The Globalization of Economic
regimes, including the gold standard, the
Relations
István Benczes
In the past 30 years, the term ‘globalization’
has earned considerable credit in the social
sciences and has also gone into common use in
public debates. Nevertheless, there is hardly
any consensus on either its precise meaning, or
its determining forces or consequences. Held et
al. (1999) offer a convenient starting point for
any discussion on globalization by claiming that
it ‘may be thought of initially as the widening,
deepening and speeding up of worldwide
interconnectedness in all aspects of
contemporary social life’ (1999: 2). ‘Aspects’
can refer to ‘political, technical and cultural, as
well as economic’ features (Giddens, 1999: 10),
implying that globalization is best thought of as
a multidimensional phenomenon.
Consequently, approaching globalization from a
purely economic perspective is ‘ … a categorical
mistake. That said, few discussions of
globalization can, or do, ignore its economic
foundations’ (McGrew, 2008: 280). This chapter
has been written within the spirit of such an
approach. Without doubt, economic
globalization does not constitute the whole
story of contemporary globalization, but in
order to fully understand its meaning and
implication, the economic dimension, as one of
the major driving forces of the process of
globalization, requires special attention.
Following a short introduction, the first section
is dedicated to the clarification of the definition,
origin and consequences of economic
globalization. As the two main fields of
economic globalization have been finance and
trade, the second section discusses the
evolution of the major international monetary
Bretton Woods system and European monetary
integration. The third section discusses trade
relations and trade policies, with a special focus
on the unilateral trade regime of the late
nineteenth and early twentieth centuries and
the multilateral regime of the post-World War II
era.
WHAT IS ECONOMIC GLOBALIZATION?
According to one of the most often cited
definitions, [e]conomic globalization is a
historical process, the result of human
innovation and technological progress. It refers
to the increasing integration of economies
around the world, particularly through the
movement of goods, services, and capital across
borders. The term sometimes also refers to the
movement of people (labor) and knowledge
(technology) across international borders. (IMF,
2008)
The phenomenon can thus have several
interconnected dimensions, such as (a) the
globalization of trade of goods and services; (2)
the globalization of financial and capital
markets; (3) the globalization of technology and
communication; and (4) the globalization of
production.
What makes economic globalization distinct
from internationalization is that while the latter
is about the extension of economic activities of
nation states across borders, the former is
‘functional integration between internationally
dispersed activities’ Dicken (2004: 12). That is,
economic globalization is rather a qualitative
transformation than just a quantitative change.
If, however, globalization is indeed a ‘complex,
indeterminate set of processes operating very
unevenly in both time and space’ (Dicken, 2004:
xv), a more substantive definition for economic
globalization is required than the one offered
by the IMF (2008). The definition provided by
Szentes (2003: 69) befits the purposes of this
particular chapter: ‘In economic terms
globalisation is nothing but a process making
the world economy an “organic system” by
extending transnational economic processes
and economic relations to more and more
countries and by deepening the economic
interdependencies among them.’
The main advantage of the above definition is
that although it does not deny the relevance of
the ‘international’, ‘regional’ or ‘national’ levels,
it refuses the assumption that the nation (state)
is the only unit of analysis and that current
trends in the world economy are simply the
redesign of the external relations of interacting
nations. Instead, it claims that economic
activities and processes (production in
particular) can be interpreted only in a global
context, i.e. in an integrated world economy.
To what extent is the nation state still a relevant
(f)actor is a major topic of current debates. For
hyperglobalists such as Ohmae (1995), states
ceased to exist as primary economic
organization units in the wake of a global
market. People are consuming highly
standardized global products and services
produced by global corporations in a borderless
world. Globalization transforms the national
economy into a global one where ‘there will be
no national products or technologies, no
national corporations, no national industries’
(Reich, 1991: 3).
On a more balanced account, Boyer and Drache
admit that ‘[g]lobalization is redefining the role
of the nation state as an effective manager of
the national economy’ (1996: 1), but refuse the
hypothesis of uniform state policies and
conceive the state as the main shelter from the
perverse effects of a free market economy. It is,
therefore, misleading to assume that
globalization has relegated the nation state and
its policies to an obsolete or irrelevant status;
governments instead ‘are acting as the
midwives of globalization’ (Brodie, 1996: 386).
Even liberals recognize that economic openness
has increased vulnerability, also admitting that
states (national economic policies and the
structure of domestic institutions) are not
influenced uniformly by globalization (Milner
and Keohane, 1996).
As new actors appear on the stage of political
and cultural globalization (such as the United
Nations (UN) or non-governmental
organizations (NGOs)), economic globalization
produces its own new entrants as well. In all
probability the major players of presentday
global economy are the transnational
corporations (TNCs). For some, contemporary
globalization is equated primarily with TNCs,
the main driving forces of economic
globalization of the last 100 years, accounting
for roughly two-thirds of world export (Gereffi,
2005).1 On the other hand, for realists, TNCs
still represent national interest (Gilpin, 2001),
while others (such as representatives of the
dependency school) are liable to identify TNCs
with the means through which the rich can
exploit the poor. What is important to note is
that TNCs are constantly evolving: as economic
integration is becoming more intensive,
production disintegrates as a result of the
outsourcing activity of multinationals (Feenstra,
1998). This move induced Gereffi (1999) to
develop the concept of global commodity
chains, an idea that reflects upon the increasing
importance of global buyers in a world of
dispersed production.
