Tag: international political economy

The Chart That Explains Your World

Everyone agrees China is a rising power. Some people think it can rise indefinitely; some people think its rise will decelerate; and some think that its rise is illusory. But it’s hard to put even the People’s Republic stellar growth rates into perspective without taking a longer view.

The chart above shows the ratios of Chinese to other countries’ GDP per capita. It’s based on painstaking work by Angus Maddison to reconstruct long time series about output. There are reasons to think that Maddison’s estimates before 1900 are a little speculative, but they are widely agreed to capture the broad picture fairly well.

Interpreting the chart is straightforward. The y-axis shows how many times richer each country or continent is than China. In 1960, for instance, the United States was about 20 times as rich per head as China, while Britain was about 15 times as rich and Japan and Russia about 8 times as rich. The chart is showing us, then, just how far behind the rest of the world China had slipped. And note that a lot of that is due to the early Communist regime; the Cultural Revolution and the Great Leap Forward are visible in the time trends as the post-World War II peaks in the ratios (since Chinese output fell dramatically as Western and Soviet output continued to rise).

Over the past 30 years, however, those ratios have plummeted. The United States and other developed countries are still much richer than China, but they are no longer vastly richer. Those falling ratios portend just how dramatic the shift in the global distribution of wealth, and of power, from the North Atlantic community will be.

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Walmart still isn’t green

Luftverschmutzung in Liaoning China
Photo credit: lhgszch on Flickr.

Back in December 2009, I wrote a post for the Duck called “Wal-mart Isn’t Green.” Jared Diamond had written a provocative op-ed about various green business initiatives for the NY Times and Steve Walt had blogged about it too.

I recently thought about that exchange because the December issue of The Atlantic included an interesting article by the Asia Society’s Orville Schell called “How Walmart Is Changing China.” Much of the article considers burgeoning environmental initiatives involving Walmart and China:

The world’s biggest corporation and the world’s most populous nation have launched a bold experiment in consumer behavior and environmental stewardship: to set green standards for 20,000 suppliers making several hundred thousand items sold to billions of shoppers worldwide. …one thing is already clear: how Walmart and China interact with each other over the next decade will be critical to the fate of the planet’s environment.

Schell mentions three very ambitious green goals Walmart has established for itself:

1. To be supplied 100 percent by renewable energy.
2. To create zero waste.
3. To sell products that sustain our resources and environment.

I’d encourage everyone to read the piece to get a feel for the scope of the problem and for interesting discussion of the various initiatives underway.

I’m primarily interested in the article’s conclusion. Will this work?

On the final page, Schell finally comes to the question that has been nagging at me for some years — as my 2009 blog post accusing Walmart of “greenwashing” made clear:

However smart, prescient, and successful Walmart’s sustainability efforts actually turn out to be, just how “sustainable” is the whole bloody global-retail proposition that lies at the heart of the company’s amazing progress?

For the first cut at an answer, Schell quotes Pulitzer Prize-winning journalist Edward Humes, who recently wrote a book about Walmart’s environmentalism:

“When I started, I didn’t imagine I would be convinced that Walmart was green. And actually, they are not green, but they are a lot better than they were. And the efforts they are making are influencing not only their suppliers, but other businesses as well. Now Walmart is acting something like a private regulator. Nonetheless, the nature of their outsourced business model is not, ultimately, sustainable.”

And Schell’s final thoughts about both China and Walmart are certainly pessimistic:

In fact, one could say the same thing about China, which—after so many decades of defiant proletarian opposition to capitalism, consumerism, and American imperialism—has embraced the American-style market and is ardently following the Walmart path to prosperity. Indeed, allowing, even encouraging, people to consume as much as they want, or can, has become one of the Chinese Communist Party’s key strategies for political legitimacy and social stability. Party leaders may label their version of development “scientific” or “sustainable,” but it’s still development. The bitter reality is that even if unrestrained consumerism becomes less environmentally destructive per unit of production than it was in the past, it is still unsustainable in the long run. So even as this most innovative of corporate and statist green strategies may represent an environmental breakthrough and good business for Walmart, and good politics for the Chinese government, it may nonetheless end up being very bad business for humankind.

