The emergence of the study of international regimes was a
significant change in the study of international organization by marking a
shift away from an exclusive focus on formal international organizations.
Krasner defines regimes as “implicit or explicit principles, norms, rules and
decision-making procedures around which actors’ expectations converge in a
given area of international relations. Regimes "are more specialized
arrangements that pertain to well-defined activities, resources, or
geographical areas and often involve only some subset of the members of
international society. Regimes may or may not take the form of international
organizations.
The term regime has a long history in economics.
An economic regime is a given set of rules and/or institutions, which are said
to govern the economy as a system, and therefore it accounts for its
qualitative (static or dynamic) behaviors. For ages governments have been
concerned with issues of international trade and have made attempts at
regulating various aspects of international economic relations. This has been
through both international organizations as well as international regimes.
International economic regimes are defined as rules, norms, procedures and
institutions that are intended to achieve common economic goals by constraining
the behavior of governments. These regimes range from simple bilateral trade
agreements to complex multilateral arrangements. They are shaped by political
factors such as the
·
distribution of power among the players
·
degree of shared goals and interests
·
nature of leadership within the system
International economic
systems are clusters of regimes that include rules of trade, investment, and
monetary flows. Since the World War II there have been three international
economic systems namely-Bretton Woods,
Interdependence, and Globalization.
Bretton
Woods System
The Bretton Woods
system prevailed from WWII until 1971 and was effective in controlling conflict
and achieving the common goals of its members. The International Monetary Fund
(IMF), the World Bank (WB) and the General Agreement on Tariffs and Trade
(GATT) are the three organizations that embodied the rules, institutions and
procedures of the system. They remain to date the cornerstones of international
economic governance.
Since these
institutions were created during and immediately after the WWII, in their early
years of operation many countries were still recovering from the devastation of
war were not in any position to compete internationally. International trade in
way of international flow of goods and money was largely hampered by tariffs,
quotas and exchange controls that protected national markets.
The Bretton woods
system anchored on three political foundations:
·
the concentration of power in a small
number of states/countries
·
the existence of a cluster of important
interests shared by these states
·
the presence of a dominant power willing
and able to assume a leadership role
Developed countries of
Western Europe together with North America dominated the Bretton Woods system
as a result of the concentration of both political and economic power in their
countries. These countries faced a challenge from those countries that were
communist leaning such as those of Eastern Europe that were in a different
international economic system. Although Less Developed Countries (LDCs) were
integrated into the world economy, they did not influence much. Because of
their political and economic weaknesses, they had no voice in the management of
world economy. The concentration of power facilitated the system’s management
by confining the number of actors whose agreement was necessary to establish
new international economic regimes and to carry out management within the
agreed upon system.
The shared belief among
the developed countries in capitalism and
liberalism and their reliance on
primarily market mechanisms and private ownership made it management easy. These
countries also agreed that governmental intervention was needed for the liberal
economic system. They favored a liberal economic system that relied primarily
on a free market with minimum barriers to the flow of private trade and
capital. They all agreed that an open system would maximize economic welfare. This
they believed would lead to economic prosperity, economic harmony as well as
international peace.
The US as the world’s
foremost economic and political power, was in a position to assume the
responsibility role of leadership of international management. The US economy
was not damaged by the war and its large market, great productive capability,
financial facilities, and strong currency was the dominant world economy. In
addition, the US was the world’s strongest military power and leader of the Western
alliance based on the fact that the US had the ability to support a large a
large military force and together with possession of nuclear weapons. With the
encouragement of the Europeans and Japanese following their economic exhaustion
and the willingness of the US to assume responsibility of leadership, the US
took up the leadership role of international management.
Interdependence
This system
characterized by interdependence replaced the Bretton Woods system and was in
existence from 1971 to 1989. A shift in the balance of power among the key
players together with changes in the nature of international economic
interactions, led a to a restructuring of the international economic order.
Economic growth and
ongoing international liberalization combined with innovations in technology
led to increased volumes of international economic interactions and growing
penetration of national economies in international trade, investment, and
monetary flows. The reduction of trade barriers and capital together with the
revolution in information technologies enabled an expansion in international
economic interactions among the developed market economies these included
· larger
international capital flows
· growth
of international trade
· development
of international systems of production.
This resulted in the
national economies becoming more interdependent and more sensitive to economic
policy and events outside the national economy. This resulted in two reactions
among the national economies:
1.
First reaction: Erection of new
barriers to limit economic interaction together with interdependence. It was
argued that continued focus on tariff reduction was no longer appropriate in an
increasingly tariff-free world economy. Non-tariff barriers had become embedded
in national economies as a response of reduced tariffs. There was pressure for
new forms of protection and managed trade as well as efforts to strengthen
regional free trade groupings.
2.
Second reaction: To go beyond
Bretton Woods and the idea of a limited management to new forms of
international economic cooperation that would manage interdependence. An open
system, according to this viewpoint, maximizes welfare but required in turn new
forms of international management that would assume responsibilities and
prerogatives formerly undertaken by the state. These views led to efforts to
establish a regular series of summits and attempts to coordinate national
macroeconomic policies although these were largely unsuccessful. In the 1980s
new initiatives were taken up to upgrade the multilateral trade regime and the
Uruguay Round was established.
