Winners and Losers in the Global Political Economy - A Critical Perspective

Winners and Losers in the Global Political Economy - A Critical Perspective International Political Economy Final exam 19/12/2016 Nina Meiniche - CPR: 040594 2186 Word count: 3531 STU-count: 22456 Page count: 9.8 standard pages BSc. International Business and Politics Copenhagen Business School, 2016 Question 4) One primary concern of International Political Economy is the identification of winners and losers. How should these winners and losers be identified and on what basis? Base your argument on one or more concrete aspects of the post war international political economy.

Introduction The question of who wins and who loses is central to the discipline of International Political Economy (IPE) as its main focus is on the continuing political conflict between the winners and losers of global economic exchange (Oatley, 2010, p. 2). But how should these winners and losers be identified and on what basis? The answer depends on the unit of analysis employed, and theories of IPE offer various views. The purpose of this paper is to address which theory of IPE offers the most valuable insights into the winners and losers in the global political economy. In order to do so, the paper conducts an analysis of economic globalisation as it is widely acknowledged that this process generates winners and losers (O Brien & Leichenko, 2003, p. 89). To delimit itself, the paper chose to assess two aspects of economic globalisation and the post war international political economy, namely global production and finance, which will be analysed by use of Neo-Marxism, and then a feminist perspective will be included as a complement to the preceding analysis. After, the findings will be discussed by drawing on realism and liberalism. Assessing the question from a critical perspective, this paper will argue that a Neo-Marxist approach, complemented by feminism, offers the clearest narrative of winners and losers in the international political economy. Essentially, winners and losers can be identified looking at social class dynamics in which the ruling transnational elite 1 exploits subordinate actors. The paper is divided into the following parts: First, the paper introduces relevant concepts and terms, and then presents its theoretical starting point. Third, the paper conducts a Neo-Marxist analysis of two aspects of economic globalisation, global production and finance. Fourth, building on the analysis, the paper includes a feminist perspective. Lastly, the paper discusses its critical approach before concluding. 1 Referring to market actors, i.e. primarily (transnational) corporate entities and high-income individuals (Broome, 2014, p. 231) 2

Concepts and terms First of all, the notion of winners and losers in the global political economy needs to be defined. The concept has been widely used, and it is generally accepted that winners succeed or gain, whereas losers experience disadvantages (O Brien & Leichenko, 2003, p. 90). This paper will focus on a dynamic characterization of structural winners and losers, that is, winners and losers occurring because of larger structural changes or processes that distribute gains and losses unequally (Ibid). Secondly, putting emphasis on globalization as liberalization, the term economic globalization will refer to the removal of restrictions to cross-border flows (O Brien & Williams, 2013, p. 27). As the process of economic globalization is constantly in progress and increasing the interconnectedness and interdependency of the global economy, it is hard to establish when exactly it began. However, after the breakdown of the Bretton Woods System in 1971 and the Washington Consensus of the late 1980s and early 1990s, which was greatly influenced by neoliberal ideas indicating a break with Keynesian economics in favour of free market economics, the forces of economic globalisation clearly increased (Ibid). As such, the paper will look at two aspects of economic globalization and post war international political economy: global production and global finance. These processes will be analysed later on. Theoretical Starting Point Before examining two trends of economic globalisation global production and global finance the paper will present its theoretical starting point, Marxism, as well as its forthcoming answer to which actors might win and lose in the global political economy. Additional theories will be touched upon later following the analysis. Whereas the realist and liberal traditions of IPE can be classified as problem-solving theories since they take the world as it is and concentrate on addressing issues within the prevailing order, the Marxist tradition of IPE is critical since it opposes the existing system and recognises the role of social forces, which are largely ignored by the above-mentioned state-actor models (Cox, 1996, p. 88; O Brien & Williams, 2013, p. 20). In general, Marxist approaches in IPE put emphasis on the social 3