IS ECONOMIC GLOBALIZATION A NEW
PHENOMENON?
Just as there is no single definition of
globalization, there is no consensus on its
origin, either. Yet, if we accept that economic
globalization is a process that creates an
‘organic system’ of the world economy, it seems
reasonable to look beyond the last 30 years or
so. The question necessarily arises how far we
should look back. Gills and Thompson (2006: 1)
very wittily suggest that globalization processes
‘have been ongoing ever since Homo sapiens
began migrating from the African continent
ultimately to populate the rest of the world.
Minimally, they have been ongoing since the
sixteen-century’s connection of the Americas to
Afro-Eurasia’.
Frank and Gills (1993: 3) also call for a broader
outlook, and located the origin of globalization
in the (very) distant past: ‘the existence of the
same world system in which we live stretches
back at least 5,000 years’. The best known
example of archaic globalization is the Silk
Road, which connected Asia, Africa and Europe.
Adopting Fernand Braudel’s innovative concept
of ‘long duration’, i.e. a slow-moving, ‘almost
imperceptible’ (1973: 22) framework for
historical analysis, world-systems analysts
identify the origins of modernity and
globalization with the birth of sixteenth century
longdistance trade.
When Adam Smith wrote his magnum opus, An
inquiry into the nature and causes of the wealth
of nations (1776), he considered the discovery
of America by Christopher Columbus in 1492
and the discovery of the direct sea route to
India by Vasco de Gama in 1498 as the two
greatest achievements in human history.2 In
the course of a couple of decades these
remarkable achievements were overshadowed
by the breathtaking technological advances and
organization methods of the British Industrial
Revolution.3 From the early 1800s, following
the Napoleonic wars, the industrial revolution
spread to Continental Europe and North
America, too.
The economic nationalism of the seventeenth
and eighteenth centuries, coupled with
monopolized trade (such as the first
multinational corporations, the British and the
Dutch East India Companies, established in
1600 and 1602, respectively) did not favour,
however, international economic integration.
The total number of ships sailing to Asia from
major European countries rose remarkably
between 1500 and 1800 (in numbers: 770 in the
sixteenth, 3,161 in the seventeenth and 6,661 in
the eighteenth century; Maddison, 2001), but
world export to world GDP did not reach more
than 1 to 2 per cent in that period (Held et al.,
1999). If global economy did exist in this period,
then it was only in the sense of ‘trade and
exchange, rather than production’ (Gereffi,
2005: 161). Countries were mostly self-
sufficient and autarkic, the UK and the
Netherlands being the only exceptions (though
long-distance trade concentrated mostly on
luxury goods).
The real break-through came only in the
nineteenth century. The annual average
compound growth rate of world trade saw a
dramatic increase of 4.2 per cent between 1820
and 1870, and was still relatively high, at 3.4 per
cent between 1870 and 1913 (Maddison, 2001).
By 1913, trade equalled to 16–17 per cent of
world income, thanks to the transport
revolution: steamships and railroads reduced
transaction costs and bolstered both internal
and international exchange (Held et al., 1999).
The relatively short period before World War I
(that is, 1870 to 1913) is often referred to as the
‘golden age’ of globalization, characterized by
relative peace, free trade and financial and
economic stability (O’Rourke and Williamson,
1999).
The structural transformation of the Western
world was, therefore, both a cause and an
effect of intensified economic integration. By
the second half of the nineteenth century, the
division of labour entwined modern world
economy. Consequently, sceptics of
globalization, such as Hirst and Thompson
(2002), recognize the origin of globalization in
this particular era and argue that in some
respects (especially with regard to labour
mobility), nineteenth century world economy
was even more integrated than the present.
CONVERGENCE VERSUS DIVERGENCE
Contemporary globalization is, however,
considered to be a myth (Bairoch, 1993) not just
because it is not without precedents. More
concerns have been raised with regard to its
impact on the worldwide distribution of
income. Those in support of economic
globalization emphasize its ability to foster
universal economic growth and development.
Dollar and Kraay (2002) argue that only non-
globalizer countries failed to reduce absolute
and relative poverty in the last few decades. On
the other hand, countries that have embraced
globalization (proxied by trade openness) have
benefited from openness considerably.5
Consequently, ‘the problem […] is not that
there is too much globalization, but that there is
far too little’ (Wolf, 2004: xvii). On a more
balanced account, the World Bank (2002) claims
that globalization can indeed reduce poverty
but it definitely does not benefit all nations.
SubSaharan Africa, where roughly half of the
population lives on less than US$1.25 (in
purchasing power parity) a day, has been
especially marginalized by globalization.
Nevertheless, whereas at the beginning of the
nineteenth century countries were moreor-less
homogenous (i.e. poor and agrarian), by the
start of contemporary globalization countries
became highly stratified (Baldwin and Martin,
1999). The ratio of the richest region’s GDP per
capita to that of the poorest was only 1.1 in
1000, 2 in 1500 and still only 3 in 1820. It
widened to 5 in 1871 and stood at 9 at the
outbreak of World War I. In 1950 it climbed to
15 and peaked at 18 at the turn of the new
millennium (Maddison, 2003).