This period also
encountered changes in power and leadership which also altered political
management of the international economic system. Although the developed
countries remained the dominant powers both economically and politically, other
countries outside the group challenged their right to manage the system. The
LDCs sought to increase their access to management and therefore the rewards of
the international economic system. Some developing countries sought to work within
the prevailing regime and to play a greater role within the system while others
dissented from the liberal foundations of international management arguing that
open monetary, trade, and financial system perpetuated their underdevelopment
and subordination to the developed countries. They sought to develop their
economies both by protecting themselves from international economic interaction
and by trying to make their development a primary goal and responsibility of
the system. The New International economic Order was created as a result of
this during the oil crisis of 1970s when part of these countries made an effort
to alter the rules of the game.
About the same time in
the 1970s and 1980s the Soviet Union and countries of Eastern Europe sought
limited participation in the international economy. Changes in the Soviet Union
and China opened up the possibility of greater East-West economic interaction. Under
Gorbachev’s perestroika/restructuring the
Soviet Union sought to move the Soviet economy more in the market direction and
to open trade, finance, and investment relations with the West. This move
resulted in the fast economic decline of the Soviet Union and helped bring
about the breakup of the Soviet empire. On the other hand China’s reforms
resulted in rapid growth.
Also within the group
of advanced industrial nation’s power shifted. In Europe the creation of
European Economic Community a trading block by six countries rivaled the US
economy and also emerged as a potential political force. This later transformed
into the EU whose goal was the elimination of trade barriers and the creation
of a customs union. It also encompassed the removal of all barriers to the
movement of capital, labor, and services. At the same time Japan became a major
world economic power and joined the developed countries and was a powerful
competitor of both the US and Europe.
The weakening of the
dollar as well as the weakening of balance of trade in the 1970s and 1980s
diminished US international economic power. The US suffered both government
spending and the balance of payments.As this happened, Japan and Europe became
dissatisfied with the prerogatives that leadership gave the US and criticized
these prerogatives especially the dollar system and US payments deficits.The US
also was increasingly dissatisfied with the costs of leadership. Détente and the lessening of the
perceived security threat weakened the security argument for Western economic
cooperation and the US leadership.
Despite this no leader
emerged to fulfill this role. Europe through the EU lacked the political unity
needed to lead the system. This period was characterized by periodic crises and
conflict among members. The powerful members sought to address the management
problems by developing new mechanisms for multilateral cooperation. Among these
were the reforms for the Bretton Woods institutions, including a major revision
of the international monetary regime and a greater focus on economic
development. Other cooperative arrangements such as the Group of seven G7
economic summits to supplement the existing institutional structures were formed.
This ushered in continuing liberalization, the gradual evolution of
international econ0omic institutions, and the adaptation of the system to the
new level of international economic interaction and the changed balance of
power.
Globalization
Another international
economic system emerged in the 1989 and runs to date. This is an extension of
interdependence. Continued international liberalization combined with improved
technologies increased international economic interaction. This era had several
changes the most profound were the political changes. The end of the Cold War
and the collapse of communism political bases shifted in the global economy. The
great divide between the capitalists and communists worlds and their respective
economic systems disappeared. The developing countries that had opposed the
liberal international economic order chose to join the prevailing consensus.
The system became truly
global from a geographical perspective. With differing levels of effectiveness,
governments across the world adopted capitalist ideology/polices of
deregulation, privatization and international liberalization. Trade barriers
were reduced, exchange controls were removed, and investment bans were
eliminated. Together with this economic changes were changes in technology. New
technological advances increased the capacity to communicate and at the same
time reduced the costs. This resulted in increased internationalization of
production and finance.
The impact of
globalization was uneven. Many countries were and individuals were able to
benefit from globalization however those that were unable to compete on the
world markets were left behind. Poor countries especially those of Africa were
unable to expand their trade or attract investment and became more
marginalized. Globalization resulted in more penetration of international
economic interaction into national economies. It questioned the ability of
governments to pursue other goals such as environmental preservation and labor
policies.
The end of the Cold War
and the creation of a global capitalist economy altered power relations.
Economic integration also created new power relationships. The EU was an
emerging powerhouse. Governments sought to respond to the new order by
modernizing institutions, rules and procedures and by developing techniques to
manage crises and pursue common interests.
Trade
policies and strategies
National trade policies
and practice tend to waver between protecting national interests and domestic
industry to limit the import of goods and services (known as protectionism),
and promoting free trade. When the international exchange of goods is neither
hindered nor encouraged, trade is referred to as being free trade. Neo-liberals
argue that a free trade system is most efficient because it allows countries to
use their resources to best advantage, producing the goods they are best placed
to produce, and importing others, thus driving economic growth. Others argue
that even under a system with limited trade barriers or none at all, “free
trade” is hampered by restrictions on labor mobility, monopolies on production
and, not least, political imperatives (for example countries wanting to
maintain self-sufficiency in key production areas such as food).
