries. But examination of trade and investment data show this to be premature. Initially therefore it may be better to consider Japan as a single country bloc. Lots of ad hoc combinations of countries that might form (limited) trading and economic blocs around the Pacific rim and in the rest of Asia have been suggested but at the present time these remain largely speculative. However it is reasonable to consider other country groupings in connection with the development of explicit bloc formation, and this we do below. As we shall see a lot of these countay groupings are rather traditional in form. The major problem the development of a more regionalized international economy presents is the protectionist sentiments that it may engender. If such sentiments were to emerge strongly they could undermine some of the other trends towards internationalization identified above, like the increase in interdependent world trade flows in particular, but also the further integration of financial markets. This issue needs closer examination, which we undertake in a moment. The general issue however is the form of the global economy as the liberal multilateralism of the post-1945 period is forced onto the defensive. Clearly this is the dominant trend of the present period, and it allows us to sum up with the main question of this paper. Will 'globalization' replace the existing emphasis on liberal multilateralism? Our suggestion is not. A more likely outcome is the further development of a newly regionalized international economy, possibly dominated by a trilateralism of the US/NAFTA,

15 370 Pnul Hint and Grahame Thompson the (expanded) EC, and Japan (with or without possible Pacific rim allies). This itself will also involve an increase in bilateral negotiation between these major players and other lesser parties. If one calls this outcome 'globalization' so be it, but it does not conform to the ideal type elaborated above. Consequences and implications: managing the new international economy? In this section we look to the future in the light of the analysis presented so far. We are particularly interested in the prospects for the general management of the 'regionalized' world economy as indicated above, and on a more limited scale, the future for the EC as an entity capable of regional economic governance. What are the prospects for national state regulation in a rapidly internationalizing economy? How is European political and economic integration (further bloc formation) likely to evolve in its post-maastricht form? Indicating the emergence of blocs does not of itself say anything about theforms of governance they will develop and adopt, or the likely relationships between those blocs. These are the issues we explore in this section. It should be noted here, however, that the outcome of the Danish referendum on ratif)ing the Maastricht Treaty in June 1992 may have thrown some of these issues into even greater confusion and uncertainty. As will become clear below we are sceptical about the emerging EC bloc formation anyway, so our analysis already mirrors some of the concerns thrown up in the wake of the Danish 'no' vote. Economic management, the nation state and 'globalization' The upshot of internationalization and the accompanying volatility of markets has been to limit the effectiveness of the strategies of national economic management developed since the 1930s. Both the traditional 'Keynesian' and newer 'national monetarist' strategies which succeeded it in the late 1970s have become less and less effective. Traditional Keynesian policies of stabilizing economic activity by stimulating domestic demand in periods of down-turn by means of fiscal and monetary policy have become severely constrained by the effects of such policies in producing inflation rates that diverge from those of dominant competitors, by the effect of sucking in foreign imports of manufactured goods when domestic demand has been stimulated, and by the consequent balance of payments constraint and exchange rate constraints generated by such boosting of domestic demand. The policies of the French socialist government in the early 1980s and their subsequent abandonment have demonstrated the difficulties of 'national Keynesianism'; as has the experience of the US during the Reagan administration in following expansionary policy, producing the current budget and trade deficits of the

16 Theproblem of 'globalization' 371 USA. International Keynesianism advocated by the French Regulation School is inherently unlikely, given the divergent interests of the major players in the international economy and the absence of a single hegemonic power able to underwrite the expansion of the international economy as the US did between the end of the Second World War and At the same time 'national monetarist' policies have also failed. The rest of the advanced industrial countries are forced to follow the lead in monetary policy of the two most successful countries, Germany and Japan. The ERM has limited the scope for monetary policy for all members of the EC, who are tied to the monetary regime of the Bundesbank. Controlling the money supply is inherently difficult given the internationalization of financial markets, the abolition of exchange controls, and the dominant role of credit money generated by the loans policy of financial institutions. The UK abandoned strict monetarism in the early 1980s. Its effects were severely deflationary. By the late 1980s the UK government had returned to a (rather traditional 'quasi-keynesian') tight interest rate policy in its attempt to control the money supply and inflation; interest rates affect the demand for money in the first instance not its supply. We can see this too was deflationary. Monetarism was intended as an expansionary policy, allied as it was with positive supply side measures. But these twin policy advances failed as an alternative to Keynesianism, because they have had severe deflationary rather than expansionary effects. The result of this argument is that there is now no doctrinally grounded and technically effective regime of macro-economic management that can produce sustained expansionary effects. It might appear, therefore, that national macro-economic management has ceased to provide a viable means of steering national economies in an internationalized system and that the nation state has lost its salience in the face of 'globalization' and supranational economic blocs. This conclusion would, however, be superficial. The mechanisms of national economic regulation have changed but governmental policies to sustain national economic performance retain much of their relevance, even if their nature, level and function have changed. In the EC, for example, a system of fixed exchange rates with the prospect of monetary union to follow, with the free movement of capital, labour, goods and services as envisaged after 1992, along with a common regulatory framework imposed by Brussels, obviously restrict some hitherto important areas of national management. But they make others more important - giving a new significance to nonmonetarist fiscal and supply-side policies for instance. Whik national governments may no longer be 'sovereign' economic regulators in the traditional sense, they remain political communities with extensive powers to influence and sustain economic actors within their territories. Technical macro-economic management is less important, but the role of government as a facilitator and orchestrator of private economic actors remains strong. The political role of government is central in the new forms of

