International Political Economy Fifth Edition THOMAS OATLEY University of North Carolina Chapel Hill 2 First published 2012, 2010, 2008, 2006 by Pearson Education, Inc. Published 2016 by Routledge 2 Park Square, Milton Park, Abingdon, Oxon OX14 4RN 711 Third Avenue, New York, NY, 10017, USA Routledge is an imprint of the Taylor & Francis Group, an informa business Copyright © 2012, 2010, 2008, 2006 Taylor & Francis. All rights reserved All rights reserved. No part of this book may be reprinted or reproduced or utilised in any form or by any electronic, mechanical, or other means, now known or hereafter invented, including photocopying and recording, or in any information storage or retrieval system, without permission in writing from the publishers. Notice: Product or corporate names may be trademarks or registered trademarks, and are used only for identification and explanation without intent to infringe. Credits and acknowledgments borrowed from other sources and reproduced, with permission, in this textbook appear on appropriate page within text. ISBN: 9780205060634 (pbk) Cover Designer: Nancy Danahy Library of Congress Cataloging-in-Publication Data Oatley, Thomas H., International political economy / Thomas Oatley.—5th ed. p. cm. Includes bibliographical references and index. ISBN-13: 978-0-205-06063-4 (alk. paper) ISBN-10: 0-205-06063-3 (alk. paper) 1. International economic relations. 2. International finance. 3. Globalization. I. Title. HF1359.O248 2012 337—dc22                            2011000588 3 Brief Contents Preface CHAPTER 1 International Political Economy CHAPTER 2 The World Trade Organization and the World Trade System CHAPTER 3 The Political Economy of International Trade Cooperation CHAPTER 4 A Society-Centered Approach to Trade Politics CHAPTER 5 A State-Centered Approach to Trade Politics CHAPTER 6 Trade and Development I: Import Substitution Industrialization CHAPTER 7 Trade and Development II: Economic Reform CHAPTER 8 Multinational Corporations in the Global Economy CHAPTER 9 The Politics of Multinational Corporations CHAPTER 10 The International Monetary System CHAPTER 11 Cooperation, Conflict, and Crisis in the Contemporary International Monetary System CHAPTER 12 A Society-Centered Approach to Monetary and Exchange-Rate Policies CHAPTER 13 A State-Centered Approach to Monetary and Exchange-Rate Policies CHAPTER 14 Developing Countries and International Finance I: The Latin American Debt Crisis CHAPTER 15 Developing Countries and International Finance II: A Decade of Crises CHAPTER 16 Globalization: Consequences and Controversies 4 Glossary References Index 5 Detailed Contents Preface CHAPTER 1 International Political Economy What Is International Political Economy? Studying International Political Economy Traditional Schools of International Political Economy Interests and Institutions in International Political Economy The Global Economy in Historical Context CHAPTER 2 The World Trade Organization and the World Trade System What Is the World Trade Organization? Hegemons, Public Goods, and the World Trade System The Evolving World Trade Organization: New Directions, New Challenges The Greatest Challenge? Regional Trade Arrangements and the World Trade Organization CHAPTER 3 The Political Economy of International Trade Cooperation The Economic Case for Trade Trade Bargaining Enforcing Agreements CHAPTER 4 A Society-Centered Approach to Trade Politics Trade Policy Preferences Factor Incomes and Class Conflict Sector Incomes and Industry Conflict Organizing Interests: The Collective Action Problem and Trade Policy Demands Political Institutions and the Supply of Trade Policy 6 CHAPTER 5 A State-Centered Approach to Trade Politics States and Industrial Policy The Infant-Industry Case for Protection State Strength: The Political Foundation of Industrial Policy Industrial Policy in High-Technology Industries Strategic-Trade Theory Strategic Rivalry in Semiconductors and Commercial Aircraft CHAPTER 6 Trade and Development I: Import Substitution Industrialization Domestic Interests, International Pressures, and Protectionist Coalitions The Structuralist Critique: Markets, Trade, and Economic Development Market Imperfections in Developing Countries Market Imperfections in the International Economy Domestic and International Elements of Trade and Development Strategies Import Substitution Industrialization Reforming the International Trade System CHAPTER 7 Trade and Development II: Economic Reform Emerging Problems with Import Substitution Industrialization The East Asian Model Structural Adjustment and the Politics of Reform Developing Countries and the World Trade Organization CHAPTER 8 Multinational Corporations in the Global Economy Multinational Corporations in the Global Economy Economic Explanations for Multinational Corporations Locational Advantages Market Imperfections Locational Advantages, Market Imperfections, and Multinational Corporations Multinational Corporations and Host Countries CHAPTER 9 The Politics of