Global-Political-Economy.pdf

Global Political EconomyWritten by Günter Walzenbach

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Global Political Economyhttps://www.e-ir.info/2016/12/29/global-political-economy/

GüNTER WALZENBACH, DEC 29 2016

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Global political economy is a field of study that deals with the interaction between political and economic forces. At itscentre have always been questions of human welfare and how these might be related to state behaviour andcorporate interests in different parts of the world. Despite this, major approaches in the field have often focused moreon the international system perspective. A side effect of this has been the relative neglect of non-elites and an all-too-often missing recognition of ordinary individuals. While states remain central to international politics, they havegradually intensified their relations with multinational corporations and strengthened their engagement withinternational organisations. Naturally, these changes in the world around us have led to a certain rethinking of theway we understand and position individuals as actors in the global economy. To account for this, many scholars nowprefer to use the term ‘global political economy’ (GPE) over the more traditional term ‘international political economy’(IPE). Although both terms are often used interchangeably, using the word ‘global’ is important as it indicates a widerscope in political economy that reaches beyond relations between states.

There are various approaches to global political economy that span the political spectrum and often overlap with theperspectives covered in chapters three and four – though they are often formulated differently to incorporateeconomic factors. These range from state-centred approaches to Marxist approaches that argue that internationalcapitalism will lead to the end of the state due to capitalism’s inherent flaws. Arguably, it has been the liberalapproach that has given individual actors (rather than states or social groups) the centre stage for analysis. As such,liberal approaches to global political economy form the bedrock of this chapter as they offer a more tangible way topresent complex issues of global economics to a beginner in a way that is relatable.

Liberal approaches

The writings of liberal political economists have become so broad a church that they can include advocates ofuncontrolled markets as well as supporters of strong state intervention in the market. This is a reflection of some ofthe practical contradictions that Karl Polanyi (1957) first discovered in different historical manifestations of liberalideas in the aftermath of the industrial revolution in the nineteenth century. Consider, in this respect, whethergovernment policy takes freedom of choice away from individuals, or if the state should establish a legal order thatenables individuals to make choices and function as participants in a market system. Polanyi’s reasoning offers aninsight into the globalising economy of the twenty-first century. In this account, markets are not just abstractconstructs that settle demand and supply for goods through a specific price, as economists would make us believe.Markets are, and always have been, much more. They are social phenomena embedded in broader communities anddirectly connected with deliberate forms of state action. As a consequence, economic, social and political life isalways interconnected. In particular, the widely held belief in the advantage of a self-regulating market processcarries with it a basic contradiction in so far as it leads inevitably to a severe disruption of the social fabric in differentcountries. This disruption can occur because of rising levels of income inequality (why some are paid more thanothers), foreign takeovers of companies, or fundamental disagreement on what needs to be done during economicrecessions to prevent social decay.

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Global Political EconomyWritten by Günter Walzenbach

Essentially, Polanyi observed two interrelated processes that explain change in the international system. At first, freemarket principles dominate and the winners from liberal economic policies exert their influence for further politicalchange. Over time, however, the political pressures created will inevitably generate a counter-movement that isopposed to the direction of reform. Other social groups within society will articulate their interests, slow down thespeed of modernisation and demand a different form of economic management and policy making. Seen from thisangle, the global political economy of the twenty-first century is an attempt to embed globalising markets intransnational social relations – quite similar to what we observed historically in terms of social and economicdevelopment at the level of the nation-state.

The early heroes of the liberal approach were Adam Smith and David Ricardo. Smith argued in favour of governmentnon-interference and the superiority of market exchanges guided by the ‘invisible hand’ of the price mechanism. Thisis a process whereby consumers seek the best quality for the lowest price and this, in turn, compels successfulproducers to find the lowest-cost method of production. Ricardo explicitly added the gains deriving from a system offree trade built around the principle of comparative advantage. Accordingly, ‘under a system of perfectly freecommerce, each country naturally devotes its capital and labour to such employments as are most beneficial toeach’. And, ‘this pursuit of individual advantage is admirably connected with the universal good of the whole’(Ricardo 1817). From this point, international trade liberalisation has been seen as a useful mechanism allocatinglabour to its most productive uses allowing in turn a much greater consumption of goods than what would be possiblein the absence of such a system.

