The Challenge of Global Capitalism
The
World Economy in the 21st Century
By ROBERT GILPIN with JEAN MILLIS GILPIN
Princeton University Press
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The Second Great Age
of Capitalism
Americans, other citizens of the industrialized world, and many peoples
in other parts of the international economy have entered what the
financial expert and economic commentator, David D. Hale has called
"the Second Great Age of Global Capitalism. The world economic and
political system is experiencing its most profound transformation since
emergence of the international economy in the seventeenth and eighteenth
centuries. The end of the Cold War, the collapse of the Soviet
Union, a stagnant yet enormously rich Japan, the reunification of Germany
and its consequent return as the dominant power in Western
Europe, and the rise of China and Pacific Asia are influencing almost
every aspect of international affairs. Changes originating in earlier decades
have also become more prominent; these developments include
the technological revolution associated with the computer and the information
economy and the redistribution of economic power from the
industrialized West to the rapidly industrializing and crisis-riven economies
of Pacific Asia. The worldwide shift to greater reliance on the
market in the management of economic affairs, and what many call the
"retreat of the state," are integrating national economies everywhere
into a global economy of expanding trade and financial flows. However,
it is the demographic revolution that will have the greatest long-term
significance. The extraordinary population decline in the industrialized
world and the explosive growth of population in China, India, other
parts of Asia, and elsewhere in the developing world will continue to
significantly alter the global distribution of economic and, of course,
military power.
These developments are having important consequences for the lives
of us all. There will be many winners as global capitalism refashions
almost every aspect of domestic and international economic affairs.
There will also be many losers, at least over the short term, as international
competition intensifies and as businesses and workers lose the
secure niches that they enjoyed in the past. Economic globalization
presents both threats and challenges for the well-being of peoples
everywhere. If individuals and societies are to adjust intelligently to
the challenge of global capitalism, it is imperative that they understand
the principal forces transforming international economic and political
affairs.
The Triumph of Economic Liberalism
The end of the Cold War in 1989 and the collapse of the Soviet Union
in 1991 sparked an international debate on the nature of the "new
world order." After the disintegration of the Soviet empire in Eastern
Europe and the subsequent fragmentation of the Soviet Union itself,
speculation on the transformation of the international system and the
nature of the post-Cold War era reached flood tide. When disappearance
of the Communist threat left the United States as the only true
superpower, many commentators believed that the American liberal
values of democracy, individualism, and free markets had triumphed
and that the world was on the verge of an era of unprecedented prosperity,
democracy, and peace. Less sanguine observers countered that the
bipolar stability of the postwar world was being supplanted by a chaotic,
multipolar world of five or more major powers, a world characterized
by new forms of intense ethnic, political, and economic conflict;
indeed, some even expected that the world might one day look back
with nostalgia to the simpler and more certain bipolar Cold War world
that the historian John Lewis Gaddis had called the "long peace."
Through most of the latter half of the twentieth century, the Cold
War and its alliance structures provided the framework within which
the world economy evolved; now that framework has been weakened.
During the Cold War, the United States and its allies generally subordinated
potential economic conflicts within the alliance to the interests of
political and security cooperation. Their emphasis on security interests
and alliance cohesion provided the political glue that held the world
economy together and facilitated compromise on important economic
differences. Even though the United States did, as many European and
Japanese charged, occasionally use its political leverage to exact economic
concessions from its several alliance partners, the United States
also clearly emphasized its security interests and allied cooperation
more than its own narrow economic interests.
With the end of the Cold War, national priorities changed and the
Western allies assigned a higher priority to their own national (and
frequently parochial) economic interests. A shift in American policy
had already become evident during the Reagan and Bush Administrations.
The new, more nationalistic emphasis was carried further in the
succeeding Clinton Administration; its declaration that
economic security
had displaced the earlier concern with
military security made the
change crystal clear. Proponents of "geo-economics" argued that economic
conflict had displaced traditional security and political interests.
A change in American attitudes and priorities appeared in growing
economic unilateralism and in ratification of the North American
Free Trade Agreement. Another significant manifestation of this change
was the pursuit in the early 1990s of an aggressive managed trade or
"results-oriented" trade policy toward Japan.
The priorities of Western Europe and Japan also changed in the
1990s. Both became less willing to follow American leadership, much
less tolerant of America's disregard of their economic and political interests,
and more likely to emphasize their own national priorities. Reunified
Germany assigned greater importance to European regional issues
and less to its alliance with the United States and began to lead in
creation of an economically and politically united Europe. Japan rediscovered
its "Asianness" and gave growing emphasis to the development
of an integrated Pacific Asian regional economy under Japanese
leadership. During the 1990s, regional concerns began to take precedence
over North American, trans-Atlantic, and trans-Pacific issues.