Most developed
countries use two types of strategic trade policies: subsidies or taxes on
imports or exports and investment or adjustment assistance subsidies. Export
subsidies, with few exceptions, such as agricultural products, violate the
General Agreement on Tariffs and Trade (GATT).
Inward
looking and outward looking Trade strategies
With reference to the
government policy towards trade, trade strategies may be broadly divided into
two groups, viz., outward oriented and inward oriented strategies.
An outward oriented or outward looking strategy is one in which trade
and industrial policies do not discriminate between production for the domestic
market and exports, or between purchase of domestic goods and foreign goods.As
Krueger observes, an outward oriented strategy is "not a government decree
that exports are desirable. Rather, it is an entire set of policies oriented
toward encouraging the production of goods and services efficiently."
An outward oriented
strategy is, thus, a neutral strategy and it does not mean an export oriented
or export promotion strategy as is sometimes mistaken, although such a strategy
could pave way for an export- led growth as experienced by some of the
south-east Asian countries.An outward oriented policy discriminates neither in favor
of exports nor is it against import substitution. It is an open policy
Neutrality is its essence.
An inward oriented or inward looking strategy is characterized by a
bias of trade and industrial policies in favor of domestic production as
against foreign trade. As import substitution is the key element of the inward
oriented strategy, it is often described as the 'import substitution strategy.
Protection of domestic
industries from foreign competition is an essential feature of the inward
oriented strategy. Protection may be accorded by tariffs, quantitative methods,
etc. However, quantities methods and such administrative restrictions as
licensing are very dominant under the inward looking strategy.
Nobody doubts today
that world competition can only grow in the future. Competitiveness has thus
become the name of the game. That is precisely what the Europeans have been
striving for as they develop their community.It is what Japan has been so
successful in doing with the growing number of links and agreements it has been
developing with virtually all nations throughout Southeast Asia.
Theoretical
model of import substitution
One of the policies and
strategies employed by developing economies to grow their industrial base is
import substitution. Import substitution industrialization strategy (ISI)
involves producing locally, goods that were formerly imported.ISI is a trade
and economic policy that advocates replacing foreign imports with domestic
production. It is based on the premise that a country should attempt to reduce
its foreign dependency through the local production of industrialized products.This
concept is based on the ideas of the Argentine economist Raul Prebisch. The
role of the state was obvious, state management of the economy should lead the
national industry away from its dependence on primary exports and give impetus
to the production of goods for the domestic market. The market was closed for
foreign companies, and national industries were forced to develop and maintain
the consumers´ wishes. The countries tried to get self-sufficient – independent
from the world market and a national industrialization at any price.
The state acted as engine
of development for the economy:
·
The state tried to set up the required
infrastructure (roads, dams, electrification, communication system, energy
etc.) to maintain the industry.
·
An overvalued exchange rate to keep
inflation down and imports expensive.
·
Nationalization of key-industries such
as iron, steel, wood, utilities and oil.
·
Protection of national markets against
foreign competition by imposing import taxes and state control of foreign
currency dealings.
·
Price controls and subsidized food to
keep the wages cheap.
The
outcome of import substituting industrialization (ISI)
The goals of higher
efficiency, productivity and more competitiveness – a development apart from
the pressure of the world market - were not been reached. The process of organizational,
technical, and social development of the industries was slow and highly
protected. During the 1950s the countries decided to open the market to foreign
direct-investments restrictively, which, after a short period of time, ruled
the more dynamical and technical sectors. The state controlled the raw
materials sector; the national private sector got less and less opportunities
to develop.
·
The policy was focused one dimensionally
on the industrial sector. The agricultural and the services sectors were
neglected.
·
The import substitution was aimed at
replacing imports from abroad, but nevertheless in most Latin American
countries the import of manufactured goods in fact increased. The terms of
trade got worse, caused by low prices for exported raw materials and expensive
imports. The industrialization could not keep up with the technical and
innovative development of the free world markets. As a result, new technologies
and machinery had to be bought from transnational companies.
·
The import substitution strategy led to
over-intrusive, bloated and inefficient state-owned enterprises (SOEs). Large
SOEs and private sector companies operated as monopolies/oligopolies within a
protected market.
·
Internal demand was not strong enough.
The needed goods got expensive and only affordable for the upper classes. There
was no need to upgrade productivity.
·
The bloatedness, inefficiency, and
corruptness of the state’s bureaucracy limited the scope of action and reforms.
·
The industrialization failed in ending
the social disparity, it got worse ever since. The unequal distribution of the
income supported this trend.
·
The ISI had massive influence on capital
formation and the financial system. State development banks and the expansive
investment for the ISI, financed by overseas credits, led to the debt crisis.
·
Inefficient SOEs, large state subsidies,
bad terms of trade, foreign credits and inability to collect taxes (low and
largely unpaid) led to fiscal deficits and inflationary pressures.
·
The countries’ economies got more and
more unattractive for foreign investors.
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