For Smith, the specialisation in working patterns and the division of labour also created new opportunities foremployees to achieve personal growth and professional careers. In the classic example, ten people working toproduce pins could produce more in total if they worked together, dividing up tasks and performing each one betterthan if they all worked separately. Where Karl Marx identified repetitive work patterns and exploitation, early liberalpolitical economy found skills, self-love and natural propensity (O’Brien and Williams 2010, 259). Taking thesearguments into the modern era, if governments across the world de-regulated economic activity, cut taxes for thewealthy, privatised and contracted out traditional state services, then unprecedented levels of economic growthwould follow. By allowing the free movement of capital, many more people can benefit from high levels of directinvestment even if employees are less mobile and more tied to a particular workplace. Thus, in the modern liberalworld view, often called neoliberalism, governments are expected to be active promoters and supporters ofglobalisation. Only left-leaning liberals, by contrast, recognise the increasingly global division of labour as responsiblefor rising levels of inequality.

What unifies liberal thinking in terms of global economics is an analytical inclusion of a variety of state and non-stateactors that form relationships of mutual dependence. Therefore, the historical focus of one country being dependenton another due to a surplus in a vital commodity, like oil or gas, has gradually given way to a much more complexunderstanding. This does not mean that the classic interaction between states has become obsolete, rather that it isenriched by including and explicitly recognising an ever-increasing number of other international actors such as thoseexplored in chapters five, six and seven. Hence, the policies of one international or regional organisation may rely onthe policies of another. This has been the case with the European Union and the International Monetary Fund in themanagement of the 2008 global financial crisis as they adopted joint programmes to assist states such as Ireland.Another example is the successful implementation of a global environmental policy by the United Nations thatbenefitted significantly from collaboration with Greenpeace, an international non-governmental organisation. In theliterature, however, it has been the multinational corporation (a private business operation with facilities and assets inat least two countries) that has received the most attention in the search for interdependent relationships acrossborders. Here, as elsewhere, the liberal account does show its broad remit, leaving room for positive evaluation aswell as critical reflection. Some liberals praise the overall benefit from competition for international investmentsplayed out on the back of the rivalry between states and multinational corporations. Others, by contrast, stress thecomparative disadvantage and limited success of less well-funded civil society actors when trying to changecorporate behaviour on a global scale.

Individual actors

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A convenient way to accommodate individual actors in the global economy has been to see them as economicallydependent workers rather than as citizens capable of bringing about social change. The economic globalisationprocess has modified this perspective to some extent, with greater recognition of the integration of a diverse, butnationally based, workforce into production patterns that can span several sovereign jurisdictions and world regions.This is in contrast to what was mentioned above in classical approaches that envisioned goods and servicesproduced from start to finish within a nation-state rather than anticipating the system of today where productionspans across borders. Technological changes have made it possible to control transnational production processesand bring together people from different parts of the world to add value to a specific good or service. By engaging inthis practice enterprises can transform their business into a global operation thriving on different wage levels and adiverse set of skills in the workforce. This naturally raises the question of how such changes in the organisation ofcapitalism influence the lives of everyday people. For example, if people produce only part of a good, such as amicrochip for a computer, how are their wages determined?

More recently, the 2008 global financial crisis has shed light on non-elite actors at the receiving end of failures in thebanking system and the reckless behaviour of financial elites. Not just blue and white-collar workers, but mortgageholders, house buyers, owners of small and medium-sized businesses, small-scale investors, shareholders, farmers,civil servants, self-employed people and students had to struggle with the implications of rescue efforts taking placesimultaneously in several of the major industrialised countries. In the aftermath of government intervention and bail-out measures, many businesses had to restructure and streamline their operations for the sake of cutting costs andmaintaining competitiveness. At the same time, individuals in their capacity as voters were asked to support far-reaching reform packages, austerity policies and new government strategies for job creation and employability. Non-elites have also been able to promote new alliances among a range of individual actors with more charitable goalssuch as income redistribution and equality in mind. Many left-leaning political economists have therefore placed theirhope in transnational solidarity and broader social movements unified under the banner of alter-globalisation – whichstyles itself as an alternative to neoliberal forms of globalisation.

