Christopher Schubert

Pol Sci 381: Int’l Political Economy

Dr. Robert Urbatch

May 6th, 2010

Try, Try, Try Again

The impermanence of large-scale economic integration and our increasing

proficiency at maintaining it

On a long enough time scale, nothing humans bring about through our ingenuity and

resourcefulness will last forever, no matter how intrinsic it may seem to our lives today. The

German philosopher Hannah Arendt wrote about this in her book “The Human Condition.” We

humans shape, through our work, our reality. When we create anything, whether its a widget or

an automobile, we give it a certain degree of durability. A certain resistance to the natural process

degradation. So to is the case when looking at our present economic system. It is difficult for

most to imagine, especially those in the younger generation, a world that did not look and

function how it does today. Our progress has a tendency to seem so absolute that it approaches

the rank of a given. A level we attained and can rest assured we will never drop below.
 This is folly. Nothing that is created through human activity can be considered to be a

universal condition for life on this planet. There is a feeling that our current level of integration

has progressed so far that there is no hope of ever reversing the trend towards protectionism and

severely reduced Trade. The present-day globalized economy shares many characteristics of past

periods of relatively widespread economic integration and as such it is not unimaginable that it

could be reversed. Although several characteristics of the modern economy make it much more

robust and resistant to total collapse, the same pressures that plagued the economic integration of

the last century are beginning to hinder the progress of this integration. As such, the modern

economic integration should be regarded as impermanent and changes to international rules and

policy should be aimed ensuring a more equitable distribution of the benefits of integration.

The current pattern resembles in form the order integration imposed by the British empire’s

economic domination. While there are several key differences, which will be discussed shortly,

both the British Empire and Modern America have imposed order over the international

economy via their hegemonic status. The result was for periods of time increasing economic

integration and trade amongst countries, a convergence of factor prices, and the process of

specialization developing division of labor among the trading nations. But even with this

evidence the claim can be made that this economic integration is significant it is not really all

that useful when looking at a particular nation’s domestic economy since the top competitors for

domestic firms are other domestic firms; added to which the fact that trade is and was only a

portion of global income.

However, its useful to be thinking about how this and other globalization forces impact

how the economy grows or changes, not just percentages. We would expect the industries that

use the relatively abundant factor of production intensively to thrive and grow, those that utilized
the relatively scarce factor suffered. It is in this way I feel that the British Empire and the modern

America differ with respect to their economic integration, namely that the Pax Britannica was a

shallower integration than that our present situation.

For example, most of the goods traded during the British time period were commodity

goods, not manufactures that require an intense amount of coordination and infrastructure to

carry out effectively. Most of the manufacturing was done in England. In the modern day

experience, there is regional specialization within manufactured goods and the production

process. The ‘world car’ has come about, assembled with parts from across the globe. So the

diversity of our division of labor is much stronger than during the Britain’s economic dominion.

This implies greater communication and coordination between international economic actors,

and we indeed have both.

The technological revolution of the past 30 years or so has enabled us to achieve feats of

calculation and information transfer that prior generations for centuries back could not fathom. It

has been estimated that the amount of information generated by the world over the next year will

exceed the amount of information generated over the prior 5,000. Even greater reductions in

shipping costs via air and containerization have reduced transaction costs even further. Our

ability to collect data about systems and the natural environment is much more reliable and

efficient. Advanced technology is allowing us to make decisions based upon this data and

determine solutions to once complex problems.

More fundamentally, we can look at how exactly this integration played out. Britain’s

move towards trade liberalization was mostly unilateral, which incurred greater rates of

protectionism in its trading partners. America fostered a globally integrated economy through

reciprocal trade barrier reductions, which incentivizes inclusion and participation. It is not too
much to assume that more participants and greater number of ties would strengthen the overall

flex of the system. While it could be both stabilizing or destabilizing, it also means the system

can be impacted and corrected more easily.

On top of this strategy, the American system has involved the establishment of

institutions. David A. Lake articulates Keohane, “[international regimes] are instruments of

stagecraft and are created to facilitate cooperation, specifically, by (a) providing a legal liability

framework, (b) reducing transactions costs, and (c) reducing uncertainty by providing

information and constraining moral hazard and irresponsibility.” (FLB, 148) These institutions

build behaviors and norms into the system that are consistent and enduring, reinforcing itself.

Also, the scope and size of the impact in terms of world population is something like has

never been seen before. As reported by David Dollar, global inequality has stopped rising, a 200-

year trend, and has remained relatively flat, so there is clearly a huge reversal of fortune for a

good chunk of the population. Since 1980 the number of extremely poor people has declined by

a dramatic 375 million. Other evidence suggests increased integration has improved the

circumstances of previously discriminated minorities and women in developing nations. While

much more progress is needed to achieve a lasting solution, these are great signs.

Multinational Corporations, while clearly not infallible, offer structure, routes, and

pathways for international economic activity. This economic entity simply didn’t exist in its

present form during prior economic integration. The ability of MNCs to impact development and

investment decisions across the globe is staggering. Wal-Mart is nearly one of the top 10

wealthiest entities in the world. They wield tremendous economic force. They are profiting from

increased economic integration and thus act as conduits for that integration further strengthening
ties betwixt markets. This is in part why current globalization forces are emphasizing both the

local and the global simultaneously.

