!! A paper written by: Laura Werup! CPR: LAW2!

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1 Final Exam IPE, IBP 2014 Laura Werup Question 5 Compare and contrast one or more aspect of the Bretton Woods and post Bretton Woods era. How and how far has power in the international political economy changed between these eras and with what effects? Final Exam International Political Economy International Business and Politics, 2014 Individual 48-h home assignment December 19th 2014 STU-count: Pages (total): 12 Pages (assignment): 10 A paper written by: Laura Werup CPR: LAW2 1 of 12

2 Final Exam IPE, IBP 2014 Laura Werup 1 Introduction There is an evident shift in the balance of power in the global political economy. This shift originates from a society that has undergone large norm transitions during the last three decades: from beliefs in a postwar Kenynsian welfare to embarkment on laissez-faire policies that culminated into a neoliberal Washington Consensus in Due to an overlyrapid capital liberalisation, the rise of financialised power has diminished national governments ability to infer, regulate and control cross-boarder activities. The consequences have encompassed financial crises, insecurity and increased locus of power in speculating activities. The market has seemingly failed due to the lack of a solid regulatory framework (Stiglitz 2000:1075). This question is more than ever relevant, as the modern economic climate is largely affected by financial insecurity that has led to a time of fiscal crises and austerity politics. This paper discusses and contrast the complexity of financial impact between the Bretton Woods and post Bretton Woods-era. It asserts and concludes that state sovereignty is not yet eroded, but capital sovereignty is, and therefore also states power of their own capital. Thus, the answer on how far power has changed and with what effects depends on what ideas that have been most convincing. However, as states are the necessary institutions in the effectuation of control, the question boils down to whether it is possible to find a compromise between capitalism that is both just and effective for the sovereign state. Embedded liberalism was seen as such compromise during the Bretton Woods era. However, a current blurred world order with dispersed political power due to the process of globalisation has reduced states possibilities in upholding the compromise. Embedded liberalism is thus not the remedy for a crisis of sovereign capital accumulation. This essay will be structured in four steps. First, it will give a theoretical justification to why this paper argues from a critical constructivist approach, ideologically permeated by marxism and contrasting neoliberalism. Second, it will give a historical pre-face to the Bretton Woods era, and how it changed into neoliberal consensus. Third, it will analyse three main variables: 1) The commodification and liberalisation of capital 2) Short-term speculations with the East Asia crisis as empirical departure and 3) The emergence of financialisation substantiated with a study by Bain & Company Inc. These variables will help to contrasts Bretton Woods and post Bretton Wood in the most clear manner, and explain the causes and effects of why states steadily fails in implementing a government s visible hand to balance the market to retain power and accumulate national capital. 2 of 12

3 Final Exam IPE, IBP 2014 Laura Werup Fourth, and lastly, it will argue and discuss whether embedded liberalism is the key to unify today s fragmented world. The paper will finally conclude, and provide aspects that can be interesting to future scholars to look upon. Due to the great scope of this question, this paper gives its limited remit to take the implosion of the monetary system and its financial consequences as point of departure. As globalisation is a descriptive concept in which the state is the structural, subjective force, this paper will take a state-centric approach. 2 Tackling Theories: Constructivism, Marxism and Neo-liberalism With an epistemological that knowledge is constructed subjectively by people, groups and actors, this paper will provide a normative value of constructivism, influenced by marxism and critically contrast neoliberal 1 theory. Blyth argues that ideas in particular, shape the identities and interests of actors. Hence, ideas have direct influence of how actors behave, perceive reality and what strategies they chose to reach their goals (Blyth 2003). The relevance of constructivism in this paper is highlighted in how it can shape societal interests and how these are pronounced by constituting social reality (Widmaier 2004). This explains how power have shifted over time, and how the element expectations in macroeconomic analysis can be explained by actors predictions in times of uncertainty. Furthermore, as the transnationalist agenda has merged with the raise of constructivism, it is relevant to include such element as it is dominating in understanding the global and transnational. The marxist standpoint in this paper sees capital globalisation as the main source of instability in the international system. The link between Marxism and constructivism is not clear cut, but it is obvious that Marx takes truth, as a social constructed phenomena as given. Marx divided true knowledge and knowledge that has been misinterpret by power, material forces in economic arrangements or ideology. Neoliberalism on the other hand, tend to limit the role for ideas. However, the idea of the free market and power of capital are perhaps the most exercised, which will be of great use in this paper. In this paper, neoliberalism is used as to describe the market-based economic policies that are advocated, such as pri 1 - vatisation and free-market promotion, and how limitations of state-based economics are shown evident. 3 of 12