In the long-run, consumers and businesses alike must figure out ways to operate sustainably. I suspect the phrase “global supply chain” isn’t going to fit into that plan very well given the inherently large volume of energy and other resource usage associated with moving and consuming products around the world, including food.

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Nein! The EU is not the Fourth Reich!

Why would anyone even suggest such a thing?

THE [Irish] GOVERNMENT has complained to the European Commission over the release in Germany of a document disclosing confidential details about new taxes to be introduced in Ireland over the next two years. In a deeply embarrassing development the document – identifying austerity measures of €3.8 billion in next month’s budget and €3.5 billion in budget 2013 – was made public after being shown to the finance committee of the German Bundestag yesterday. The document, seen by The Irish Times , confirms the Government plans to raise VAT by 2 percentage points to 23 per cent, which would generate €670 million. Next month’s budget would also contain a €100 a year household charge, yielding €160 million, it says.

I find this particularly interesting, given that I spent last Monday at a conference entitled “The Decline of the European Empire.” In my presentation, I argued that it doesn’t make a ton of sense to talk about the EU as an “empire,” except — and this is a pretty important except — when governments in the periphery are reduced to subalterns implementing policies preferred by Europe’s polycentric (albeit German-inflected) core. Via Henry Farrell.

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State of the Field, Redux: What’s Wrong with IPE?



There are a few things that make me really hot under the collar. The first is the unending 100+ degree summer heat in central Texas. The second is the unending debate on the “state of the field”, in particular the state of the International Political Economy (IPE) discipline. It is a topic near and dear to my heart (IPE, not Texas heat). A few years ago, I was so provoked by Benjamin Cohen’s trenchant intellectual history of IPE and the reactions that followed that I put together a special issue on the so-called “American School of IPE” in Review of International Political Economy. This was soon followed by a special issue on the British School of IPE, edited by Nicola Phillips in New Political Economy. Finally, in hopes of achieving some closure on all the kvetching and navel-gazing, Nicola and I combined the two special issues and solicited a new round of essays, which came out last year as a book on the Past, Present and Future of IPE. At that point, I decided to stop worrying about the state of the field and return to more rewarding, substantive research.

But Dan’s blog from a week ago on the state of IPE today brought all the angst back. Dan raised a simple, yet powerful question: why have our top journals (specifically International Organization) had so few articles on the global financial crisis? For that matter, why do the top journals have so few IPE articles on anything of real importance to the world economy today?

Rather than stew in my juices and provide a snarky reply, I turned to some of my uber-talented IPE friends with these questions. Here are two great responses I received from Mark Blyth and Thomas Oatley, which I reproduce here, with my thanks.

From Thomas Oatley, Associate Professor at UNC Chapel Hill, author most recently of a great IPE piece in IO, “The Reductionist Gamble: Open Economy Politics in the Global Economy“:

Perhaps no research directly relevant to the American financial crisis has appeared in IO because mainstream American IPE values general knowledge over case-specific knowledge. It believes further that general knowledge is produced through the statistical analysis of large samples. David Singer, in a recent APSA Political Economy section newsletter, nicely summarizes the kind of research this orientation implies. “From a research design perspective, a reasonable way forward is to test hypotheses about the conditional impact of capital inflows on the probability of financial crises in the developed world. The scope and quality of regulation are likely contenders for inclusion in such a model. The cases of Australia and Spain suggest that large capital inflows might be less destabilizing if the banking system faces strict capital requirements and prohibitions against non-traditional banking activities. Other possible conditioning variables include, inter alia, resource endowments, partisanship, and corporate governance.”

So why hasn’t IO published research along the lines Singer proposes? I suspect that such research has yet to appear because standard statistical techniques are not well suited to the complex causality that characterizes banking crises. This causal complexity has two dimensions. The first is equifinality: multiple causal paths produce banking crises. Post liberalization “capital inflow bonanzas” that drove the Scandinavian crises is a different mechanism than the “post-Louvre over-valued yen with abundant domestic savings” mechanism that generated Japan’s banking crisis in the late 1980s, which is a different mechanism than the over-exposure to Greek sovereign debt that underlies current weakness of German banks. All three mechanisms might be different than the “zero private savings, large government deficit and global savings glut of historic proportions” mechanism that caused the US crisis.