Why are less developed regions unable to catch
up with developed ones – as predicted by
standard economic theories such as the
neoclassical Solow growth model? Bairoch
(1993) argues that while in the developed part
of the world, industrial revolution and
intensified international relations reinforced
growth and development on an unprecedented
scale (as compared to the previous era), the
rest of the world did not manage to capitalize
on these processes. Reflecting upon the division
of labour between developed and developing
countries in the nineteenth century, Bairoch
claimed that ‘the industrialisation of the former
led to the de-industrialisation of the latter’
(1998: 11).
The structural deficiencies of the world
economy are heavily emphasized by the
socalled structuralists. Structuralism is a ‘cluster
of theories which emerged in the 1950s, 1960s
and 1970s … [and] share the idea that North
and South are in a structural relationship one to
another; that is that both areas are part of a
structure that determines the pattern of
relationships that emerges’ (Brown, 2001: 197).
The best known critical approach to the
prevailing social division of labour and global
inequalities is offered by worldsystems analysis,
which claims that capitalism under globalization
reinforces the structural patterns of unequal
change. According to Wallerstein, capitalism, ‘a
historical social system’ (1983: 13), created the
dramatically diverging historical level of wages
in the economic arena of the world system.
Thus, growing inequality, along with economic
and political dependence, are not independent
at all from economic globalization.
Accordingly, underdevelopment (i.e. a
persistent lack of economic growth and
development, together with impoverishment
and even malnutrition) is not the initial stage of
a historical and evolutionary unilinear
development process (as predicted by Rostow,
1960), but a consequence of colonialism and
imperialism. But while for Hobson (1902/2005)
imperialism was a kind of ‘conscious policy’
adopted by leading capitalist nations,
Wallerstein and his followers identified
imperialism as the product of the world
capitalist system which has perpetuated
unequal exchange.
The modern capitalist system is unique in the
sense that it created political structures that
guaranteed an endless appropriation and
accumulation of surpluses from the poor (or the
periphery) to the emerging (or the
semiperiphery) and – in particular – the
advanced industrialized (or the core) countries.
It is, however, not just that the periphery is
dependent on the core: the latter’s
development is also conditioned on the former.
The link between these groups is provided via
trade and financial transactions, and is
organized by a dense web of businessmen,
merchants, financial entrepreneurs and state
bureaucrats. Globalization, the product of the
long process of capitalist development, is,
therefore, nothing new for world-system
analysts; it is simply the relabelling of old ideas
and concepts (Arrighi, 2005).
INTERNATIONAL MONETARY SYSTEMS
According to Krasner (1983:2), regimes can be
thought of as all the ‘implicit and explicit
principles, norms, rules, and decision making
procedures around which actors’ expectations
converge’. Consequently, an international
monetary system or regime (IMS) ‘refers to the
rules, customs, instruments, facilities, and
organizations for effecting international
payments’ (Salvatore, 2007: 764). In the liberal
tradition, the main task of an IMS is to facilitate
cross-border transactions, especially trade and
investment. An international monetary system
is, however, more than just money or
currencies; it also reflects economic power and
interests, as ‘money is inherently political, an
integral part of “high politics” of diplomacy’
(Cohen, 2000: 91).
THE GOLD STANDARD
The origins of the first modern-day IMS dates
back to the early nineteenth century, when the
UK adopted gold mono-metallism in 1821. Half
a century later, in 1867, the European nations,
as well as the United States, propagated a
deliberate shift to gold at the International
Monetary Conference in Paris. Gold was
believed to guarantee a non-inflationary, stable
economic environment, a means for
accelerating international trade (Einaudi, 2001).
Following Prussia’s victory over France in 1872,
Germany joined the new regime. France
decided to do so six years later. With the joining
of the United States in 1879, the gold standard
became the international monetary regime by
1880. Following the joining of Italy (1984) and
Russia (1897), roughly 70 per cent of the
nations participated in the gold standard just
before the outbreak of World War I (Meissner,
2005).
In practice, the gold standard functioned as a
fixed exchange rate regime, with gold as the
only international reserve. Participating
countries determined the gold content of
national currencies, which in turn defined fixed
exchange rates (or mint parities) as well.
Consequently, ‘common adherence to gold
convertibility … linked the world together
through fixed exchange rates’ (Bordo and
Rockoff, 1996: 3). Monetary authorities were
obliged to exchange their national currencies
for gold at the official exchange rate without
limits on international markets.
One of the main strengths of the system was
the tendency for trade balance to be in
equilibrium. Balanced positions were ensured
by the automatic price-specie flow mechanism,
which assumed a passive change in money
supply and a full flexibility in internal prices.
David Hume (1752) was the first to elaborate on
this mechanism by developing his quantitative
theory of money. Accordingly, as a deficit
nation’s gold reserves diminished
09_Steger(since its import was financed by
gold), its general price level started to decline as
well, which restored its competitiveness on
international markets. The price that such
countries had to pay for the automatic
adjustment mechanism was the loss of
autonomy in monetary policy. In practice, it also
meant that deficit nations were enforced to
initiate serious deflationary policies.
In order to assess whether the gold standard
was successful, a good reference point is
offered by Eichengreen (1996: 1), who claims
that the role of a properly designed IMS ‘is to
lend order and stability to foreign exchange
markets, to encourage the elimination of
balance-of-payments problems, and to provide
access to international credits in the event of
disruptive shocks’. The regime was indeed able
to create stability; it also helped nations to
restore equilibrium in their current accounts
and provided an almost unlimited access to
world finance.