Anecdotal evidence from observing the Global Economic Crisis of 2008 leads the author

to believe we presently have an interwoven system of businesses and government across the

planet that is very interested in cooperation, coordination, and integration. These are international

norms and realities that have never existed before. In the face of retreating capital flows in the

forms of international investment and trade, the economies of the world quickly banded together

to coordinate a response.

In the face of retreating capital flows in the forms of international investment and trade,

the economies of the world quickly banded together to coordinate a response. Nearly, if not all of

the G-20 countries enacted expansionary fiscal and monetary programs and the result has been a

painful correction; which we are currently still dealing with in terms of lower output and

increased unemployment. However, there was no permanent retraction away from the

international economy. The system suffered the shock and is now working out the consequences,

but it held. For now anyway, we’ll see how Europe fares.

However, even given these unprecedented characteristics of our current global economy,

current economic integration remains “shallow” and absolutely reversible. Liberalization of trade

policies and financial capital, the opening of markets, is only one piece of the puzzle. The

realities of the various domestic economies and governmental systems remain fractured. There is

a plurality of different regulatory regimes across countries in all areas of economic significance:

labor, environmental, financial.

This lack of legal and political integration undermines the functionality of the global

economic system by increasing transaction costs and creating an environment that is unstable
and generates significant friction within the system. Repeated financial crisis spread by

contagion, persistent current account deficits in the United States translating into capital outflows

from poorer countries, and increased wage inequality between skilled and unskilled workers

which has manifested as lower inequality in the developing world and higher inequality in the

industrialized.
 This is especially prescient when considering rich countries as it is backlash against

globalization and integration in these countries that could lead to protectionist policies and the

unravelling of our present economic integration. This backlash is explained by Scheve and

Slaughter, “policy [US policy] is becoming more protectionist because the public is becoming

more protectionist, and the public is becoming more protectionist because incomes are stagnating

or falling” (FLB, 539). Since especially unskilled and low-skill workers face increased

competition through a more integrated labor market there will be trends towards lower wages

and unemployment among these groups. Evidence confirms, “...from 1966 to 2001, the median

pretax inflation-adjusted wage and salary income grew just 11 percent - versus 58 percent for

incomes in the 90th percentile and 121 percent for those in the 99th percentile” (FLB, 540).

If an unskilled worker for example, loses their job in a rich country to globalization and

relocation in the developing world, the impact does not stop at that individual, it is dispersed

throughout the rest of the economy. Their ensuing job search puts pressure on the labor markets,

even of non-trading industries. So the economic integration likely has a significant impact in

explaining this inequality via the aforementioned mechanism.

The rising inequality translates into increased protectionist sentiment among the

population, which in Democratic societies like those that make up the modern era, that has

important political realities. If these realities become codified as policy, the benefits from

liberalization will be reduced and the economic integration could fall back in on itself. This is

why many claim that the benefits of globalization must be shared more equally among all and

investment must translate into genuine development, or else the frictional effects of integration

could snuff it out as it did in the past.

 So we stand at a place where we are better armed with institutions, technology, and

increasing gains among the some of the largest and poorest populations in the world, but

backlash is not unfelt due to underlying disharmony among political and social systems. Dani

Rodrik summarizes, “Jurisdictional discontinuities impose transaction costs on international

trade and finance that remain in place even when conventional barriers in the form of import

duties and financial restrictions are removed” (FLB, 564).

The greatest example of a truly integrated market is the United States, because there is a

political and social integration that reduces inefficiencies in the system. The EU is attempting to

do this now, as supranational government action and oversight become more and more the norm.

To translate this onto the global level would require a huge retreat of national sovereignty and the

expansion of democratic politics to the next level. Rodrik uses the term “deep integration” to

explain this type of harmonization, while at the same time suggesting that it was a near definite

impossibility suggesting a pursuit of second-best “policy-space” solutions. This new institution,

agreement, mechanism, etc. would theoretically allow rich countries to address issues of

distribution and facilitate the adjustment of its work force to new employment opportunities;

while at the same time allowing poorer countries to stay in the economic system yet maintain a

degree of industrial policy control and flexibility, like the successes of India and China would

suggest.
 The author is unconvinced. The era of the United State’s economic supremacy is ending,

yet it will still be decades before China or any of the other BRIC countries, who are the would-be

contenders for the top slot, surpasses it in size. More and more we are able to communicate and

interact with people from other countries, cultures, with world perspectives different from our

own. If there is to be an even larger downturn, one that dramatically reduces welfare and erodes

the power of the nation state on a large enough scale, one of the possible outcomes must be the

establishment of a global government to bring order. The bonds of cooperation that have been

forged between countries, while not always magnanimous, will not disappear. To this observer, it

does not seem likely we will abandon each other at this point. No it seems feel that if the

wrinkles in economic integration can not be ironed out in time to avoid a painful retraction

humanity will likely try, try, try again.

 Works Cited or Consulted

• From International Political Economy: Perspectives on Global Power and

Wealth:

“British and American Hegemony Compared: Lessons for the Current Era of Decline”
by David A. Lake
“Globalization, Poverty, and Inequality since 1980”
by David Dollar
“Globalization and Inequality, Past and Present”
by Jeffrey G. Williamson
“The Political Economy of Trade Policy Reform”
by Razeen Sally
“A New Deal for Globalization”
by Kenneth F. Scheve and Matthew J. Slaughter
“How to Save Globalization from Its Cheerleaders”
by Dani Rodrik

• From International Political Economy 4th Ed. by Thomas Oatley:

Chapter 16: “Globalization: Consequences and Controversies”