Major Events in International Political Economy - Essay Example

? Breton Woods Monetary System, Oil Embargo, And International Political Economy Introduction IPE refers to the Global Political Economy or the studyof political science as it relates to the economy and international relations. Cohen, B.J. (2008, p. 16) defines IPE as “the reciprocal and dynamic interaction in international relations of the pursuit of wealth and power.” It considers various cultures and their response as a country or organization to certain political initiatives that have an impact on international trade, socio-economic changes and developments, including but not necessarily limited to the market developments. According to Friedon, J. and Martin, L. (2003, p.118), “the boundaries of IPE are not always clear”. It covers domestic trade politics, policies on FX rate, politics with the World Trade Organization (WTO), international trade of goods and capital, as well as the interaction between the domestic and international economic and political factors. Furthermore, scholars utilize a mixture of empirical data and theories to arrive at an understanding of IPE at different points in time. This essay looks into the major events that had an impact on the International Political Economy or simply International Relations, namely, the Breton Woods Monetary System and the Oil Embargo of 1973. Discussion What was the Bretton Wood Monetary System (BWMS)? The process of monitoring the exchange rates between the dollar and other foreign currencies by World Bank (WB) and the International Monetary Fund (IMF) and lending reserve money supply for developing nations, wherein the US dollars were linked to gold with $ 1 equals 35 oz. of gold, was well known as the BWMS. In nearly 150 pages the National Bureau of Economic Research (NBER) publicized the history of Bretton Woods, from its origin to its demise, and concluded by saying (1992, p. 61) “The defects and dramatic collapse of Bretton Woods have discouraged nations from seeking to restore a system like it.” The system collapsed as soon as the dollar link to gold was severed and instead, the value of foreign currencies was made to float against the US dollar. It derived its name from the American resort where a conference of national economic leaders agreed on a plan to reconstruct out of the war damages, by following the international monetary rules. 730 delegates from 44 nations then allied with the USA and UK had agreed to link the foreign exchange (FX) rates to the dollar which corresponded to a gold standard value. The international transactions were then aimed to reconstruct countries damaged by World Wars. They decided to fix the FX rates against the dollar. The currency of each country was given a par value against the dollar. They agreed on not allowing the foreign currencies to float and to maintain adequate supply of monetary reserves and to avoid any economic warfare. FX currency should not be controlled to regulate purchases or sales of currencies intended for trade of goods and services. As for the purpose of having a forum wherein members can vote on certain decisions pertaining to the monetary rules, the USA maintained a veto power. By August 15, 1971, seeing that dollars were headed towards a proportion which could not be backed by gold, the standard of convertibility of the dollar to gold was suspended. Both the par value and gold standard ended. That was the end of the Breton Woods Monetary System. Currencies of industrial countries were made to float for consideration during FX transactions. In place of gold standard value of the dollar, the basis became whatever promises were made by the government. The events after Britton Woods saw USA and UK suffering in terms of deficits in its Balance of Payments and high unemployment rates. This has made economists suggest that the economic system should once again be created or modified similar to the way it was done when the Bretton Woods Monetary System began. But there have been major changes in the world market, particularly the rising prices of oil which caused great damages to non-oil producing countries. Value of money of households was apparently devalued by consequent price increases in the prime commodities. But in the USA, the effect of oil price increases can just be temporary if there will be an eventual lowering of the oil price. Or it can be damaging to some businesses if the high price persists, because oil price affects cost of production, selling price, and eventual demand. The Economist (2012) cites such a complex situation. Shortly after the implementation of what came to be known as “the flexible exchange-rate period, 1973-1985” (Levi, Maurice D. 2009, p. 238), the USA gained an advantage because oil prices increased following the oil embargo. At that time, it was believed that USA was self-sufficient when it came to oil. Many other countries experienced inflation. USA became a lender of oil importers. Oil importers needed more dollars to buy their oil supply. On the other hand, OPEC nations earned more dollars and wanted to invest their income in the USA, thereby giving the USA more cash to lend. Unfortunately, by the 1980s, the US government experienced growing Balance of Payment Deficits. It could have been due to heavy reliance on interest income from loans extended to borrowers at a time when more dollars were needed by oil importers, while income from growth in private and public enterprises was not enough to cover for overall cash outflows of government. When prices of oil dropped, the BOP became a problem. Government economic forecast became attuned to oil price hikes, when all of a sudden, in 1986, the oil price took a deep dive. In 1973, during the oil embargo, oil price rose from $2.50 per barrel to $14.00 per barrel. It increased some more by 1978 when Iran’s Ayatollah Khomeini