These shifts in national priorities and foreign policies have extraordinarily
important ramifications for the future of the world economy
Since World War II, the principal foundations of the international
economy with its free markets and trade liberalization have been America's
international leadership and the willingness of Western Europe
and Japan to follow America's lead. However, in the 1990s, the most
prosperous and economically successful era in world history was
threatened by changes. The close cooperation of previous decades had
weakened, and there could be serious negative consequences for world
peace and prosperity. The global economic turmoil of the century's
final years warns that there are serious threats to the health and stability
of a liberal global economy.
The Achilles heel of the post-Cold War liberal world order is the
poor public understanding of economic liberalism, of the functioning
of the market system, and of how capitalism creates wealth. The acrimonious
debate over the North American Free Trade Agreement
(NAFTA), for example, revealed that many American citizens and even
some very successful business executives failed to comprehend the rationale
for trade liberalization. Economists' arguments that open markets
are very beneficial and that trade protection can be very costly are
frequently overwhelmed by popular misconceptions and self-serving
demands for protection against "cheap" imports and "unfair" trading
partners.
Economists themselves must assume part of the responsibility for
public misunderstanding. Too many American economists are content
to continue writing their frequently incomprehensible technical papers
and to remain aloof from public discussions of crucial issues of economic
policy. A notable exception to this detached attitude is found in
Globaphobia (1998), where Gary Burtless and his colleagues use conventional
economic analysis in a comprehensible manner to dispel strident
and unfounded attacks on globalization. Without a better understanding
by the average citizen of how the market economy works,
including its strengths and its weaknesses, the liberal economic order
will continue in jeopardy.
Economic Globalization
Since the early 1980s, economic issues and the global economy have
become more central to international economic and political affairs
than at any time since the late nineteenth century Many commentators
have noted a profound shift from a state-dominated to a market-dominated
world. The market's increased importance, reflected in increased
international flows of goods, capital, and services, has been
encouraged by declining costs of transportation and communications,
the collapse of command-type economies, and the increasing influence
of a conservative economic ideology based on the policy prescriptions
of economics. This resurgence of the market is really a return to the
pre-World War I era of expanding globalization of markets, production,
and finance.
At the turn of the century, issues arising from economic globalization
confront national societies and the international community Immediately
after the end of the Cold War almost every economist, business
executive, and political leader in both industrialized and industrializing
countries expected that economic globalization would lead to a world
characterized by open and prosperous economies, political democracy,
and international cooperation. However, as the 1990s progressed, and
especially in response to the post-1997 global economic turmoil, a
powerful negative reaction to globalization arose in both developed and
less developed countries. Rejections of globalization and its alleged negative
consequences became especially strident within the United States,
Western Europe, and some industrializing economies. Globalization
has been blamed for everything from growing income inequality to
chronic high levels of unemployment and even to the oppression of
women, and critics have favored such nostrums as trade protectionism,
closed regional arrangements, and severe restrictions on migration.
Certainly the future of the international economic and political system
will be strongly affected by the relative success or failure of the proponents
and opponents of globalization.
According to the "globalization thesis," a quantum change in human
affairs has taken place as the flow of large quantities of trade, investment,
and technologies across national borders has expanded from a
trickle to a flood. Political, economic, and social activities are becoming
worldwide in scope, and interactions among states and societies on
many fronts have increased. As integrative processes widen and deepen
globally, some believe that markets have become, or are becoming, the
most important mechanism determining both domestic and international
affairs. In a highly integrated global economy, the nation-state,
according to some, has become anachronistic and is in retreat. A global
capitalist economy characterized by unrestricted trade, investment
flows, and the international activities of multinational firms will benefit
rich and poor alike.
Others, however, emphasize the alleged downside of economic globalization,
including the increase of income inequality both among and
within nations, high chronic levels of unemployment in Western Europe
and elsewhere, and, most of all, the devastating consequences of
unregulated financial flows. These critics charge that national societies
are being integrated into a global economic system and buffeted by
economic and technological forces over which they have very little control.
For them, the global economic problems of the late 1990s offer
proof that the costs of globalization are much greater than its benefits.