Second, causality may be conjunctural. That is, rather than having a consistent effect across cases, the impact of a variable might depend on how it combines with other factors. An over-valued currency on its own may not increase the probability of a banking crisis, but an over-valued currency in combination with surplus domestic savings and a particular regulatory structure may have caused Japan’s banking crisis. Multiple conjunctural causality is challenging for standard statistical techniques, although techniques for managing these challenges do exist (see Bear Braumoeller. 2003. “Political Complexity and the Study of Politics,” Political Analysis 11: 209-233).

Why haven’t quantitatively oriented IPE scholars applied techniques such as Braumoeller’s to the study of banking crises? I think the problem may rest in the rarity of major banking crises. According to Reinhart and Reinhart, only 5 major systemic banking crises occurred in developed countries between 1973 and 2007. If three or four distinct causal mechanisms are at work in these five crises, it will be difficult to find statistically significant configurations among sub-sets of crises.

In short, I would argue that no articles directly relevant to the financial crisis have appeared in IO because the field attaches little value to studying the US crisis in isolation, and the banking crises with which it might share common properties are so infrequent that statistical techniques are unlikely to identify general relationships. As a result, an event of supreme global importance gains very little attention from American IPE scholars.

From Mark Blyth, Professor at Brown University, hard at work on a book about the financial crisis that is bound to be a classic in the field:

There are more than a few IPE scholars who have written about the financial crisis and its aftermath. Its just that they have done so in venues that are not as cumbersome as traditional peer reviewed journals. There are two problems with looking to such journals as venues.

The first is the ‘hit the moving target’ problem. I wrote a piece in 2008 called ‘this time it really is different’ on the 2008 crisis and the EU, and by the time I got editor comments, it had morphed into the Euro crisis. Add publication time-tabling into this and almost anything you can say about this is redundant. By the time you revise it to catch up its redundant again. Economists (as usual) have an advantage over us with sites like the NBER and VOXEU designed to get it out quickly, so they get the press.

The second is the ‘discipline of discipline’ problem. Frankly, younger IPE scholars are taught to work with quant data and not say anything beyond it. That’s the skill set. They are taught to do ‘tractable’ questions. What’s tractable about the GFC? That’s a problem when past data is absolutely no use in discerning future trends beyond broad Reinhardt and Rogoff ‘lets dump medieval Spain and modern France in the same data set and talk about defaults’ approach.

Others can talk about intellectual hegemony and the like, but as someone who has sat on a board for many years, I can say its the submissions or lack thereof the is the real killer. Why aren’t IPE journals publishing crisis work? Possibly because no one is submitting it? Or because its much more bang for the buck and much faster to publish in Foreign Affairs or on line?

One last thought. All journal submissions need to be tied into disciplinary debates in order to pass the sniff test at a journal. So what is the debate that the crisis ties into that IPE has a track record on? US decline (got that wrong several times)? Institutional change (most popular models are all about incremental change while the world gets smacked by a Black Swan every week)? Diffusion? (of what, panic)? Human Rights and Trade? (relevance?)

The fundamental problem is that IPE imagines a world quite unlike the one we actually inhabit much of the time. As a consequence when we are asked to comment on the world we actually inhabit, we have little to say.

Finally, I should note that there are in fact some great works out there by IPE scholars that directly hit on the current global financial crisis. I won’t try to be comprehensive, in fear of overlooking several obvious examples, but I’ve read (or re-read) three in the past month that are simply terrific: Herman Schwartz’s Subprime Nation; Randy Germain’s Global Politics and Financial Governance, and Eric Helleiner, Stefano Pagliari and Hubert Zimmermann’s (eds) Global Finance in Crisis.

If anyone out there can point to other great sources – in journals and books – please send in your suggested readings list.

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The 1950s are calling — they want their theoretical debates back

Daniel Drezner takes another stab at the Brooks-Krugman-Winecoff-Drezner-Farrell dustup. I merely wish to make a few points:

  • Most voters are information specialists; they do not tend to specialize in the intricacies of policy debates. Thus, they are unlikely to know, for example, the actual distributional implications of the Bush-era tax cuts or understand the details of Iraq.
  • Many of the more engaged voters are partisans; they process information through the cues they receive from party spokespersons. This is why, for example, a conservative health-care plan rapidly morphed into radical socialism over a period of roughly two years.
  • Political elites, opinion leaders, and special interests know both of these facts, and they operate accordingly. Hence, while Dan is correct that TAARP received bipartisan support, he needs to ask why it became politicized along partisan lines. Or why it is that misleading cues predominate in political discourse. 