A fundamental requirement for any such processes to work is an increasing number of people-to-people contactsdeveloping various types of cross-border relationships. International migration offers an example where Polanyi’s keyargument is relevant. Although governments have closely cooperated for the sake of liberalising the flow of goods,services, and capital, the same cannot be said about the flow of people. Restrictions to migration movements havebecome the rule rather than the exception. In a market economy, key decisions about investment, production anddistribution are driven by supply and demand. This has led, as a side effect, to diverging approaches to migrationcontrol within liberal political systems. Canada, for example, was the first nation to implement a points-based systemby which entry visas are granted on the basis of specialist skills or aptitude tests. Moreover, relative populationdensity and regional distribution is also taken into consideration when residency permits are linked to particular jobsor states within the federal system. Such restrictions on personal freedom are accepted precisely to achieve a bettergoodness of fit with the demand side for immigration and the requirements of regional economies. Only gradually,and over time, are individual restrictions reduced, thus slowing down the pressures for adaptation that is expectedfrom new arrivals as well as society as a whole.

Another example of the Polanyi-type adjustment process can be found in the area of philanthrocapitalism. Theseaccounts show personal characteristics and entrepreneurial spirit through the activities of billionaires such as WarrenBuffett, Bill Gates, George Soros and Mark Zuckerberg. This elitist circle is not just known for its wealth, but also forindividual ambitions to transcend the business world and influence political leaders in their decision-making process.Through the funding of global campaigns, each of these entrepreneurs has tried to make a difference in terms ofpoverty reduction, public health, educational reform and democratisation. In other words, corporate elites are activelytranslating individual success into altruistic behaviour on a global level. Broadly speaking, the institutionalarrangements surrounding philanthrocapitalism help to safeguard core business activities while branching out intonew sectors with genuine global reach and potential. The individual actors of this emerging system use their personalwealth to construct new global policy networks that specifically include individuals from governmental and non-governmental organisations susceptible to a particular vision of the future (Cooper 2010, 229). Therefore, personalgain, shareholder benefits or compensation for aggressive business tactics may not be at the forefront of theirconsiderations. Instead, corporate social responsibility in this interpretation can be seen as a form of enlightened self-

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interest, recognising the danger of a potential backlash from society at large to excessive market power and businessinfluence.

The Chan-Zuckerberg Initiative is a useful example of philanthrocapitalism. Its aims are to administer the donation of99 per cent of the married couple’s Facebook shares to a range of global projects, which amounts to tens of billionsof US dollars. Its founders chose the institutional form of a limited liability company (LLC) rather than extending themodel of a charitable trust or social fund to the global level. This ensures that as an organisational form it cancontinue to generate profit and donate money to specific political causes. More traditional non-profit organisationshave stricter requirements for the disclosure of information to qualify for tax exemptions, whereas LLCs have fewerrules in this respect and still allow for investment in profit-driven projects in addition to philanthropic activities. Thus,this type of business structure offers new degrees of flexibility to move shares between separate business operationsand to extract profits for the owners, if so required. In this way, the core of the Facebook business model thatgenerates the wealth held by Chan and Zuckerberg remains unchanged. The ambition to do good at a global level isclearly counterbalanced by the need to generate revenue and income through a lucrative commercial service.

Whether financially successful entrepreneurs with celebrity status can have a truly transformative capacity when itcomes to the finding of solutions for international policy problems is open to debate. Their activities, as observed atthe annual meeting of the World Economic Forum in Davos, Switzerland, at least suggest that they are increasinglyrecognised as important contributors to global public policy. Fame and fortune, however, is not always the maincriterion to be part of an international gathering. The independently organised World Social Forum is deliberately non-elitist in that it welcomes a broad range of civil society organisations and social movements to its annual convention.The 2016 meeting in Montreal, Canada, carried the slogan ‘another world is needed – together it is possible’ andaimed to ‘gather tens of thousands of people … who want to build a sustainable and inclusive world, where everyperson and every people has its place and can make its voice heard’. What both events have in common is thecontinuing effort to build transnational alliances that gradually dissolve any neat distinction between the public andthe private sphere and make the global count in the study of political economy.

The state and the multinational corporation

The industrialised state of the twenty-first century is going through significant stages of adaptation andtransformation in response to economic globalisation and losing its privileged position in the international system. Notonly the rising powers of Brazil, Russia, India and China but also multinational corporations represent a seriouschallenge to its once dominant role. There is now little expectation that major economies will adopt a light regulationeconomic policy style along the lines of the once dominant US model. Instead, the notion of the competition statecaptures best how since the 1990s government actors have created more business-friendly regulatory frameworksactively supporting internationally operating firms in their efforts to generate more growth and employmentopportunities. A well-trained domestic workforce becomes, in this context, an important asset to promote a particularterritory for the allocation of foreign direct investment.