Although the term "globalization" is now used broadly, economic
globalization has entailed just a few key developments in trade, finance,
and foreign direct investment by multinational corporations. Since the
end of World War II,
international trade has greatly expanded and has
become a much more important factor in both domestic and international
economic affairs. Whereas the volume of international commerce
had grown by only 0.5 percent annually between 1913 and 1948, it
grew at an annual rate of 7 percent from 1948 to 1973. As figure 1.1
shows, international trade has grown much more rapidly than the
global economic output. Over the course of the postwar era, trade has
grown from 7 percent to 21 percent of total world income. The value of
world trade has increased from $57 billion in 1947 to $6 trillion in the
1990s. In addition to the great expansion of merchandise trade (goods),
trade in services (banking, information, etc.) has significantly increased
during recent decades. With this immense expansion of world trade,
international competition has greatly increased. Although consumers
and export sectors within individual nations benefit from increased
openness, many businesses find themselves competing against foreign
firms that have greatly improved their efficiency During the 1990s,
trade competition became even more intense as a growing number of
industrializing economies shifted from an import-substitution to an export-led
growth strategy Nevertheless, the major competitors for most
all American firms are other American firms.
Underlying the expansion of global trade have been a number of
developments. Since World War II, trade barriers have declined significantly
due to successive rounds of trade negotiations. For example,
over the past half century, average tariff levels of the United States and
other industrialized countries on imported products have dropped
from about 40 percent to only 6 percent, and barriers to trade in services
have also been lowered. In addition, since the late 1970s deregulation
and privatization have further opened national economies to imports.
Technological advances in communications and transportation
have reduced costs and thus significantly encouraged trade expansion.
Taking advantage of these economic and technological changes, more
and more businesses have expanded their horizons to include international
markets. Despite these developments, most trade takes place
among the three advanced industrialized economies—the United
States, Western Europe, and Japan, plus a few emerging markets in East
Asia, Latin America, and elsewhere. Most of the less developed world is
excluded, except as exporters of food and raw materials. It is estimated,
for example, that Africa south of the Sahara accounted for only about
1 percent of total world trade in the 1990s.
Since the mid-1970s, the removal of capital controls, the creation of
new financial instruments, and technological advances in communications
have contributed to a much more highly integrated
international
financial system. The volume of foreign exchange trading (buying and
selling national currencies) in the late 1990s has been approximately
$1.5 trillion per day, an eightfold increase since 1986; by contrast,
the global volume of exports (goods and services) for all of 1997 was
$6.6 trillion, or $25 billion per day! In addition, the amount of investment
capital seeking higher returns has grown enormously; by the mid-1990s,
mutual funds, pension funds, and the like totaled $20 trillion,
ten times the 1980 figure. Moreover, the significance of these huge
investments is greatly magnified by the fact that foreign investments are
increasingly leveraged; that is, they are investments made with borrowed
funds. Finally, derivatives or repackaged securities and other
financial assets play an important role in international finance. Valued
at $360 trillion (larger than the value of the entire global economy),
they have contributed to the complexity and to the instability of international
finance. It is obvious that international finance has a profound
impact on the global economy.
This financial revolution has linked national economies closely to
one another, significantly increased the capital available for developing
countries, and, in the case of the East Asian emerging markets, accelerated
economic development. However, as a large portion of these financial
flows is short-term, highly volatile, and speculative, international
finance has become the most vulnerable and unstable aspect of the
global capitalist economy. The immense scale, velocity, and speculative
nature of financial movements across national borders have made governments
more vulnerable to sudden shifts in these movements. Governments
can therefore easily fall prey to currency speculators, as happened
in the 1992 European financial crisis (which caused Great Britain
to withdraw from the Exchange Rate Mechanism), in the 1994-1995
punishing collapse of the Mexican peso, and in the devastating East
Asian financial crisis in the late 1990s. Whereas for some, financial
globalization exemplifies the healthy and beneficial triumph of global
capitalism, for others the international financial system seems "out of
control" and in need of improved regulation.
The term "globalization" came into popular usage in the second half
of the 1980s in connection with the huge surge of foreign direct investment
FDI) by multinational corporations (MNCs). As shown in figure
1.2, FDI expanded significantly in the late 1980s, increasing much
more rapidly than world trade and economic output. Throughout
much of the 1990s, FDI outflows from the major industrialized countries
to industrializing countries rose at approximately 15 percent annually;
FDI flows among the industrialized countries themselves rose at
about the same rate. In the late 1990s, the cumulative value of FDI
amounts to hundreds of billions of dollars. The greatest portion of this
investment has been in high-tech industries, such as those of automobiles
and information technology.
These general statements, however, hide noteworthy aspects of FDI
and MNC activities. Despite much talk of corporate globalization, FDI
is actually highly concentrated and distributed very unevenly around
the globe. Most FDI takes place in the United States, China, and Western
Europe because firms are attracted to large or potentially large markets.