Dan doesn’t, as far as I can tell, disagree with the larger point that Henry and I make about the absurd character of many taken-for-granted mechanisms and assumptions in International Political Economy (IPE) — as well as significant branches of Security Studies. So I guess the “real world” stakes need to be dragged onto the table: whether or not our system of government is badly compromised by the asymmetric influence of various sectoral and special interests.

I didn’t use to think so, but I’m coming around to the view that it is. A significant chunk of what our political process accomplishes is the enablement of rent-seeking. And that’s all Brooks’ tirade against the influence of the demos amounts to in the end: a pseudo-intellectual justification for the extraction of greater rents by the powerful.

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Riverdance your way through through the Irish Bailout in two minutes: Taiwan animation style!

From NMA – those who brought you the Tiger Woods Video, and the USA-China Currency Crisis Rap Battle video comes the Ireland Bailout video (which I can’t make fit in the frame! Edit: Fixed!)

As an IR blogger with an interest in econ, you might be interested in this animated take on Ireland’s current state of financial distress. I can’t vouch that a leprechaun really charged into Biffo’s office as he was taking in a Guiness, but we tried our hardest to condense the situation in less than two minutes.

Please watch it if only for the signs the protesters are holding at the end.

Despite the email, I don’t pride myself on a knowledge of economic issues. (My bank account can attest to this. Pension-shmention, I want shoes!) However, as this is the internet, I will add my uninformed £0.02.

While I can’t resist the Riverdancing corporate investors, I think the video may end up too pessimistically. Ireland is in a lot of trouble to be sure, but one has the sense now that at least all of the dirt is on the table. This is unlike Greece, for example, where nobody seems to actually know what’s going on or where the problems actually end. (Michael Lewis’ take on this in Vanity Fair is amazing.) One can believe (or hope) that there won’t be many more nasty surprises.

So while I’m not trying to downplay the setback that this bailout represents, I remain slightly optimistic in that I believe that there is now at least a foundation from where Ireland can make a comeback (albeit at a tough price.) It has a well educated and entrepreneurial population. It seems willing to do whatever it takes. And it has certainly seen worse than this.

As for me, I’m just going to keep compiling these videos until I have enough to use them to replace my first year lectures.

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Currency Rap, or “your IR youtube video du jour”

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Seeing the whole board on financial reform

Clive Crook does:

The problem is not just that specific rules – higher bank capital requirements, for instance – threaten profits and are therefore opposed. It is that all governments see themselves as partners of their industries in world competition. Regulators seek not a level playing field but one tilted to their own groups’ advantage. This is not a hidden bias. It is proudly advertised. A government that did less than stand up for its own companies would be seen as failing in its duty.

In finance, a footloose industry, this striving for regulatory advantage undermines rules imposed by other countries. Financial regulation will underperform until regulators work more closely with counterparts abroad than with those they police.

[…] Pieces of the needed reforms are reasonably clear. They include higher capital and liquidity requirements, linked to size and to the credit cycle. Orderly resolution arrangements must be designed for non-bank financial groups as well as banks. There is growing support for requiring contingent capital (bonds that convert to equity under stress) and subordinated debt (increasing creditors’ exposure to writedowns). These should strengthen market discipline over risk-taking.

Such measures will meet resistance, especially if done unilaterally. The industry will cry competitive disadvantage. International co-operation is therefore essential. But discussions among regulators are moving slowly. While America’s turf fights remain unresolved, it is not even clear who should speak for US regulators.

I would agree with Crook. If policy makers focus too much on the domestic arena their best efforts will be doomed to fail. Not only must they take into consideration how the effectiveness of their reforms will be partially determined by similar actions in other countries, but they should be using the international arena to their advantage.