The outbreak of World War I brought an end to
the classical gold standard. Participating nations
gave up convertibility and abandoned gold
export in order to stop the depletion of their
national gold reserves. Although the UK did
attempt a return to the gold standard at pre-
war price levels in 1925, it did not finally
succeed. The overvalued pound sterling and the
emergence of new rivals, especially the United
States and France, reduced the competitiveness
of the UK substantially. As opposed to the pre-
World War I era, the UK could not finance its
current account deficit by capital inflow
anymore; therefore, it had no other choice but
to abandon the gold standard once and for all in
1931.
Indeed, the 1930s became the darkest period
of modern economic history. Competitive
devaluations, along with tough capital controls
and the imposition of (prohibitive) tariffs,
induced a race to the bottom which culminated
in a devastating drop of international
transactions. The negative spiral of the 1930s
provided historical evidence to the close
relationship between exchange rate policy and
trade measures (Eichengreen and Irwin, 2009).
The change from the gold standard to
competitive devaluations and floating was,
however, more than a simple shift from one
financial regime to another. In Karl Polányi’s
(1944) views, the deep structural changes of the
time, which were partly the causes and also the
consequences of universal suffrage (labourers
managed to influence domestic politics), made
the governments reluctant to defend a pegging
system at any cost. In the classical gold
standard regime, deflationary policies were
endorsed without much hesitation. After World
War I, however, labourers became more and
more successful in preventing incumbents from
adopting welfare reducing austerity measures.
THE BRETTON WOODS SYSTEM
AND ITS DISSOLUTION
The dramatic consequences of the beggar-
thyneighbour policies of the inter-war period
and the wish to return to peace and prosperity
impelled the allied nations to start negotiations
about a new international monetary regime in
the framework of the United Nations Monetary
and Financial Conference in Bretton Woods,
New Hampshire (US), in July 1944. Delegates of
44 countries managed to agree on adopting an
adjustable peg system, the gold-exchange
standard. The US dollar was the only
convertible currency of the time, so the United
States committed itself to sell and purchase
gold without restrictions at US$35 dollar an
ounce. All other participating but non-
convertible currencies were fixed to the US
dollar. The goldexchange standard was not the
only competing idea on the table, however. The
British economist, John Maynard Keynes,
proposed ambitious reforms for the post-war
era and recommended the creation of an
international clearing union, a kind of global
bank, along with the introduction of a new unit
of account, the ‘bancor’ (Keynes, 1942/1969).
Nevertheless, the United States insisted on its
own plan and branded the British proposal as a
serious blow to national sovereignty.
Delegates also agreed on the establishment of
two international institutions. The International
Banks for Reconstruction and Development
(IBRD) became responsible for post-war
reconstruction, while the explicit mandate of
the International Monetary Fund (IMF) was to
promote international financial cooperation and
buttress international trade. The IMF was
expected to safeguard the smooth functioning
of the gold-exchange standard by providing
short-term financial assistance in case of
temporary balance of payments difficulties.
As opposed to Keynes’s plan of a new
international clearing union, the Bretton Woods
system did not prevent countries from running
large and persistent deficits (or surpluses) in
their balance of payments. Although nations
were allowed to correct the official exchange
rate in order to eliminate deficits (hence the
name, adjustable peg system), adjustments did
not happen frequently. The UK, for instance,
was put under constant pressure by speculators
to devaluate its currency (it did so only once in
1967). Abstention from devaluations that were
believed to be humiliating triggered investors to
relocate their capital outside Britain.
The US’s situation was unique, however. During
the first few years of the new regime, the
country managed to maintain a surplus in its
balance of payments. As soon as Europe
regained its pre-World War II economic power,
the external position of the United States
turned into a persistent deficit as a natural
consequence of becoming an international
reserve currency. Nevertheless, by the mid-
1960s, the dollar became excessively
overvalued vis-à-vis major currencies. As a
response, foreign countries started to deplete
the US gold reserves. Destabilizing speculations,
fed by the huge balance of payments and trade
deficit, along with inflationary pressures, forced
the United States to abandon the gold-
exchange standard on 15 August, 1971.
Although industrialized countries were keen to
return to some kind of a controlled exchange
rate mechanism under the so-called
Smithsonian Agreement (a de facto
dollarstandard) in December 1971, neither the
devaluation of the US currency (and the
revaluation of the partners’ currencies), nor the
dollar’s non-convertibility to gold managed to
stabilize world finances. In early 1973,
industrialized countries decided to float their
currencies and intervene in financial markets
only in case of drastic short-term fluctuations.
Longer-term prices of currencies were
determined by demand and supply forces
exclusively. This shift in exchange rate policy
was acknowledged by the Jamaica Accords in
1976.
Managed floating, however, did not perform
any better, either; in fact, advanced countries
had to interfere on a few occasions in order to
avoid calamity. In 1985 for instance, G7
countries agreed on a substantial devaluation of
the US dollar under the Plaza Agreement, as a
result of an increasing pressure of domestic US
manufacturers and agrarians to restore their
competitiveness on world markets. Two years
later, in 1987, the Louvre Accord was drawn up
in order to defend the dollar from further
devaluation on the markets. While the United
States might have benefited from these globally
coordinated actions, one of the main losers was
evidently Japan. The appreciation of the yen
proved to be disastrous for the Japanese
economy, which faced a decade-long struggle in
the 1990s as a partial consequence of the
‘dollar politics’ (see Destler and Henning, 1989).