4 Final Exam IPE, IBP 2014 Laura Werup 3 Contrasting Systems 3.1 The Financial Restrictiveness: Bretton Woods The Bretton Woods era was characterised by rules and norms that later were transformed by structural changes in the world economy and political decisions in response to developments during the 70s and 80s (Broome 2014: 176). It is crucial to understand the underlying ideas behind Bretton Woods, in order to grasp what changed the global political economy. The Bretton Woods monetary system emerged in 1944 due to a previously turbulent financial period including The Great Depression and an imploding Pax-Britannica gold standard. As countries in the interwar period have had severe problems in maintaining their exchange rates, the Bretton Woods exchange rate policy linked all currencies to the dollar, and the dollar to gold. The wish for social stability, care of full employment combined with free trade and stable currencies were core ideas, which governments pursued during the following decades. Capital flows were strongly restricted, and the system induced rapid growth and little speculations, mere financial instability and few crises (The Economist:2014). When US became threatened as a hegemony by the emergence of great economies, such as Germany and Japan, president Nixon abandoned the link to gold in 1971 and the fixed exchange-rate system became floating. What remained from the dissolved Bretton Woods system was two global institutions: International Monetary Fund (IMF) and the World Bank (WB). Bretton Woods was thus a system that, mainly due to its collective belief in economic stability and institutional representation, could outline checks and balances on capital flows to preserve a high degree of domestic politic autonomy and flexibility (Broome 2014: 171). This is evident in the implementation of capital controls in for instance Europe and Japan, who had experienced volatile exchange rates and were now liberated from the danger of capital speculations (Helleiner 1994). The embarkment upon neoliberal ideas in the end of Bretton Woods culminated into a Washington consensus in 1989 an era that gave rise to a new periphery of export-orientated growth strategies, undervalued exchange rates and great capital outflows. 4 of 12

5 Final Exam IPE, IBP 2014 Laura Werup 3.2 Support for Financial Globalisation: Post-Bretton Woods The change in paradigms in the fall of Bretton Woods have come to diminish the effective exercise over economic and political processes by states and international organisations (IOs), and has been replaced by institutionalised forms or expressions of [private] power (Hall & Biersteker 2002:4). This change in paradigms will be captured by how actors have interacted with each other on elite level and created a meaning about their identity and purpose. The post 1970-Bretton Woods era was built on an emerging neoliberal consensus. The understanding of lifting out capital control from the impossible trinity used in shaping any monetary system, resulted in consciously, highly integrated financial markets. Although the two main founders of the Bretton Woods system, Harry Dexter White and John Maynard Keynes, predicted and warned that free capital flows would have a harmful impact on national economic performance and state autonomy, it was nonetheless enforced (Broome 2014: 175). Hence, the lack of regulations in the cross-border capital movements and the idea of globalisation as a natural force, leaved governments with no alternative, but to accept and believe in the dictates of the market and the rise of neoliberal free competition. A further globalised economy have aligned export led growth with a desire for depreciated currency. In the post Bretton Woods system, capital is allowed to flourish in a majority of countries as long asset central banks buy foreign exchange to prevent currency crashes. Thus, capital is not very constrained internationally. Moreover, there is a widespread public ignorance of how the monetary system is effectively controlled by not merely central banks, but by commercial banks and private, global capital markets (Pettifor 2014). Public authorities have little impact on the management of the global financial system and more power is given to corporations and credit ratings (Broome 2014:92). The interaction on elite level can be drawn analogous transnational class formation in which elite socialisation takes place through channels in transnational forums in which the top, corporate and political leaders and those with owner interest in capital meet to exchange ideas (van der Pijl, quoted in van Apeldoorn 2004:162). As capitalism has emerged to become more globalised, social relations takes place within capitalist societies in which the capitalist class 2 is the ruling force (van Apeldoorn 2004:161). This class formation is a political 2 The argument does not expand upon class fractions (i.e conflict within the capitalist class) between money- and pro- ductive capital (Staricco 2014 Lecture 2). 5 of 12