One way would be to use international negotiations and commitments as a way to gain leverage over the powerful interests of the financial industry who see less regulation (even sensible regulation) as against their interests. There is a rich literature on the use of international organizations and agreements as commitment mechanisms, a way of “tying one’ hands” so that what are normally tough reforms domestically due to lobbying and special interest pressure become easier to resist. If the Obama administration wants to pass sensible financial reform it might consider focusing more on finalizing international standards across, say, the OECD in order to shift the domestic playing field to its advantage.

[Cross-posted at Signal/Noise]

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Hamiltonian Failure?

Yesterday, my class on U.S. Foreign Policy considered Walter Russell Mead’s Hamiltonian School — ostensibly an American realism grounded in the aligned interests of the state and business.

The Hamiltonians have their roots in Alexander Hamilton. They have always believed that the American national strategy should be modeled on the British system: use your trade to make money through commerce; government should support large business; your trade policy should be an instrument of your economic development, however that benefits you most; and then, the revenues from your international trade will support your military expenditures and interests while preserving political stability at home.

For most of U.S. history, argues Mead, Hamiltonians were mercantilists — favoring “open door” trading policies over “free” trading policies. However, after World War II, the Hamiltonians became free traders and thus embraced GATT, then WTO, NAFTA, etc.

After outlining Mead’s arguments to the class, I also presented some data that questions whether the new laissez-faire Hamiltonians have made the right call. Does the free trade system they’ve helped create build American wealth?

Dan Drezner might disagree with the limited analysis I provided, but many of the students shared the concerns I was raising.

I started the challenge with the question famously raised by Robert Reich: “Who is us?” Then, I asked the students to consider (from the Hamiltonian position) if the American state has perhaps gone too far in removing itself from global capitalism — effectively benefiting transnational corporate interests (and mercantilist states) at the expense of U.S. interests.

Essentially, the U.S. trade deficit has ballooned to historic levels, a substantial portion of that deficit is linked to trade with China. A huge problem is the loss of America’s manufacturing base:

the U.S. manufacturing sector never emerged from the 2001 recession, which coincided with China’s entry into the World Trade Organization. Since 2001, the country has lost 42,400 factories, including 36 percent of factories that employ more than 1,000 workers (which declined from 1,479 to 947), and 38 percent of factories that employ between 500 and 999 employees (from 3,198 to 1,972). An additional 90,000 manufacturing companies are now at risk of going out of business.

The “continental realist” John Mearsheimer argues that the U.S. has had a flawed China policy for a very long time. Yet, as the data reveal, the U.S. is helping to make China a stronger future great power competitor.

In the long run, the U.S. might be able to survive the loss of its manufacturing base — thanks perhaps to its innovative information technologies. However, in the midst of a deep recession (with real unemployment at near 20%) and huge trade deficits, the current situation seems troubling — at least it should for Hamiltonians worried about American national interests.

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Susan Strange was (mostly) Right

I just re-read Susan Strange’s article, “The Westfailure System” in the Review of International Studies 25, 3 (July 1999). In either early 1999 or late 1998 (depending on the editorial schedule of RIS), she wrote:

“I have put the financial failures of the state-based system first because my current research has convinced me that it is the most acute and urgent of the current threats-without-enemies. If we do not find ways to safeguard the world economy before a succession of stockmarket collapses and bank failures eventually lands us all in a 20-year economic recession — as the history of the 1930s suggests it might — then no one is going to be in the mood to worry overmuch about the longterm problems of the environment.”

I doubt she would be rejoicing at the accuracy of her predictions about the fate of the Copenhagen climate talks in the face of the global financial crisis. OK, maybe not a 20 year recession, but the insight is still pretty good.

What I find less satisfying in the article, but only because the argument is only sketchily developed, is her “What is to be done?” section. She asks for the emergence of a viable opposition to the hegemony of a transnational corporate class (TCC), an opposition grounded in “an emerging global civil society”. Not anti-market or anti-business (she draws a distinction between small and medium-sized firms and the TCC), but transcending the state and existing multilateral institutions. She concludes with a message to academics:

“We have to escape and resist the state-centrism inherent in the analysis of conventional international relations. The study of globalisation has to embrace the study of firms no less than of other forms of political authority. International political economy has to be recombined with comparative political economy at the sub-state as well as the state level. It is not our job, in short, to defend or excuse the Westphalian system.”