The 1990s saw the triumph of the neoliberal,
pro-market Washington Consensus. Its
programme points were advocated and
disseminated by the major international
financial institutions.8 The IMF used these
points as part of its adjustment requirements
(or conditionalities) in exchange for financial
assistance. Several countries, especially the so-
called emerging markets such as Mexico, Brazil
or the East Asian tigers, deregulated their
financial sectors and fully liberalized capital
transactions from the late 1980s onwards.
Reforms, however, were not supplemented by
strengthened domestic supervision or
monitoring. Additionally, thesecurrencies were
pegged to the US dollar, which happened to
appreciate substantially during the 1990s and
caused a loss in the price competitiveness of
emerging markets. The unregulated and free
flow of capital, the huge current account
deficits and the soft pegging regimes made
these economies highly vulnerable, resulting in
a financial crisis that first hit Mexico in 1994 and
reached East Asia in 1997–8.
The Washington Consensus and its freemarket
ideology has been criticized by many right from
its conception. Stiglitz (2002) blamed the IMF
and its rigid conditionalities for the failed
development performance of the periphery. His
main argument was that free-market policies
such as liberalization or privatization could not
deliver the expected results in an environment
of imperfect or incomplete markets and
inadequate or missing institutions. From a
wider perspective, Wallerstein (2005)
commented the change of economic thinking of
the late 1980s and early 1990s by arguing that
‘development was suddenly out. Globalization
arrived in its wake … Now, the way to move
forward was not to import-substitute but to
export-orient productive activities. Down not
only with nationalized industries but with
capital transfer controls; up with transparent,
unhindered flows of capital’ (2005: 1265).
EUROPEAN MONETARY INTEGRATION
In the post-World War II era, the United States
originally wanted to implement the
Morgenthau Plan, which intended to downsize
the German economy into a pastoral and
agricultural one. As a response to the USSR’s
push for communism in Eastern Europe and the
rise of socialist and communist parties in the
West, the plan, however, became quickly
abandoned, and the United States started to
advocate an economically and militarily strong
Germany and Western Europe. The United
States activated its post-war reconstruction
programme, the Marshall Plan, in 1948, which
was administered by the Organization for
European Economic Cooperation, the
predecessor of the Organization for Economic
Cooperation and Development (OECD). The
miraculous growth performance of Western
Europe prompted a closer cooperation on a
regional level, resulting finally in the European
Coal and Steel Community in 1951.9 This was
followed by the signing of the Rome Treaty in
1957, which established the European
Economic Community (EEC), and was the first
major step towards an ‘ever closer union’.
The original six founding members
(Germany, France, Italy, Netherlands, Belgium
and Luxembourg) aimed at the creation of a
common market, where goods, services, capital
and labour moved freely. Originally, the
European six did not plan any direct
cooperation in the field of finance or exchange
rate policies. The collapse of the Bretton Woods
system, however, placed the EEC under
pressure, and member countries eventually
agreed on setting up a regional monetary
regime, the European Monetary System (EMS)
in 1979. The EMS was a unique system, since
neither the US dollar, nor gold could play a role
in the stabilization process of exchange rates.
Instead, a symmetric adjustable peg
arrangement, the European Exchange Rate
Mechanism, was created (Gros and Thygesen,
1998).
The success of the EMS and the total
abolishment of capital controls by the end of
the 1980s opened the way for Jacques Delors,
then President of the European Commission, to
propose a radical leap forward in European
economic integration. With the support of both
late French President Francois Mitterrand and
German Chancellor Helmut Kohl, the
foundations of a new European Economic and
Monetary Union (EMU) were laid down in the
Maastricht Treaty in 1992. By 1999, the
member states of the EMU abandoned their
national currencies and delegated monetary
policy onto a supranational level, administered
by the European Central Bank (ECB), whose
primary goal has been the maintenance of price
stability. The first ten years of the EMU were an
evident success for participating countries:
trade and capital transactions increased;
economies became more integrated;
macroeconomic stability was restored and the
euro became the second most widely used
reserve currency (European Commission, 2008).
The global financial and economic crisis
of 2008–9, however, posed dramatic challenges
for the European Union (EU). The euro-area is
suffering from serious design flaws. The ECB is
not a lender of last resort, that is, it cannot bail
out individual countries which have lost their
monetary authority (that is, they cannot
devaluate their currency or reduce domestic
interest rates in case of troubles). The EU is not
a fiscal union either; therefore, it does not have
any specific means to fix financial difficulties on
a community level. Yet, the financial and
economic crisis, which culminated in an EU-
wide sovereign debt crisis by late 2009, has
demonstrated that the troubles of some
member states can easily undermine the
stability of the whole zone; contagion has
become a real threat. As a response to the
crisis, the EU enacted a three-pillar financial
rescue programme in 2010, comprising the
following: (1) the European Financial Stability
Mechanism, (2) the European Financial Stability
Facility; and (3) the financial assistance of the
IMF. Since the three-pillar system was designed
for a temporary period only, the EU has decided
to activate its own permanent rescue facility,
the European Stability Mechanism, from 2013
onwards.