6 Final Exam IPE, IBP 2014 Laura Werup process in which the capitalists have succeeded to reach agreements vis-à-vis the state (van Apeldoorn, 2004:155). The post Bretton Woods-era is thus significant to the extent that private actors interest and ideas dominate. Next section will explain the variables behind this development. 4 Commodification and Liberalisation of Capital The institution of flexible exchange rates in 1973 have made many observers to nostalgically look back at the Bretton Woods era with fixed exchange rates (Bordo & Eichengreen 1993:515). It has turned out that floating exchange rates and hot money flows implies higher degrees of short-term volatility 3 like those found in commodity or equity mar- kets (ibid). Hot money flows impact the ownership structure of businesses and whether profits are re-invested locally or over seas. The latter is harmful for the national investing climate and contributes to the weakening of the economy (Dooley 1998, Broome 2014:172). Nevertheless, some economists in the field counter argues that increased capital flows will in fact have welfare-improving effects. Frankel (2010) proposes that capital liberalisation can be beneficial for long-term growth by increasing the access to finance for investment at lower cost; diversifying assets and liabilities across countries and put greater discipline on macroeconomic policy (Frankel 2010). Arguably is also that imposing barriers to capital trade will result in less capital accumulation in countries that do not have a comparative advantage in producing capital goods (Mutreja et al. 2014:2). Such barriers would inhibit the benefits from trickle down effects. However, empirics have not been as clear-cut: the East Asian crisis depicts well how the fundaments of a neoliberal post Bretton Woods system could make governments to pursue unsustainable expansionary policies and create a crisis from basically nothing real existing. 4.1 Effect I: Speculations East Asian Booms and Busts The East Asian crisis implied enormous losses of economic activity in East Asia due to sudden reversals of foreign capital inflows. The Thai Bath came under speculative attacks in 1997 when investors began to withdraw money out of the country (Broome 2014:177). Under conditions of high uncertainty and exchange rates volatility, actors can speculate 3 This argument is not focusing on FDI s which can be seen as beneficial, but on damaging hot money flows which enable currency speculations and opportunities to make profits trough arbitrage (Broome 2012:172). 6 of 12

7 Final Exam IPE, IBP 2014 Laura Werup and exploit the system by elasticity of expectations in order to make short-term profits (ibid). The East Asian crisis is well depicting such weak financial system. It was later rescued by a re-implementation of financial improvements with bank regulations and limits on loans and investment rates (Stiglitz 2000:1084). Thus, the implementations of a regulatory framework before the introduction of derivatives, loans in foreign currencies and increased capital velocity is needed in order to secure stability on a dispersed money market (Broome 2014:177). Whatever position, a firm legal financial system and structured regulations are to prefer, as it will otherwise turn out what Polanyi predicts: the idea of a selfadjusting market implies a stark utopia. Such an institution could not exist for any length of time it would have physically destroyed man and transformed his surroundings into a wilderness (Polanyi 1944:3). China, for instance attracts great amount of FDI s alongside strong maintenance and control on short-term capital (Stiglitz 2000:1083). International policies should thus serve, not only preserve the economic agenda in order to maintain stability and long run policies. However, as global capitalism has entered a new phase with global transnationalisation of both production and capital (van Apeldoorn 2002:55-60), the growing excessive impact of free capital flows implies that banks and transnational firms are increasingly involved in control of capital volumes, while their production, investments, lending and speculative activities construct the economic climate in which states operates (Broome 2014:92). Their inference in state activity was simplified through the post Bretton Woods era due to little political resistance against the demand for financial liberalisation by neoliberal advocates and global corporate interests (Helleiner 1994:312). Thus, private actors constrain states political agenda and it is evident that the financial sector seems to grows even more tremendous, and even more harmful. 4.2 Effect II: Financialisation Financialisation 4 have grown substantially larger since the 70s and its excess is harmful to the economy as finance no longer is a public utility nor a controlled, regulated service, but a system driven by private actors. Financial power is socially constructed, captivated by short-term reasoning and speculative activities of currency traders and hedge funds Financialisation refers to an increase in the size and importance of a country s financial sector relative to its overall 4 economy. 7 of 12