Despite similar pressures to reduce government expenditure, states have also continued to diverge in the way theyprovide welfare for different social groups within their societies. It has become popular to privatise public servicesand leave the task of their delivery to companies rather than the state. As a consequence, the role of the civil servantis now similar to that of a business manager overseeing the spread of markets into new areas such as education,health and security. Yet, in line with the Polanyi-type adjustment process, government agencies and stateorganisations cannot entirely shed their responsibility for some of the negative effects of radical policies associatedwith market liberalisation, especially in trade and finance. Economic globalisation creates ‘winners’ and ‘losers’,which leads to the issue of inequality in societies. To win the support of the ‘losers’, governments typically have tooffer compensatory measures through income redistribution, retraining programmes or further educationalopportunities. The budgetary resources necessary for the funding of such activities brings into perspective taxationas a main attribute of modern forms of government as well as an indicator of state power relative to other actors inthe international system. As the international controversy around the tax bills of large multinational corporations likeAmazon has shown, there is a general public expectation that multinational corporations should make a faircontribution to the states in which they generate their profit. After all, for their business models to succeed they have

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to be able to draw on a well-developed infrastructure, an educated workforce and general health care.

Furthermore, through direct tax evasion, or the use of regulatory loopholes, large corporations may gain a decisiveadvantage over local suppliers operating in the same market sector and offering comparable services. For example,due to different tax laws within member states of the European Union, the video streaming service NetflixInternational was exempt from UK corporation tax despite having around 4.5 million paying customers in the UK. Inline with the letter of the law, it only paid 5 per cent income tax in Luxembourg. Although this is a regional example,multinational companies with global operations can also shift profits to countries where lower taxes apply bytransferring royalties between different branches of their business. What emerges is a picture of waning state powerwith global business actors playing off different tax regimes to their own advantage. Seen from their angle,multinational corporations are merely following the rules of the game as implemented by governments in their nationalsystems. If the rules change, their behaviour will change as well. Indeed, due to public pressures there seems to beevidence of a step change in this issue, at least in Europe where corporations like Google and Starbucks have beenreprimanded.

Multinational corporations in their interaction with civil society have sometimes been the target of non-governmentalpressure groups and trade unions, which call for boycotts due to breaches of international environmental or labourstandards. More frequently, however, liberal approaches have singled out their exceptional capacity to create wealthat a national, as well as international, level. Their cross-border investment activities in home or host states are oftenassessed positively as they ensure technology and capital transfer, develop managerial skills in diverse countrycontexts and ensure market access while simultaneously creating new jobs, thus providing a ‘social’ service in lieu ofthose typically seen as justifying the state and, therefore, excusing them from taxes. In the case of Apple this hastaken the form of a global supply chain by which the bulk of its products are designed in the United States, butmanufactured elsewhere – predominantly in China – due to lower costs. This is also an indication of the impacttechnological change in the production process has on the multinational corporation–state relationship. Seen from thePolanyi angle it is no surprise that when Apple’s chief executive officer Steve Jobs was asked by US presidentBarack Obama why manufacturing could not return to the US, he simply replied, ‘Those jobs aren’t coming back’(Duhigg and Bradsher 2012). Even the most powerful national politicians find it hard to deal with the socialconsequences of these technological innovations in the global market.

Towards global economic governance?

One popular way to react to the fundamental changes in the production sphere described above has been thesigning of regional and global trade agreements. At times this is combined with further steps towards marketintegration and intensified political cooperation among nation-states. The exponential growth of such deals hasgenerated a major controversy in the field about whether regional and global organisations constitute a new ideal forthe international economic system, making it possible to align the multitude of potential actors for the purpose ofcreating effective global policies.

The widespread appeal of regional governance is shown by the prominent examples of regional groupings looselymodelled on the example of the European Union. This can be seen primarily in the North American Free TradeAgreement (NAFTA), the Southern Common Market (MERCOSUR), the Association of South East Asian Nations(ASEAN) and the Economic Community of West African States (ECOWAS). The evidence available so far isinconclusive as to whether regional organisations can act as the final stepping-stone or, perhaps, present a majorstumbling block for the emergence of a genuine form of governance in the global system. In the case of the EuropeanUnion a prime purpose has been to build a single market, but in many areas this has necessitated a range ofmeasures to deal with some of the undesirable consequences of market liberalisation. For the sake of economicprosperity all European Union member states agreed to remove trade barriers and reform some of their domesticregulations, while at the same time devising measures through which particular groups within society are entitled todirect financial compensation. Through its own legislative process, the European Union has also been actively tryingto cushion some of the effects of an open market by enforcing environmental targets, health and safety standardsand guarantees for equal opportunities.