The critics of the Eurozone have always
underlined the fact that EMU would never be
able to qualify for a well-functioning and stable
monetary zone without a common budget of
the size of federal countries such as the United
States (Feldstein, 1997). The future of the EMU
depends on the willingness of member states to
agree on more fundamental changes in the
governance of the Eurozone. One of the most
promising ideas is to develop the current
structure into a fiscal union, supported by a
pan-European banking supervision. These
innovations may lay down the foundations of a
political union as well in the distant future.
INTERNATIONAL TRADE AND TRADE POLICIES
The late Nobel-laureate economist, Paul
Samuelson, was once asked if he could name
one proposition which he considered as both
valid and non-trivial in the social sciences.
Samuelson famously referred to David Ricardo’s
comparative advantage theory (Samuelson,
1995). According to Ricardo (1817), a country
such as England could benefit from voluntary
trade even if its trading partner (which in the
original example was Portugal) was more
effective in producing both wine and clothing.
England should specialize in the production of
the good with less disadvantage and let
Portugal produce the other product. The appeal
of the theory is that every single nation must
have a comparative (that is, relative) advantage
in something irrespective of its initial
conditions.
But trade is not without politics. Alexander
Hamilton and Friedrich List recognized quite
early on (i.e. in the late eighteenth and early
nineteenth century, respectively) that voluntary
trade can have very different distributional
effects and it can also hinder the long-term
development prospects of the country
producing the lower value added (i.e.
agricultural) products. A temporary retreat from
international trade can thus be beneficial for
the less effective nation. In his so-called ‘infant
industry argument’, List (1841/1928) did not
oppose the Ricardian comparative advantage
theory; but he did warn that trade patterns
should not be considered as static. Instead, by
temporarily restricting the free flow of goods, a
national industry can be established, thereby
fostering long-term economic growth and
political power. In the realist and
(neo)mercantilist school, protection is, in fact,
still a natural way of securing national
objectives (Gilpin, 2001).
Reformist and radical (new left and
neoMarxian) theorists, such as Emmanuel
(1972) or Amin (1976), argued, however, that
unequal exchange is a fundamental and
systemic distinguishing characteristic of modern
world economy.11 The social division of labour
contributes to the economic development of
the core and hinders development at the
periphery. By grasping the leading role in the
transformation of the world economy, Europe,
and later on its Western offshoots, managed to
gain control of the rest of the world, creating a
unique and unfair global division of labour
(Wallerstein, 1974, 1980).12 Core economies
‘have had [thus] the best of two worlds, both as
consumers of primary commodities and as
producers of manufactured articles, whereas
the underdeveloped countries had the worst of
both worlds, as consumers of manufactures and
as producers of raw materials’ (Singer, 1964:
167).13 According to Amin (1993), if the world
economy is such that it benefits core countries
at the expense of the periphery, the latter
should adopt protectionism in its extreme form
of de-linking, i.e. a total breaking up of the ties
between the subordinated developing
economies and the core.
International trade can trigger tensions not just
between nations, but also within a particular
country. Gains from trade within a country will
affect the relative well-being of its citizens,
especially producers and consumers,
differently, who will, therefore, either support
or oppose trade. Based on the Stolper–
Samuelson theorem, which claims that
international trade benefits the domestically
abundant factor of production (land, labour or
capital) and weakens the scarce factor,
Rogowski (1990) managed to demonstrate how
the owners of the locally abundant factor of
production increase their political power and
influence as well. Consequently, the coalitions
of potential losers of trade provide permanent
source for a strong advocacy of protectionism
from the least developed countries to the most
advanced economies, including the EU or the
United States.
UNILATERAL TRADE ORDER
In seventeenth and eighteenth century Europe
international trade was basically a means to
accumulate surplus (gold reserves) in the
balance of payments by stimulating export and
restricting import. The mercantilist era of the
time was best characterized, therefore, as a
zero-sum game on the global level. Trade and
trade policies served the interest of monarchs
from Portugal to England, who financed wars
and consolidated authority over domestic
constituents with the help of accumulated gold
stocks.
The surge of international trade arrived only
with Europe’s industrial revolution and the
consequent repeal of the British Corn Laws in
1846 in particular. Industrialists triumphed over
landowners and farmers, opening the way for
further industrialization in Britain. The so-called
Cobden-Chevalier treaty of 1860 allowed the UK
and France to specialize in commodities based
on their respective comparative advantages and
to achieve further advances in industrialization.
Voluntary trade also helped to avoid the
eruption of an abrupt war between the two
countries (Dunham, 1930).15 Several other
bilateral trade agreements followed suit across
Europe, each built upon the so-called most-
favoured nation (MFN) principle, which stated
that any negotiated reciprocal tariff reductions
between two parties should be extended to all
other trading partners without conditions.
Overall average tariffs declined from 16.3 per
cent (1859) to 6.3 per cent (1875) in Britain,
from 11.8 per cent to 6.5 per cent in France,
from 7.1 per cent to 2.5 per cent in Germany
and from 7.3 per cent to 3.6per cent in Austria-
Hungary (Lampe, 2008). Europe witnessed the
emergence of a sort of multilateral system of
bilateral agreements, giving birth to the ‘first
common market’ in the second half of the
nineteenth century (Marsh, 1999).