Go Susan. Which is why the sort of increasingly rare investigative journalism evident in today’s Washington Post story about AIG is worth highlighting — great material for tracing the inner workings of the inciters of the herd, the “animal spirits” in action…
I suspect you enlightened readers of the Duck already know this stuff (Strange herself repeatedly says that the ideas she is presenting are “kids-stuff”), but I would be interested to hear comments on whether the global civil society approach has really gained any traction in the last decade.
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Voting with their feet

Here’s an interesting factoid: For the first time since the Great Depression, the migration of people from the less-developed to developed countries may have reversed. Remittances are expected to be dropping next year by 8 percent. On the other hand, many of the returnees have skills and capital, and that may help back home.

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Query: IPE and Blogging

Via sitemeter I recently found my way to IPE at UNC. Which leads me to wonder: I know there’s a fairly robust subculture of security blogs–and camps within that subculture, such as COIN and nG Warfare* blog communities–but what about IPE?

*With n equaling a value between four and six, inclusive.

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Can recession cause regime change?

Joshua Kurlantzick recently argued that the global economic downturn might spell doom for a number of autocratic governments around the world. Most, he argues, have staked their legitimacy on economic performance. Dramaticaly reduced world demand for consumer goods and energy threatens states like China, Russia, and Venezuela (and perhaps also Iran and other OPEC states):

Modern autocracies are very different from those of the past. Rather than ruling by strict ideology, ruthless internal police, and tight control of information, authoritarian regimes like Beijing and Moscow have remained in power primarily by making an implicit bargain with their most critical middle-class citizens — you might not have freedom, but you will have money. As long as the broad middle class, which is where the most dangerous dissent would take hold, is gaining ground economically, the regime is safe.

So while in the West, leaders worry that the global economy faces a second Great Depression, such an economic crisis poses a major threat to some of the world’s most resilient autocracies. A strong economy was their only backstop. Now, starved of the growth that keeps them in power and unable to repress their people as old-fashioned dictators did, these autocracies may have nothing left to fall back on.

He concluded with even stronger language:

The Great Depression fed dangerous new autocratic ideologies like fascism and communism; a second Great Depression could destroy them. While the economic crisis will cause untold human suffering in these and other countries, it is quite possible that, on the other side of it, we will see the end of that distinctive phenomenon of the late 1990s and early 21st century: the growth autocracy. And that, at least, would bring some light to a financial dark age.

That sounds almost hopeful, doesn’t it?

However, at least for China, James Fallows rejects this analysis in the April Atlantic:

Why do I think the Chinese have good reasons for hope?

One answer lies in the realm of straight economics. Some of the lost demand is sure to be picked up within China itself, thanks to a stimulus plan that, at some 4 trillion RMB (about $600 billion), is proportionately much larger than the one proposed by the Obama administration, because the Chinese economy is so much smaller than America’s.

Fallows then proceeds to explain the superior position of Chinese banks — they can (and will) lend money to prime the economy. Other sectors of the economy also have lots of tools and resources, he argues.

Fallows continues by rejecting the sociology and politics undergirding Kurlantzick’s thesis:

Beyond straight economics, the “China is over” hypothesis seems to miss important cultural and political realities. Its unspoken premise is that average Chinese people just barely tolerate the social bargain the government now offers—limited freedom, potentially unlimited wealth. So if the regime ever falls short on its material promises, the deal will be off and people will rebel.

This does not square with what I have seen. I have often wondered why so many people in different roles and regions in China seem vivid. The answer has to be more than contrast with my own blandness. I think it is because being in China today is like being in Western Europe in the 1950s. No one’s family story is dull or uneventful. People doing routine jobs have been through great hardships and dramatic swings of fate.

He then regales readers with stories of ordinary peoples’ prior reactions to the Cultural revolution, natural disasters, and other serious hardships in China. The people will tolerate the economic downturn and the government will survive. Indeed, the final section of his article explains how the recent downturn actually creates new opportunities for future Chinese successes.

He concludes with an interesting thought: is the U.S. similarly taking advantage of opportunities presented by the current downturn?

FYI: Over at my personal blog, I’ve posted (and critiqued) a couple of other pieces on the potential “upside of the downturn.” And like Fallows, I worry that some opportunities will be lost. For instance, though reduced energy consumption means less greenhouse gas emissions globally, it might also mean less government spending on alternative energy and attention directed away from environmental problems.