Multinational Corporations 7 Regulating Multinational Corporations Regulating Multinational Corporations in the Developing World Regulating Multinational Corporations in the Advanced Industrialized Countries Bargaining with Multinational Corporations The International Regulation of Multinational Corporations CHAPTER 10 The International Monetary System The Economics of the International Monetary System Exchange-Rate Systems The Balance of Payments Balance-of-Payments Adjustment The Rise and Fall of the Bretton Woods System Creating the Bretton Woods System Implementing Bretton Woods: From Dollar Shortage to Dollar Glut The End of Bretton Woods: Crises and Collapse CHAPTER 11 Cooperation, Conflict, and Crisis in the Contemporary International Monetary System From the Plaza to the Louvre: Conflict and Cooperation during the 1980s Global Imbalances and the Great Financial Crisis of 2007–2009 Exchange-Rate Cooperation in the European Union CHAPTER 12 A Society-Centered Approach to Monetary and Exchange-Rate Policies Electoral Politics, the Keynesian Revolution, and the Trade-Off between Domestic Autonomy and Exchange-Rate Stability Society-Based Models of Monetary and Exchange-Rate Politics The Electoral Model of Monetary and Exchange-Rate Politics The Partisan Model of Monetary and Exchange-Rate Politics The Sectoral Model of Monetary and Exchange-Rate Politics CHAPTER 13 A State-Centered Approach to Monetary and Exchange-Rate Policies Monetary Policy and Unemployment 8 The Time-Consistency Problem Commitment Mechanisms Independent Central Banks and Exchange Rates CHAPTER 14 Developing Countries and International Finance I: The Latin American Debt Crisis Foreign Capital and Economic Development Commercial Bank Lending and the Latin American Debt Crisis Managing the Debt Crisis The Domestic Politics of Economic Reform CHAPTER 15 Developing Countries and International Finance II: A Decade of Crises The Asian Financial Crisis Bretton Woods II The Heavily Indebted Poor Countries CHAPTER 16 Globalization: Consequences and Controversies Globalization and Global Poverty Globalization and “Sweatshops” Trade and the Environment Glossary References Index 9 Preface Local economic developments reflect global forces. Consider the sovereign debt crisis that struck Greece in the spring of 2010. The Greek government borrowed heavily between 2006 and 2009. Greece’s ability to borrow so much was made possible by two global developments: high savings rates in China created a large pool to draw from; the creation of the euro seemed to make Greece a low-risk borrower. German banks intermediated much of the funds that flowed to Greece in this period. When the Greek government’s financial position deteriorated sharply in the fall of 2009, financial markets began to doubt Greek solvency and sold Greek debt in massive quantities. Because German banks held such large amounts of Greek debt, a possible Greek default would possibly precipitate a severe banking crisis in Germany that could ripple across the EU and potentially undermine the euro itself. To stave off this possibility, EU governments agreed (reluctantly) to provide financial assistance to Greece in order to restore stability. Hence, global forces enabled Greece to get into financial difficulty, and once Greece encountered problems, its difficulties threatened economic stability throughout the EU. And had the crisis brought euro down, the global economy would have suffered a terrible blow. In this “era of globalization,” the factors that shape our economic lives are as likely to originate in far away places as they are to stem from local events. Understanding the global economy requires knowledge of politics as well as economics. For globalization is not a spontaneous economic process; it is built on a political foundation. Governments share a broad consensus on core principles; core principles inform the elaboration of specific rules. Specific rules establish international institutions—the World Trade Organization, the World Bank, and the International Monetary Fund. These international institutions in turn facilitate a political process through which governments reduce barriers to global exchange and create common rules to regulate other elements of the global economy. This political system—the foundation and the process—has enabled businesses to construct the network of international economic linkages that constitute the economic dimension of globalization. Understanding the global economy, therefore, requires a political economy approach: We must study its political as well as its economic dimensions. Studying the political and economic dimensions of the global economy requires us to develop theory that simplifies an inherently complex world. This book develops a theoretical framework in which politics in the global economy revolve around enduring competition between the winners and the losers generated by global economic exchange. As economists since Adam Smith have told us, global exchange raises aggregate social 10