dynamics of exploitation in wealth-making processes of the global political economy (Broome, 2014, p. 23). This paper will primarily draw on transnational historical materialism (THM) as it applies the Marxist approach to the study of transnational social relations (Overbeek, 2013, p. 162). Hence, unlike realism and liberalism, national interests are reflected in the interests of the ruling transnational economic class and state and interstate relations are seen as subordinate to the dynamics of social relations (Broome, 2014, p. 24). As such, social class dynamics is the primary unit of analysis (Ibid), and, given the increasingly transnational character of social groups, they should be understood as fractional (Overbeek, 2013, p. 167), in turn indicating that processes of change is a consequence of fractional struggle promoting a certain set of ideas. Finally, capitalism is the driving force in the global political economy, reflecting the class conflict in which the ruling transnational elite exploits subordinate actors. This gives rise to a transnational capitalist hegemon, which is described both as a social structure, an economic structure and a political structure (Cox, 1983 in Overbeek, 2013, p. 169). Accordingly, in terms of winners and losers in the global political economy, the capitalist hegemon will be the winner identified on a social, economic and political basis whereas the loser are the subordinate classes. Economic Globalisation and the Transnational Capitalist Elite In the following, the paper will use THM to analyse economic globalisation by examining global production and finance, and in turn see how these processes produce winners and losers in the global political economy. Global Production Global production is not a new phenomenon, but its size and the level of fragmentation in global value chains is; companies have unparalleled opportunities to restructure their activities in the globalised world. Globalisation and the liberalisation of trade is a major cause of this development as it is a fundamental precondition for its existence (Thun in Ravenhill, 2014, p. 286). Indications of the growth of global production can be found in the rising significance of trade in components as well as 4

the enormous escalation of FDI 2 flows, which are largely clustered in developing countries, and dominated by acquisitions and mergers between large corporations (Ibid). Certainly, the most evident enlargement of global production has been the rise of transnational corporations (TNCs) (O Brien & Williams, 2013, p. 103). TNCs make up 50 per cent of global trade and constitute the majority of the global production structure, and, notably, the annual sales of the world s largest TNCs greatly outshine the GDP of the most nation-states (Ibid). This should furthermore be seen in the light of the fact that nearly 4/10 of the control over the economic value of TNCs in the world is held, via a complicated web of ownership relations, by a group of 147 TNCs in the core, which has almost full control over itself 3 (Vitali et al., 2011, p. 6). Thus, on top of the fact that TNC s undertake the role as the producers of wealth (O Brien & Williams, 2013, p. 148), the global network of corporations is highly centralized in what Vitali et al calls a super-entity (2011, p. 6). Applying THM, these developments from the 1970s and onwards can be seen as a class project of capitalist globalization. In the view of THM, the formation of a transnational class is a major aspect of globalization as it redefines the relation between production and territoriality as well as between states, economic institutions and social class formation (Robinson & Harris, 2000, p. 4). As such, class structure is no longer bound to any geography or nation-state as illustrated by the said rise of market actors and the core of TNCs as a super-entity. In turn, the market actors are the winners as they successfully promote neo-liberal ideas and subordinate lower classes. As suggested by Wade in Ravenhill (2014, p. 338), even though the proponents speak of catch-up growth and win-win situations, what we have seen is extremely uneven benefits gained namely by giant firms centred largely in the West, by the top 10 per cent of the income distribution in the world, and by the US state standing out because of its high wealth and income inequality (Ibid). This further reveals the asymmetrical nature of the changes in social relations; the market actors profit, while the lower classes lose out. 2 Foreign Direct Investment 3 The network analysis of global corporate control by Vitali et al (2011) also finds that among 43060 TNCs the 737 top holders accumulate 80% of the control over the value of all TNCs (Vitali et al, 2011, p. 6) 5

To further elaborate on the empirics presented above and indicate the connection to global finance, the core of global corporate power is itself governed by finance as the top 50 are financial firms, except one (Wade in Ravenhill, p. 336). Moreover, as of 2014, the value of financial transactions to global GDP rose from about 14 in 1997 to almost 70 (Ibid), signifying that the realm of GDP, i.e. the real economy, is surmounted by that of finance. However, as shown by the global recession offset by the financial crisis of 2008, the negative effects of the financial realm rapidly spill over into the real economy (O Brien & Williams, 2013, p. 173). The financial crisis highlighted the great inequality created by neoliberal (de-) regulation. The market actors who caused the crisis became the winners, as apparently, they had the advantage of being too big to fail, whereas the every day actors where the ones who lost their jobs, homes and savings (O Brien & Williams, 2013, p. 181). Moreover, it has been argued that the financial crisis shows a shift in power from public to private as seen by private governance being institutionalized in the Basel process 4, which gave market actors the power to inflate bubbles and socialise the costs (Wigan, 2010, p. 120). Applying THM, this demonstrates how the transnational capitalist hegemon largely dominate and benefit from the capitalist system at the expense of the subordinate classes. Global Finance Since the post war era, the area of global finance has been through an immense transition marked by a shift from government-imposed restrictions to the current global system of enormously mobile capital and private market actors in the lead position (O Brien & Williams, 2013, p. 103). Among the most frequently identified consequences of economic globalization, and a trend that has come along with this liberalization of capital mobility, is the increase in global tax competition 5 (Broome, 2014, p. 224). While this has not caused a complete race to the bottom, states now rely more heavily on tax revenue from personal income and consumption instead of tax revenue from capital gains or corporate income (Broome, 2014, p. 228). 4 Referring to the process revolving around the Basel Accords, which are recommendations on banking laws and regulations made by the Basel Committee on Banking Supervision (Wigan, 2010, p. 122) 5 Denoting the pressure on states to either decrease taxation to prevent losing tax income to countries with lower tax rates, or the deliberate effort to undercut taxes of other states to attract investment (Broome, 2014, p. 224) 6