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G-20

The G-20 is wrapping up in London, and they seem to have successfully issued a communique that is actually more than straight boilerplate non-commitment.

My hope is that the reforms discussed for the IMF begin a re-fastening of the embedded-liberalism that has served as the foundation of the international order and an institutionalization of this new compact.

The global economic turmoil is revealing two key structural facets of the international order. First, the US remains the Hegemon. In the end, the world is looking to the US for leadership, and its clear that only the US can provide the economic and political leadership to pull the world out of the current crisis. Second, and conversely, while the US is probably as powerful as its ever been, the price of hegemony is skyrocketing, and other actors are rapidly accruing power as it diffuses away from the US. Quite simply, the current US trajectory seems unsustainable, and it requires a new grand-bargain it is to reach a new sustainability. Immediate evidence of this new structure: the G-20 as the forum for rescuing the world’s economy.

As the NYT reports:

the leaders of nearly two dozen of the world’s largest economies agreed Thursday to a broad array of new fiscal and regulatory steps, in a desperate effort to revive the paralyzed global economy.

At the conclusion of the first economic summit meeting to rivet world attention in decades, Prime Minister Gordon Brown of Britain announced that the leaders had committed to $1.1 trillion in additional loans and guarantees to finance trade and bail out troubled countries….

Among the steps Mr. Brown detailed are strict new regulations on hedge funds and rating agencies, as well as a crackdown on tax havens, which will be publicly named and subject to sanctions if they do not agree to share tax information with the authorities of other countries.

The Group of 20 also agreed on new global rules to cap the pay and bonuses of bankers, as well as a common approach to dealing with the toxic assets on the balance sheets of the world’s banks. That is an issue that has bedeviled the Obama administration and other governments.

Giving teeth to an endorsement of free trade at the last summit in Washington, the countries agreed to “name and shame” countries that erected trade barriers. They also pledged $250 billion in financing for trade.

The most concrete measures relate to support for the International Monetary Fund, which has emerged as a “first responder” in this global crisis, making emergency loans to dozens of countries.

The Group of 20 pledged to triple the resources of the Fund to $750 billion — through a mix of $500 billion in loans from countries, and a one-time issuance of $250 billion in Special Drawing Rights, the synthetic currency of the Fund, which will be parceled out to all its 185 members.

The BBC details the reforms to the IMF:

The IMF is also set to have a bigger role in preventing future crises, by developing an early warning system for financial problems, and taking a larger role in looking at the problems of the financial sector as a whole, in conjunction with a new global regulator, the Financial Services Board.

But the biggest changes in the IMF will come after 2011, when it has been agreed that there will be a review of the voting structure. That could lead to the US losing its veto power, while China and other emerging countries get a bigger voice.

It has already been agreed that in future, the convention that the World Bank and IMF must be headed by an American and a European respectively will be abandoned.

In return, China will be asked to lend some of its reserves to the IMF – and will continue to push for the idea that the SDR will become a real reserve currency, ultimately replacing the dollar.

The changes to the resources and the role of the IMF are historic and perhaps the most important outcome of the G20 summit.

But it must be borne in mind that providing more resources for the IMF can be only a short-term solution to the immediate crisis now engulfing developing countries.

While full reform remains more of a fantasy than reality, this is certainly more than a nod in that direction.

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Replace the Dollar?

A friend writes,* “What the end of hegemony looks like…”

In another indication that China is growing increasingly concerned about holding huge dollar reserves, the head of its central bank has called for the eventual creation of a new international currency reserve to replace the dollar.

In a paper released Monday, Zhou Xiaochuan, governor of the People’s Bank of China, said a new currency reserve system controlled by the International Monetary Fund could prove more stable and economically viable.

A new system is necessary, he said, because the global economic crisis has revealed the “inherent vulnerabilities and systemic risks in the existing international monetary system.”

On the one hand, true. China’s over $1 trillion in dollar-denominated reserves aren’t as safe as they once were, and a devaluation of that asset through inflation would not be good for China. But, where else are they going to go?

While few analysts believe that the dollar will be replaced as the world’s dominant foreign exchange reserve anytime soon, the proposal suggests that China is preparing to assume a more influential role in the world. Russia recently made a similar proposal.