8 Final Exam IPE, IBP 2014 Laura Werup (Clapp, Helleiner 2012:492). An IMF working paper shows that once the financial sector becomes to vast, it is inhibiting growth and increases volatility. In US during 2012, the private sector credit was as high as 183,8% of the American GDP (Arcand et al. 2012). Bain & Company s study on financialisation asserts that capital superabundance will continue to exert a dominant influence on investment patterns for years to come and that a $27 trillion growth in global GDP will support a $300 trillion increase in total financial assets by 2020 (Bain & Company, Inc. 2012:7). Capital abundance and the lack of real economy, have left European and US households, commercial banks and governments in immense debt and left regulators desperate in attempts to impose new, efficient capital requirements. Capital abundance flows will continue to spur the frequency, intensity, size and durance of asset bubbles (Bain & Company Inc. 2012:4). The challenge for states will be to curb the expansion of the financial sector. The report suggests that financialisation will tip the balance of power from owners of capital to owners and creators of good ideas. However, this might be harder than it seems, as the yield-seeking capital increasingly crowds into all available asset classes and diversification will become even harder to achieve (Bain & Company, Inc. 2012:5). The expansion of the financial sector have thus induced a change that began in the end of the Bretton Woods system in early 70s and is has exploded due to financial systematisation, advanced technology and loose constraints on capital mobility. It is well explained by private actors ideas in shaping the private, financial sphere with speculative behaviour. They 8 of 12

9 Final Exam IPE, IBP 2014 Laura Werup have fed artificial growth and conveyed lenders to go from quality to quantity: the financial sector has grown dreadfully large. Actors are the main source in re-shaping the power and the autonomy of states (Broome 2014:171). If the development of finance will follow as predicted, it will only be those who understand the consequences of long-term financialisation that will set the agenda. So, the Bretton Woods system was perhaps after all, not so bad in preserving liberalisation of trade alongside a belief in state autonomy and capital control. Could such climate become retained in a modern, fragmented post Bretton Woods era? 5 Embedded liberalism The Bretton Woods world order commenced with intergovernmental collaboration and market integration to maintain a balance of payments equilibrium in a global environment (Ruggie 1982). The West experienced a gloomy era of capitalism, and Ruggie s concept of embedded liberalism legitimised openness and cooperation in economic trade and monetary relations (Broome 2014:22). The Bretton Woods system was liberal in the sense of establishing an open system of international trade, but also embedded in a framework that could be regulated by national governments. Ruggie underscored that states should retain their autonomy to handle domestic economic stability, which concerned for instance full employment and social services. Embedded liberalism can thus be seen as a compromise of redundant free markets and protectionism. Samuel Brittan referred to the embeddedness as capitalism with a human face, to justify the growing free trade alongside shared social values and principles (Brittan 1996). 5.1 Re-embedding liberalism? Ruggie proposed that macroeconomic changed stemmed from changing social ideas and ideology, rather than changing inputs from external economic dynamics. The end of Bretton Woods changed such rules and decision-making procedures of international regimes on money and trade, but did not reshape their social purpose. Constructivism is thus playing a central role: ideas do matter. In the fall of Bretton Woods, shared beliefs took a different look by the promotion of integrating markets and neoliberal consensus. Re-embedding liberalism would today require establishments of capital controls. Could there be a chance to possibly lean back on such policy? The embedded liberalism have one superior 9 of 12

10 Final Exam IPE, IBP 2014 Laura Werup flaw: it disregards the domestication of capital. To export capital during the Keynesian Bretton Woods era was less convenient than it is today. Roos puts it accurately: the only way to export capital by then was by illegally stuffing a bunch of gold or dollar bills in an old sports bag in the back of your trunk (Roos:2011). We have entered a new era with easy accessibility to information, Internet and financial engineering. Regulations for large banks and financial institutions will be, if not impossible, extremely difficult to achieve. Embedded liberalism is not what many scholars have proposed: a remedy for a crisis of capital accumulation. Keynesian stimulus economy lost its impact and sustainability when capital could start to move freely. Today, the interests of regulating capital are casted doubt upon, when ideas of keeping the market liberalised seems to dominate. 6 Concluding remarks This paper have shown how and how far power in the international political economy has changed between the Bretton Woods and the post Bretton Woods era. It refers to the persuasiveness of different consensus taking place during times when society have undergone radical idea-transformations: from Keynesian welfare to neoliberalism. States power in shaping the political, global agenda has been deteriorated due to the rapid liberalisation of capital, it has complicated macroeconomic policy and reduced states autonomy to control their economies. Loosely regulated financial markets have been affected by private actors ability to shape and influence the agenda, and by letting financialisation grow large, it has led to effects such as higher rates of speculative activities, financial crises and less economic stability. Thus, states power to shape the international realm is a lost case in terms of capital sovereignty. However, states are still the dominating controlling forces, but those who understand the ideas of the current market will be those to set the agenda. We are standing in the midst of a blurred 21st century, without any distinct consensus or coherent agenda that is leading the international political economy. It is clear that embedded liberalism is not the remedy for a crisis of sovereign capital accumulation. It has been replaced, and what has come in its position will be an interesting account of analysis for further scholars to look upon. 10 of 12