An associated issue is that of offshore 6 finance and tax havens 7, driven by the reduction or removal of restrictions on cross-border capital flows, rising global trade flows as well as the globalization of production networks and, in turn, has facilitated the growth of market actors who minimalize their tax payments by sheltering their taxable revenues offshore (Broome, 2014, p. 231). It is one of the main fiscal problems that governments face, but the means that capitalist elites possess for tax avoidance and evasion markedly exceed the resources that states have at their disposal to persecute the behaviour (Broome, 2014, p. 229). What Palan denotes the paradox of the offshore is very much in effect; while the offshore world was created for market actors to escape regulations, taxations and public scrutiny, those creating this world have been the very state system it is supposed to evade (Palan, 2003, p. 21). Applying THM, this is not much of a paradox, however. Rather, it might simply illustrate the supremacy of the capitalist hegemon in promoting and exploiting the capitalist system to increase its power and profits. The losers of tax evasion and avoidance activities are easily identified; the everyday actors. According to Broome (2014, p. 231), everyday actors are the main losers of global tax competition for two reasons: Firstly, if a government s revenue problems result in cuts in public expenditure, they might be unevenly affected. Secondly, due to their income and economic transactions being far less mobile than those of transnational market actors, they may end up paying a higher level of tax in spite of their lower earnings (Ibid). At the other side of the coin we find market actors, the capitalist elite, who are the major beneficiaries since they are able to lawfully hide their taxable revenues. Further, the losses are immense and unequally distributed. A recent analysis reveals that the most harmful effects of the offshore world are on the worlds poorest (Kar et al, 2015). As of 2011, citizens of developing countries held US$4.4 trillion in assets in tax havens, and since the early 1980s, the developing world has experienced substantial capital outflows, especially outflows of illicit capital (which, as opposed to inflows of recorded capital, are not beneficial for developing countries). In addition, 6 Referring not to a geographical location but rather to a set of juridical realms marked by more or less withdrawal of regulations and taxation on the part of a growing number of states (Palan, 2003, p. 19) 7 Signifying jurisdictions with low or non-existent personal or corporate income taxes for non-residents (Broome, 2014, p. 229) 7

the report states there is perhaps no greater driver of inequality within developing countries than the combination of illicit financial flows and offshore tax havens. These mechanisms and facilitating entities benefit the rich we call them the 1 per cent for convenience and harm the middle class and poor (Kar et al, 2015, p. iv). Then, who wins and loses in the process of economic globalisation? The explanation provided by THM seems to grasp a lot of what goes on as it permits the conception of the global world as a world of transnational agency. Applying THM, the said empirics can be seen as indicators of the transnational integration of a capitalist elite. Indeed, the sharp rise of FDI, the great increase in the number of TNCs as well as the spread of mergers and acquisitions across borders, the super-entity of the global corporate network, and the rise of the global financial system points toward a transnational capitalist elite, or capitalist hegemon, increasingly in control and increasingly a winner at the expense of the exploited class, the losers. In the next section, a feminist framework will be applied to complement the findings. Feminism as a Complementary Theory Like the Marxist tradition, feminism can be categorized as a critical approach (Watson in Ravenhill, 2014, p. 45). Feminist IPE considers gender relations to be the primary unit of analysis as gender is constitutive of the global political economy (Broome, 2014, p. 26). According to feminists, authority operates through gendered power struggles and economic relations resulting in patriarchy or male dominance, which are reproduced at the global level (Ibid). Feminism and Marxism share their emphasis on the interests of the exploited and a critique of capitalism highlighting hegemony in state and society, which is why this paper choses to complement the two theories (O Brien & Williams, 2013, p. 21; Watson in Ravenhill, 2014, p. 45). However, Marxism has ignored women and gender issues as focus is only on the interaction of economic classes (O Brien & Williams, 2013, p. 203). For example, while a Marxist view on labour solely includes paid work in the formal economy, feminists also refer to unpaid work at home. Thus, pushing beyond the Marxist view of society, winners and losers can also arise because of gendered social relations. As such, a gendered analysis of the developments concerned with economic globalisation allows for the reveal of a patriarchal transnational capitalist hegemon as 8