The era, however, was not without conflicts
and interruptions to free trade (Findlay and
O’Rourke, 2007). The United States adopted a
highly protective import substitution
industrialization with tariffs on manufacturing
goods, averaging at 45 per cent. From the 1860s
onwards, France, the Scandinavian countries
and to a lesser extent even the UK enacted a
few protectionist measures as a response to the
inflow of cheap agricultural products from the
overseas territories and the industrialization
efforts of catching-up countries like Germany
and the United States. Nevertheless, neither the
prevailing unilateral trade regime, nor the
hegemonic position of the UK was threatened.
Britain remained powerful enough both in
economic and military terms; it could also rely
on the vast reserves of its colonies, especially
India (Arrighi and Silver, 2003).
World War I, however, was a dramatic blow to
free trade. Protectionism, in turn, was
detrimental to development, peace and stability
(Ruggie, 1982). Two rounds of World Economic
Conferences in 1927 and 1933 failed to deliver
tariff reductions and exchangerate stabilization
because of the unwillingness of the United
States to take the role of the hegemon as a
successor of a weakened Great Britain.
Domestic politics in the United States evidently
turned against restrictions-free trade as a
consequence of the Great Depression of 1929–
33. The Smoot-Hawley Act of 1930 increased
tariffs to record-high levels in the United States.
Retaliation was the rational response from
trading partners and international trade
dropped by one- to two-thirds as a
consequence (Irwin, 1998).
The enactment of the US Reciprocal Trade
Agreements Act in 1934 eventually put a stop to
any further decline in international trade. The
Act allowed the president to determine trade
policies and also eased the pressure put on the
Congress for protection. In practice, the Act was
a return to the principle of MFN and it provided
a solid base for a renewed international trade
regime following World War II.
MULTILATERALISM: FROM THE GATT TO
THE WTO
While the United States was reluctant to take a
leadership role after World War I, this was
naturally not the case two-and-a-half decades
later. The dollar became a world currency,
backed by two-thirds of the world’s gold
reserve in 1950 (Green, 1999). The United
States was the largest aid donor, mostly in the
form of the Marshall Plan. Due to the total
collapse of the European and Japanese
manufacturing industries, the global role of US
manufacturing increased substantially,
accounting for 60 per cent of the world’s total
in 1950, while its export amounted to one-third
of the world’s total (Branson et al., 1980).
As opposed to the pre-World War I regime of
non-institutionalized unilateralism, the new
trade regime was more or less a liberal,
multilateral rules-based system backed by a
solid legal approach to trade relations (Winham,
2008). According to Ruggie (1982), it was a
compromise between the extreme liberal
international regime of the long nineteenth
century and the economic nationalism of the
inter-war period.
Originally, the new international trade regime
should have been steered by the International
Trade Organization (ITO), which was originally
conceived as one of the three pillars of the
Bretton Woods system (the other two being the
IMF and the IBRD). Although the United States
played an undisputable role in creating the ITO,
a series of vetoes in the US Congress blocked its
formation. In place of a unique trade
organization, nations committed to a world of
lowered tariffs decided to coordinate their
actions under the auspices of the General
Agreement on Tariffs and Trade (GATT).
The GATT exerted influence via a series of
multilateral trade negotiations (or rounds). The
first five rounds concentrated on tariff cuts
exclusively (see Table 9.1). From 1964 onwards,
the scope of trade negotiations experienced a
slow but steady expansion. The creation of the
European Economic Community in 1957
enforced the United States to adopt the Trade
Expansion Act of 1962 and to call for a new
round, the so-called Kennedy Round. The result
was an across-the-board cutting (replacing the
previous practice of item-by-item cuts) and
reduction of non-tariff barriers, especially that
of anti-dumping measures (Evans, 1971). In the
1970s, the Tokyo Round proceeded with the
same extended mandate, and, besides tariff
cuts, it also adopted a series of codes of
conduct, such as the subsidies code or the
government procurement code (Deardorff and
Stern, 1983).
The most famous multilateral trade
negotiations were carried out under the
Uruguay Round between 1986 and 1994. While
earlier trade negotiations proved to be
successful in reducing tariffs, a series of other
punitive measures (namely non-tariff barriers)
were imposed by countries. Also, the pattern of
international trade changed dramatically. Trade
gravitated to multi- or transnational
corporations, which tried to optimize their
operations worldwide by allocating resources
(including manufacturing capacities) based on
principles other than comparative advantage.
By the early 1980s, intra-industry or even inter-
company trade has become the determining
feature of the international division of labour
(Dunning, 1990.) The pervasive influence of
TNCs resulted in a change in the politics of
trade. According to Held and McGrew (2001:
325), ‘it is global corporate capital, rather than
states, which exercises decisive influence over
the organization, location and distribution of
economic power and resources’ in the
contemporary world economy.
The Uruguay Round extended multilateral rules
to new issues and sectors, such as agriculture
(which culminated in a bitter dispute between
the United States and the EU). Furthermore, it
invited a large number of developing countries
to participate in trade negotiations, and it also
created a new and more efficient dispute
settlement mechanism (Walter and Sen, 2009).
The major outcomes of the trade negotiations
were the agreements on trade-related
investment measures (TRIMs), trade in services
(GATS) and traderelated aspects of intellectual
property rights (TRIPs). The agreements were
advocated by major advanced countries and
targeted mostly developing nations with huge
service market potential (especially in finance
and telecommunication).