17 372 Paul Hint and Grahame Thompson economic management. Neither the financial markets nor the Brussels bureaucracy, to take the case of the most coherent trade bloc, can impose or secure the forms of social cohesion and the policies that follow from them that national governments can. National governments can still compensate for the effects of internationalization and for the continued volatility of the financial markets. Before going into more detail on these continuing, indeed reinforced, key political orchestrational features let us look at the more overtly economic character of (non-monetarist) fiscal policy. Fiscal policy has been in the shadow of monetary policy ever since the demise of Keynesianism, as broadly sketched above. During the late 1970s and 1980s it became very difficult to argue for an 'independent' fiscal policy; both nationally independent and one independent of monetary policy. However, things may be now about to change. One thing the advent of a possibly closer economic and monetary union within Europe (and more generally, the relative 'cooling of the casino' internationally) could do is to help 'disengage' fiscal from monetary policy once again. Take the case of the EC. The closer monetary union becomes the more individual countries could engage in independent fiscal policies. This does not mean that they will be totally free to do as they wish on the fiscal front. The post-maastricht guidelines for government fiscal balances are quite tight (around 3 per cent of GDP). But these are only meant to be guidelines and in practice they may be quite flexible (more flexible than monetary guidelines for instance, which are to be under the direction of an 'independent' European Central Bank). Thus, as decisions on monetary policy are increasingly taken elsewhere, i.e. centrally, individual governments will be able to decide their own fiscal policies relatively independently of monetary policy. This could enable some quite innovative fiscal responses as a result. Any new fiscal regime will also be operating in an environment of increasing financial and labour market integration, and this would need to be taken into account by policy makers. The problem this will pose is how to develop tax systems that minimize both the incentives to avoid individual national taxes and the ability to do so. Broadly speaking we need to think in terms of factor mobility in relationship to taxation. Capital and money markets will probably integrate most rapidly and thoroughly, so there may be little scope for differential corporation taxes or taxes on savings (via taxes on savings institutions). Differential taxes on consumption may also be difficult (they are already very high in the EC), but here it depends upon how internationally mobile purchasers are in the face of tax rates. Will they be prepared to travel long distances just to save tax differences? Thus there may be more scope here. In the case of income taxes again this all depends upon how integrated the labour market becomes. Clearly there are likely to be degrees of integration. A lot of work overseas is temporary. But in general the highest paid and the lowest paid tend to be the most internationally mobile. In the case of indigenous EC workers, cultural and linguistic barriers may still be high in terms of labour mobility, and a lot

18 The problem of 'globalization' 373 will depend upon how quickly and efficiently mutual recognition of professional qualification and standards develops. In general there may still be quite a lot of scope for differential income taxes before (dis)incentive effects become rife and undermine the effectiveness of these. Finally, the most immobile factor is likely to remain property of one kind or another. People cannot just up and away with their houses for instance. Thus there may be some innovative scope for new forms of property taxes as this becomes an increasingly attractive source of tax revenues for governments. Returning to the general role of the nation state in regulating the economy, there are three key functions which stem from its role as orchestrator of an economic consensus within a given community. States are not like markets, they are communities of fate which tie together actors who share certain common interests in the success or failure of their national economies. Markets may be international, but wealth and economic prosperity are national phenomena. They depend upon how well national economic actors can work together to secure certain key supply-side outcomes. National policy provides certain key inputs that cannot be bought or traded on the market. The market is embedded in society and governments remain a crucial element in the success of their societies - providing cohesion, solidarity and certain crucial services that markets of themselves cannot. The three key functions are: (1) The state if it is to influence the economy must construct a distributional coalition, that is it wins the acceptance of key economic actors and the organized social interests representing them for a sustainable distribution of national income and expenditure which promotes competitive manufacturing performance (amongst other things). The major components of such a coalition are: the balance of national income devoted respectively to consumption and investment; a broad agreement on the level of taxation necessary to sustain state investment in infrastructure, training and collective services for industry; and a framework for controlling wage settlements, the growth of credit and levels of dividends such that inflation is kept within internationally tolerable limits. (2) Such a distributional coalition is only possible if the state performs another function, that is the orchestration of social consensus. Such coalitions only work when they emerge from a collaborative political culture in which the major organized interests are accustomed to bargain over national economic goals, to make lasting commitments to determine policy by such bargaining and to police their members' compliance with such bargains. Industry, organized labour and the state achieve a successful balance between co-operation and competition; such a system is not devoid of conflict, nor are interests wholly coincident, but there are mechanisms for resolving such differences. Such an overall consensus only works if it is also keyed-in with the effective operation of more specific resource allocation mechanisms, such as the system ofwage determination and the operation of capital markets.

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