FDI in less developed countries, with a few notable exceptions,
has been modest. In addition to that in a few Latin American countries,
and particularly in the Brazilian and Mexican automobile sectors, most
FDI in developing countries has been placed in the emerging markets
of East and Southeast Asia, particularly in China. When one speaks of
corporate globalization, only a few countries are actually involved.
Despite the limited nature of corporate globalization, multinational
corporations (MNCs) and FDI are very important features of the global
economy. The increasing importance of MNCs has profoundly altered
the structure and functioning of the global economy. These giant firms
and their global strategies have become major determinants of trade
flows and of the location of industries and other economic activities
around the world. Most investment is in capital-intensive and technology-intensive
sectors. These firms have become central in the expansion
of technology flows to both industrialized and industrializing
economies. As a consequence, multinational firms have become extremely
important in determining the economic, political, and social
welfare of many nations. Controlling much of the world's investment
capital, technology, and access to global markets, such firms have become
major players not only in international economic, but in political
affairs as well, and this has triggered a backlash in many countries.
Economic globalization has been driven by political, economic, and
technological developments. The compression of time and space by
advances in communications and transportation has greatly reduced
the costs of international commerce while, largely under American
leadership, both the industrialized and industrializing economies have
taken a number of initiatives to lower trade and investment barriers.
Eight rounds of multilateral trade negotiations under the General
Agreement on Tariffs and Trade (GATT), the principal forum for trade
liberalization, have significantly decreased trade barriers. Since the
mid-1980s, Latin American, Pacific Asian, and other developing countries
have initiated important reforms to reduce their trade, financial,
and other economic barriers. More and more firms have pursued global
economic strategies to take advantage of these developments.
Elimination of capital controls and movement toward a global financial
system along with removal of barriers to FDI have also accelerated
the movement toward both global and regional integration of services
and manufacturing. In both industrialized and industrializing economies,
spreading pro-market thinking has strongly influenced economic
policy to reduce the role of the state in the economy. The collapse of the
Soviet command economy, the failure of the Third World's import-substitution
strategy, and the growing belief in the United States and
other industrialized economies that the welfare state has become a
major obstacle to economic growth and to international competitiveness
have encouraged acceptance of unrestricted markets as the solution
to the economic ills of modern society. Sweeping reforms have led
to deregulation, privatization, and open national economies. In the late
1990s, the debate over the costs and benefits of economic globalization
became highly acrimonious.
Meanwhile, the increased openness of national economies, the enlarged
number of exporters of manufactured goods, the more rapid increase
in trade than in the growth of the global economic product, and
the internationalization of services have greatly intensified international
economic competition. Growth of the proportion of world output
traded on international markets has been accompanied by a significant
change in the pattern of world trade. Many less developed countries
(LDCs) have shifted from exporting food and commodities to exporting
manufactured goods and even services. As indicated in figure 1.3, since
1965 the developing economies' share of world trade has increased
considerably. Manufactured goods have begun to provide a growing
proportion of this LDC trade at the same time that the United States and
other advanced industrial economies have been shifting from manufactured
exports to export of services. This restructuring of the entire
global economy is economically costly and politically difficult and is
producing many losers as well as winners.
Intensification of global competition in manufacturing, especially in
high-tech products, has resulted in increased concern in advanced
economies about international competitiveness, particularly about
manufactures from the low-wage industrializing countries. The prestigious
World Economic Forum reflected these concerns when it proclaimed
in the mid-1990s that competition from industrializing countries
was causing deindustrialization of the advanced economies. These
concerns have been magnified as more and more Pacific Asian countries
have sought to export their way out of economic distress; consequently,
more and more groups and leaders in advanced economies worry about
such competition and brand it as unfair. Some even express fear that
their own living standards could be reduced to those of China. Many
believe that intensified competition from the industrializing countries
has, at the least, increased job insecurity, unemployment, and income
inequality; growing concerns have increased pressures for trade protection
and economic regionalism.
The increased openness of the world economy, emergence of new
industrial powers, and the global economic slowdown have contributed
to a substantial surplus productive capacity in a number of industrial
sectors. A notable example is automobile manufacture, which, like possession
of a national airline, has long been considered a necessary attribute
of a sovereign nation as well as a source of high wages for blue-collar
workers. The United States, Japan, many European countries,
and some industrializing countries have large automotive industries. It
is obvious that many of these firms must merge or even eventually shut
down as the global supply of automobiles outruns effective demand; of
the approximately eighteen major auto firms in the world, it is probable
that only about seven or so will ultimately survive.