After almost 50 years of rules-based trade
negotiations, the Uruguay Round gave birth to a
‘real’ international trade institution, the World
Trade Organization. The WTO was launched on
1 January 1995 and has become an official
forum for trade negotiations. As opposed to the
GATT, it is a formally constituted organization
with legal personality.
Although the developing countries represented
a unified front for a new round of trade
negotiations in Seattle, 1999, the ministerial
conference closed without reaching concrete
results. Nevertheless, Seattle demonstrated the
strength of NGOs and anti-globalization
movements, which protested not only in favour
of the disadvantaged and less-developed
countries but also against the current status
quo of world affairs – including the dominance
of the US economy, the selfish interest of large
multinational corporations and the assumed
discriminatory workings of the WTO.
Expectations were once again on the rise in
Doha in 2001. The quasi-official Doha Round
could have become a round on economic
development, but the positions of the opposing
parties were so rigid that it eventually failed to
meet expectations. Developing nations insisted
on the correct and full implementation of the
Uruguay Agreement (especially in the sphere of
agriculture), while the United States tried to
keep labour and environmental issues on the
agenda, and the EU wished to negotiate and
codify competition and investment policies.
None of the following ministerial conferences
could reach a real breakthrough.17 The
stalemate between the two major camps,
however, pushed developing countries to unite
and strengthen their positions within the WTO
by forming a pressure group called the Group of
20 (G20). The unprecedented coalition accounts
for almost two-thirds of the world’s population
and onequarter of global agricultural export
(Narlikar and Tussie, 2004).
DEVELOPING COUNTRIES AND
INTERNATIONAL TRADE
Developing nations did not participate actively
in multilateral trade negotiations for a relatively
long time. Apart from the socalled East Asian
newly industrializing countries, which adopted
an outward-oriented development strategy,
most of the developing countries did not
manage to integrate into the post-World War II
trading system successfully. On the one hand,
they followed an inward-looking, import-
substitution industrialization strategy, which did
not favour trade openness (Findlay and
O’Rourke, 2007). On the other hand, advanced
economies were also reluctant to open their
markets to commodities such as textile or
agriculture products in which developing
countries had a natural comparative advantage.
The first major change in this state of affairs
happened in 1964, when the United Nations
Conference on Trade and Development
(UNCTAD) was established with the joint effort
of the developing world. The aim of UNCTAD
was to promote trade and cooperation between
the developing and the developed nations. A
decade later plans for a new international
economic order were laid down, with the
multiple objectives of providing preferential
access to advanced countries’ markets,
renegotiating debt, establishing international
commodity agreement (to stabilize primary
product prices),18 providing transfer of
technology, and increasing aid substantially
(Salvatore, 2007). Nevertheless, the two oil
crises and the consequent slowing down of
economic activity in the developed nations
swept these initiatives away. Instead, advanced
countries adopted highly protective measures
(both tariffs and non-tariff measurements) in
order to cushion the negative effects of the
economic stagnation of the 1980s.
The change in the behaviour of developing
countries arrived with the Uruguay Round.
Originally, the round was meant to be a grand
bargain between developed and developing
economies (Ostry, 2002). The former were
expected to open their markets, especially to
agricultural and textile products, whereas the
latter accepted the new regulation on
intellectual property rights and services. While
developing countries have opened up their
service markets, their export of agricultural
products is still blocked by advanced nations.
Agriculture has a share of one-third to a half of
the total economic output in most developing
countries. Without the liberalization of
agriculture, it is simply impossible for
developing nations to fully integrate into the
global economy.
By quantifying the gains from the round,
Harrison et al. (1997) argued that the aggregate
welfare gains were between US$100 (in the
short run) and US$170 billion (in the long run)
annually. Developing countries, however, might
have easily found themselves on the losers’ side
– at least in the short term. Hertel et al. (1998)
have also acknowledged that Africa is a
potential loser of the Uruguay Round. Khor
(1995) thus views the WTO as the means by
which industrialized countries can gain access
to the markets of developing countries.
widely at the onset of their own development.
It is hypocritical, therefore, to enforce
developing countries to fully liberalize their
trade and financial sector.
All in all, the current trade regime and
especially its main propagator, the WTO, is
heavily criticized for ‘a striking asymmetry.
National boundaries should not matter for
trade flows and capital flows but should be
clearly demarcated for technology flows and
labor flows … This asymmetry … lies at the heart
of inequality in the rules of the game for
globalization’ (Nayyar, 2002: 158).
DISCUSSION QUESTIONS
1 Why did the Bretton Woods System collapse
in the 1970s?
2 In what ways is market globalism embedded
in contemporary global economic relations?
3 To what degree has intergovernmental
cooperation to limit exchange rate volatility
enabled the globalization of finance?

In fact, a number of criticisms have been voiced

with regard to the current trade regime. Wade
(2003), for example, has condemned the three
major trade agreements, i.e. the TRIMS, the
GATS and the TRIPS, for constraining the
available set of industrial policies for
development to such an extent that
development ladder of developing economies
had been practically kicked away. DiCaprio and
Amsden (2004) regard the WTO as a logical
consequence of the Washington Consensus
approach to development, which considers
domestic interventions highly distortive and
ineffective. Stiglitz (2002) argues that today’s
advanced economies applied such ‘distortions’