the winner. While top positions in the corporate world are widely dominated by men, and women only account for 16 per cent of the seats in national parliaments, it has furthermore been argued that TNCs use the socially constructed gender-role ideology as a means to offer unequal pay for women relative to men and constrain access to particular jobs (Chow, 2003, in O Brien & Williams, 2013, p. 217). The feminist perspective reveals that women are major losers due to a number of factors. Firstly, men and women are affected differently from economic globalisation, and poor and working-class women are hurt the most by global crises (O Brien, 2013, p. 56). Secondly, the face of poverty tends to be female, implying that a large share of the losers identified above are women. Thirdly, structural adjustments are proportionately much more severe for women because they lose essential public services as exemplified from the debt crises in the 1980s to the recent financial crisis of 2008 (Ibid). As such, the feminist perspective can shed light on additional losers, so to speak, that would be forgotten if only THM was employed. In view of the arguments above, THM, complemented by feminism, offers the clearest narrative of who win and loses in the global economy. In the subsequent paragraphs, this analysis will be discussed by including realism and liberalism. A Conventional Critique The critical approach chosen in this paper certainly gives rise to criticisms as will be elaborated on by including two mainstream theories of IPE, realism and liberalism. Realism First and foremost, realists see the nation-state as the primary unit of analysis and the central actor within IPE. Second, the economy and markets are subordinate to the interests of the state, which in turn are the determinants of international outcomes (Broome, 2014, p. 20). Third, the international stage is characterized by anarchy in which states pursue their self-interests, by focusing on economic policies that provide relative gains and power, reflecting the view that cooperation is a zero-sum game (Ibid). According to the realist approach then, winners and losers can be found among states gaining or losing relative to each other. However, given the influence and immense gains of the market actors pointed out in the preceding paragraphs, the 9

realist perspective fails at providing a subtle account with its narrow focus on states and ignorance of the transnational character of capitalism. For example, regarding offshore finance and tax havens, the winners and losers would be found among states according to realism. But how can the winners be among states when even the largest states fail to tackle the issues? While states dwell upon their collective action problems, market actors continue to hide their tax liabilities. Liberalism A key feature of the liberal tradition in IPE is the focus on international cooperation and interdependence. Rather than zero-sum games the results of this reflect positivesum games involving mutual gains, even though some might benefit more relative to others. The unit of analysis is rather broad as it encompasses states, individual actors and interest groups (Broome, 2014, p. 22). Finally, liberal approaches favour limited state intervention in market mechanisms, economic integration and open capitalist markets (Ibid). Winners and losers can thus be multiple actors and by emphasising positive sum games mostly win-win situations are expected. Yet, like realism, the liberalism lacks explanatory power in this case. From a liberal view, with its commitment to free-market economics and positive-sum games, all actors can benefit. Neo-liberal deregulation should generate mutual gains, but as exemplified above with the processes global production and finance, the gains are largely one-sided and to the benefit of market actors at the expense of everyday actors, indicating that Liberalism, even with its broad level of analysis, fails at giving insight into who actually dominates, gains and loses. While there are arguably various beneficiaries of economic globalisation, liberalism and realism as state-centric analyses do not acknowledge this emerging transnational capitalist hegemony of classes and groups that are no longer tied to any nation-state or territory. Thus, by taking social class relations into consideration, one can provide a much more subtle explanation of who wins and loses in the global political economy. Conclusion This paper had sought to address which theory offers the clearest narrative of who the winners and losers are in the global political economy. To do so, two aspects of economic globalisation and the post war international political economy, specifically 10

global production and finance, have been analysed by using the framework of the theories of THM and feminism. Subsequently, the findings have been discussed by including a conventional critique. Based on this, the paper concludes that THM, complemented by feminism, gives the most valuable insight into who gains and loses in the global political economy of economic globalisation. The winners are the market actors, the transnational capitalist elite, who enjoy remarkable benefits and gains. The losers, in turn, are the everyday actors and the world s poorest - of which a large share are women - that are subjugated to the prevailing economic order and furthermore bearing the costs of crises grown out of the capitalist system. 11

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