Global overcapacity in a number of economic sectors has caused
some observers to declare that the world economy is suffering from a
glut of manufactured goods, or what Marxists call "underconsumption";
this has led many observers to declare that global capitalism is in
a systemic crisis requiring radical structural reforms. Certainly, rationalization
along with elimination of surplus capacity in the automobile
and many other economic sectors has been made necessary by globalization.
Adjustment will be painful and will result in large numbers of
laid-off workers, especially low- or semi-skilled workers, who may find
it difficult to find equally well paying jobs. However, as Paul Krugman
has argued, a large part of the "surplus" problem is due to the exaggerated
fear of inflation in such countries as Japan and Germany where
central banks place a higher priority on price stability than on economic
growth. More expansionary economic policies would significantly reduce
the surplus. Moreover, as has happened in the past, the problem
of excess capacity in certain sectors will work itself out as supply is
reduced to match demand. But until the problem is resolved, it will
pose severe political problems for national governments and for the
world economy.
Although there is general agreement on the increased importance of
the market and of globalization, there is intense controversy over the
role of economic factors in the determination of international economic
affairs and over the likelihood of cooperation versus conflict. Oversimplifying
somewhat, two schools of thought on this issue can be discerned
in American and other writing. I shall call one school the "market-oriented"
position because of its emphasis on free markets and its
commitment to free trade and, most important, to a significant decrease
in the role of the state in the economy. The other school of thought is
more diverse, but, for lack of a better term, I shall call it the "revisionist"
position because of its emphasis on economic conflict, trade protection,
and the strong role of the state in the economy.
The market-oriented position is based on the theories and policy
prescriptions of economics and asserts that, whereas in the recent past
the policies of powerful states and international institutions have played
the dominant role in the organization and functioning of the international
economy, in the twenty-first century free markets and economic
forces will increasingly determine international economic affairs. The
demise of communism, the increasing integration of national markets,
and the failure of inward-looking economic policies of less developed
countries have resulted in a global shift toward such market-oriented
policies as free trade and export-led growth and to a drastic reduction
of the role of the state in the economy As the London
Economist has
observed, since the collapse of communism, there has been universal
agreement that no serious alternative to free-market capitalism exists as
the way to organize economic affairs.
Many also argue that the world is moving toward a politically borderless
and highly interdependent global economy that will foster prosperity,
international cooperation, and world peace. In this view, with the
triumphal return to the free market and the laissez-faire ideals of the
nineteenth century, global corporations will lead in organizing international
production and maximizing global wealth. A corollary of this
position is that the American economic and political system has become
the model for the world. Moreover, the United States, as the only
true superpower, will lead the rest of the world. Global economic policy
will focus on economic multilateralism and on strengthening international
rules and institutions created within the Bretton Woods system.
American leadership and the reformed Bretton Woods system will facilitate
continued cooperation among the dominant economic powers and
thereby ensure the global economy's smooth functioning.
Revisionist critics of globalization foresee a world characterized by
intense economic conflict at both the domestic and international levels.
Believing that an open world economy will inevitably produce more
losers than winners, revisionists argue that unleashing market and other
economic forces could result in an immense struggle among individual
nations, economic classes, and powerful groups. Geo-economic adherents
of this position believe (paraphrasing the German strategist Karl
von Clausewitz) that international economic competition, especially in
manufacturing, is the pursuit of foreign policy by other means. Many
assert that this global struggle for market share and technological supremacy
will be embodied in competing regional blocs dominated by
one or another of the three major economic powers and that the European
Union under German leadership, the North American bloc under
U.S. leadership, and the Asian Pacific bloc under Japanese leadership
will vie for economic and political ascendancy.
This rather pessimistic position declares that the clash between communism
and capitalism has been replaced by conflict among rival forms
of capitalism and social systems represented in regional economic
blocs. In a provocative article in 1991, for example, Samuel P. Huntington
argued that, with the end of the Cold War, Japan had become a
"security threat" to the United States. Subsequently, in even more provocative
writings, Huntington proclaimed that intracivilizational conflicts
will dominate the agenda of world politics well into the twenty-first
century. Some commentators, reflecting on the tragic events in
the former Yugoslavia and in the Soviet Union in the 1990s, argue that
an age of intense ethnic and nationalistic conflict has been unleashed on
the world. In a world still divided by rival national ambitions in which
economic factors in effect determine the fate of nations, many conclude
that international economic affairs will become increasingly filled with
conflict.
(Continues...)
(C) 2000 Princeton University Press All rights reserved. ISBN: 0-691-04935-1