11 Final Exam IPE, IBP 2014 Laura Werup Bibliography Arcan, J.L., Berkes., E., & Panizza, U., (2012), Too Much Finance? IMF Working Paper, Research Department, authorised for distribution by Andrew Berg June 2012, retrieved Dec Bain & Company, Inc (2012), A World Awash in Money: Capital Trends Through 2020, retrieved Dec Blyth, M., (2003), Structures Do Not Come with an Instruction Sheet, Perspectives on Politics 1(4): Bordo, M.D., & Eichengreen, B., eds. Marston, R.C (1993), Retrospective on the Bretton Woods System: Lessons for International Monetary Reform, Cambridge, National Bureau of Economic Research, University of Chicago Press, chapter 11, pp Brittan, S., (1996), Capitalism with a Human Face, Cambridge, Mass: Harvard UP Broome, A., (2014), Issues and Actors in the Global Political Economy, Basingstoke, Palgrave Macmillan Clapp, J., & Helleiner, E., (2012), International Political Economy and the Environment: Getting back to basics, International Affairs, 88:3, pp Dooley, M., (1998), Indonesia: is the light at the end of the tunnel oncoming traffic? Deutche Bank Research, Emerging Markets Research (June) Frankel, J. A., 2010, Monetary Policy in Emerging Markets: A Survey, NBER Working Paper, No (June). Gilpin, R. (2001), Global Political Economy: Understanding the International Economic Order, Princeton: Princeton University Press Hall, R.B., & Biersteker T.J., (2002), Introduction: Theorizing Private Authority. In The Emergence of Private Authority in Global Governance, Cambridge: Cambridge University Press, 3-22 Helleiner, E., (1994): States and the Reemergence of Global Finance ; Ithaca: Cornell University Press Helleiner, E., (1994), Freeing money: Why have states been more willing to liberalize capital controls than trade barriers? Netherlands, Policy Sciences 27: , 1995, Kluwer Academic Publishers 11 of 12

12 Final Exam IPE, IBP 2014 Laura Werup Mutreja, P., Ravikumar B., Sposi, M (2014), Capital Goods Trade and Economic Development, St. Louis, Research Division Federal Reserve Bank of St. Louis Working Papers, May 2014 Pettifor, A., (2014) Just Money How to Break the Despotic Power of Finance, Commonwealth Publishing (January 2014) Polanyi, K., (1944), The Great Transformation, Boston: Beacon Press Ruggie, J., (1982) International Regime, Transactions, and Change: Embedded Liberalism in the Postwar Economic Order, International Organization 36, pp Roos, J., (2011), From Crisis to Crisis: Can embedded Liberalism work? ROAR Magazine RSS, published , retrieved from roarmag.org Staricco, I.J., (2014), The Neo Marxist Tradition, Lecture Slides, International Political Economy, Copenhagen Business School, 10 September 2014 Stiglitz, J.E., (2000), Capital Market Liberalization, Economic Growth and Instability, World Development Vol. 28, No. 6, pp , Great Britain The Economist, (2014), What was decided at the Bretton Woods summit, The Economist, retrieved Dec Van Apeldoorn, B., (2004) Theorizing the transnational: a historical materialist approach,journal of International Relations and Development, 7, pp Van Apeldoorn, B., (2002), Transnational Capitalism and the Struggle Over European Integration, London: Routledge Van der Pijl, K., (1984), The Making of an Atlantic Ruling Class, London: Verso A theory of global capitalism, feature review. New Political Economy 10 (2): WHO (2014), Washington Consensus, World Trade Organisation, trade/glossary/story094/en/, retrieved Dec Widmaier, W.W., (2004), Theory as a Factor and the Theorist as an Actos: The Pragmatist Constructivist Lessons of John Dewey and John Kenneth Galbraith, International Studies Review 6(3): of 12