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The scope of the European Union has also revealed some of the difficulties of regional projects, with member statessometimes wishing to ‘opt out’ of certain areas when they are not in agreement with regional plans – such asadopting the euro currency. An extreme instance of this can be seen in the British vote to leave the European Unionin the 2016 ‘Brexit’ referendum. In a wider sense, negotiation rounds for global trade deals, as opposed to regionalones, have stalled and protectionist behaviour for whole industrial sectors has been on the rise. Although tariffs are atunprecedented low levels globally, it has proved much harder to further harmonise national business regulations andguarantee mutual market access. If the aim is to achieve higher growth rates, enhance consumer choice and createmore jobs, then hidden trade barriers have to be tackled much more effectively at the global negotiation table. Theliberal ambition to take transnational civil society more seriously also comes at a price. Keenly aware of the historicalrecord and detrimental effects of free trade deals, critics are deeply concerned about the repercussions that newlarge-scale, inter-regional agreements might have. In different parts of the world voters and interest groups havebecome increasingly sensitive to the impact of trade liberalisation on labour standards, worker rights, incomedistribution and environmental sustainability.

More generally, there is a problem with the very institutions of global governance in how they settle a trade-offbetween their democratic accountability and effective economic policymaking. In the case of the World TradeOrganization (WTO), with 164 member states, the implementation of trade rules is not easily reconciled with thedemands articulated by international non-governmental organisations such as Greenpeace. These frequently holdthe view that the management of international organisations has been captured by a few powerful countries,undermining their role as honest brokers, mediators and enforcers of joint policies (Stiglitz 2002). At the same time,not everyone agrees that giving non-state groups advisory status and better access to the organisation’s internaldecision-making would solve the dilemma. Due to the intergovernmental character of the World Trade Organization,its democratic legitimacy is set in a ‘one country, one vote’ system where the governing body consists of tradeministers delegated by the member states.

From the angle of democratic accountability things look even more problematic in other global economic institutions.Most notably, the International Monetary Fund (IMF), which is charged with the task of ensuring economic stabilityaround the world. The International Monetary Fund allocates voting rights proportional to the size of financialcontributions made by its 189 member states. At grassroots level critical voices view this as fundamentallycontradicting the organisation’s goal of global policy change and economic reform. They see a desperate need fornew social mass movements to address the failings of deregulated capitalism, build working arrangements for globalgovernance and arrive eventually at a fairer world. Despite pessimistic assessments of the viability of such a systemof global governance, an element of optimism can be gained from historical experience of bottom-up communitybuilding and the transformative power of human agency (Hale et al. 2013). Although there is always the risk that thepolitical adjustment process at transnational level may offer too little too late, the historical work of Polanyi suggestswith a degree of certainty that, under exceptional circumstances, previously passive individual actors – the ‘silentmajority’ in conservative terminology – can proactively instigate large-scale institutional change.

Conclusion

The examples presented in this chapter highlight the diverse social and political adjustment processes that a largelyunregulated global market system necessarily entails. While we certainly live in a global economy, for the time beingwe lack a common response to the challenges this brings. The analytical turn from the international to the global, asmentioned in the introduction to this chapter, alerts us to the fact that change has occurred – though measuring itstrajectory is difficult due to the fragmented array of actors and agendas evident at the global level. Liberalapproaches stress the inevitability of economic globalisation but place some hope in the responsiveness of particularglobal actors as long as their activities are made accountable. Accordingly, praise of market mechanisms as a forcefor good across the globe has been matched by ever-growing demand for reforms enabling ordinary people to sharemore the spoils of the system rather than being exploited by it. As long as democratic processes such as electionsare strongly tied to domestic political communities, a still-evolving global market system built around liberal principlescontinues to present a serious challenge. If for our own individual benefit we believe there should be an element ofcontrol over this process, then regional and international organisations with the power to devise and implement globalrules are the natural place to look. Without denying the impact of other factors such as philanthropic acts, or states

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acting alone, these are a second-best solution in the absence of an effectively coordinated global economic policy.

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About the author:

Gunter Walzenbach is Senior Lecturer in European Politics at the University of the West of England. His mainacademic interest lies in the interaction between political and economic institutions for the purpose of social problemsolving.

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