Lets look at this more closely. The Dollar has its privileged position in the world economy because a) many economists believe that the world economy needs some sort of stable reserve currency, b) the US is willing and can afford to maintain such a strong currency, and c) the rest of the world has left this arrangement unchallenged and benefits from it. Much of this is classic Kindleberger–the world economy needs a stabilizer, one stabilizer, to stabilize the global economy as market, currency, and lender of last resort. The US is that stabilizer.

The third of those reasons–acceptance by other world powers–is now under some degree of threat as China starts to fret about its dollar position. However, absent another actor willing and able to play the role of stabilizer, everyone–China included–risks putting themselves in a significantly worse position should the dollar lose its pride of place in the international economic system.

China suggests that the IMF’s SDR form a new reserve currency. This indicates they really aren’t all that serious about actually doing anything to dislodge the dollar. For one, to have a currency able to act as a reserve currency requires backing of a stable, authoritative, empowered entity that can manipulate fiscal and monetary policy as needed to protect the value of its currency. We call this a sovereign state. To give the IMF such rights would make the IMF a de-facto global economic sovereign. China has no demonstrated desire to create supra-national authority, not at the UN, nor the IMF. Moreover, there is a significant and real cost to maintaining a strong reserve currency. The strength of the dollar makes the US a great destination for products–we can afford to buy others’ cheap stuff. A significantly de-valued dollar (coupled with an increased value of other currencies like the Yuan or Yen or Won) would be a disaster to economies that rely on exports. China would need to show that it is willing and able to take on a stabilizing role in the global economy, which just doesn’t seem in the cards as of yet.

Perhaps, though, this might be read as an attempt to gain leverage:

The timing of the Chinese announcement, analysts said, could also be aimed at giving Beijing more leverage to negotiate with the United States and other nations in London on trade and on proposals about how to stabilize the global economy.

All that said, it would be foolish for US policy planners to simply ignore China’s (and others) growing dissatisfaction with the Bretton Woods legacy system that now constitutes the global economy. The fundamental bargains that made such a hegemonic system possible (cf Ikenberry) have become frayed, and while neither China nor the EU (nor India, for that matter) are poised to overthrow US hegemony in the short term, they can clearly erode US hegemony by driving up the cost of acting as a stabilizer. In the medium term, this imposes a cost on everyone, as the global economy (and security order) falters without a clear stabilizer, but from a realist perspective, the relative gains (or in this case declines) could benefit the challengers to US hegemony–at least that’s what they are betting on.

*as in, a friend of mine forwarded me a link to that article with the caption. I have never met David Barboza, the author of the NYT article.

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IPE in the USA

Get thee over to The Monkey Cage. Once there, read Henry’s summary of the debate in the current issue of the Review of International Political Economy concerning US IPE monoculture.

The thematic issue, which has been in the works for quite some time, could not have come at a better moment.

With the discipline of Economics shaken by the irrelevance of much of their work to recent events, I have to wonder if, and when, those who have designed IPE with the goal of emulating the dismal science will make more of an effort to open their subfield to the benefits of intellectual heterodoxy.

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The resurrection

Nothing like a global financial crisis to make the IMF relevant again.

In all seriousness, though, after the 1997 East Asian financial crisis it seemed that the IMF was in danger of irrelevance. Very few countries were willing to accept the conditions required by the IMF for loans. But with the world only a few steps back from the brink, that appears to be changing. And with the outcome of the Ukraine-IMF negotiations pending, we may soon get a sense of how much the IMF is willing to require in exchange for cash infusions.

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Bretton Woods 2.0

If British Prime Minister Gordon Brown and French President Nicolas Sarkozy have their way, the advanced industrialized nations will come together to negotiate a new economic order. But they will do so in a world in which the US and the European Union enjoy roughly equal GDP (with a slight advantage for the EU right now). When Bretton Woods was negotiated, in contrast, the US controlled about half of global economic production.

In other words, any such bargain would be the product less of US hegemony than US-EU comity, with China, Japan, and India as important players in the mix. This is, whatever one thinks of its merits or chances, a bold call to build a multipolar economic institutional order. It signals how much the world has changed not only since 1945, but also since the “unipolar moment” of the 1990s.

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