reigned, causing oil price to soar from $ 14 to $ 34 per barrel. The price of oil suddenly fell down to only $ 7.oo. This had a devastating effect on the BOP since expenditures were set high based on the forecasted dollar inflows which were somehow reacting to the price of oil. Wallace, William M. (2010, pp. 9-10) disclosed these shocking changes and even cited how American businesses were penetrated by the Japanese by their teamwork and quest for higher quality of manufactured goods. Reaganomics otherwise known as the supply-side economics was in effect during the term of Pres. Ronald Reagan 1981 to 1989. It advocated tax reduction to stimulate economic growth, control of money supply to minimize inflation, reduction in government regulations, and reduction in government spending. Yet the result was a BOP deficit due to the sudden lowering of the oil price in the world market. Federal debts increased. Norton, M. B. et. al. (2011, p.981) wrote: “Most of the new inequality was due to Reagan’s economic policies, which benefited the wealthy at the expense of the middle- and lower-income Americans.” And that was because the tax reduction actually reduced the taxes of the 1% rich by 14.4% while it increased the taxes of the poorest 20% by 16%. Also, in the latter half of 1980s, OPEC politicized the pricing of oil, meaning that oil supply and prices were based on decisions of politicians interested in their own benefits. Cleveland, C.J. (2009, p. 234) cited the situation of the Shah of Iran who raised prices of their oil supply for the world market. The decision to increase prices had nothing to do with limitations in oil reserves. In the following years, investments into the USA mostly acquired US businesses rather than created and established additional US businesses. By the year 2000, Howenstine, N. G. reported (2001, p. 29) that 99% of the total investments in the US was for the purpose of acquiring businesses in the USA. The ultimate beneficiaries were 75% from Europe while the rest were divided among Canada, Latin America, Western Hemisphere, Pacific, and Asia. UK was the biggest investor. What had happened to International Political Economics turned out to be more about International Relations, since there was not much politics involved in achieving commercial trade between the USA and other countries. Conclusion Up to the present day, although the Breton Woods Monetary System no longer exists, countries give importance to the US dollar. The US dollar, as international standard, remains to be the recognized currency for trading worldwide in many countries. USA government economic policies like the stimulus package was reported by the IMF (2011, p.1) to have resulted in some political stability because it calmed international markets. It means many countries would like to see USA as a good source of business, but cannot hope to gain from USA as a trading partner if its government fails to correct the economic problems of its country. IMF recognized the global spillover effects of recession in the USA and said (2011, p.5) that the mere news about bonds and stocks in the capital market “is a major driver of foreign asset prices, while foreign events have only weak effects on US asset prices”. Yet the business world sees USA to be only the 2nd predominant role in commercial trade wherein the Euro Trade is most predominant. Even in the Middle East, North African, Afghanistan, and Pakistan (MENAP) countries that have been benefitting from oil price increases, the IMF recognized (2011b, p.1) that they would experience adverse effects if advanced economies fail to “address their debt and fiscal challenges”. An economic trend has sidestepped political maneuvers. Globalization and computerization worldwide have the effect of adjusting the system of societies--both economic and political systems. In Red China, for example, wherein the government is Communistic rather than Democratic, the leadership there have started dealing with many democratic nations by relaxing some of their policies in order to allow “free enterprise” for foreign multinationals like McDonalds within China Mainland. From the perspective of business, a food enterprise like McDonalds sees the vast market for quality food to be made up of 1.3 billion Chinese. In 1990, the first McDonald’s store opened. Griffith, W. (2008) revealed that the branches of this foreign multinational in Red China had reached 800. Under a Communistic regime, the government used to have a closed door policy against capitalism years earlier. Seeing the need and advantages of relaxing their strict policies, the Chinese government now has investments in various parts of the world, including in the USA, wherein the large population of Chinese laborers are able to find jobs. Foley, D. (2011) reported that Chinese investments in the USA reached $ 11.6 billion. However, he noticed the Chinese government’s decision to be founded on commercial advantages rather than political reasons. Investing in companies with technologies needed by the country allows the Chinese government to gain access to foreign innovative technologies. Red China’s need for energy sources for its growing population and growing business activities can be one of the major reasons why the government seeks to invest in some countries that are rich in oil or potentially rich in oil supply. There were reports about heavy use of charcoal and the disadvantage of having polluted atmosphere, which drives China to seek better energy sources. References Bordo, Michael D. (1993). The Bretton Woods International Monetary System: An Historical Overview. NBER Working Paper No. 4033. March 1993. Available at http://www.nber.org/papers/w4033.pdf?new_window=1 Cleveland, Cutler J. (2009). Concise Encyclopedia of the History of Energy. Academic Press. October 5, 2009. 354 pages Cohen, Benjamin J. (2008). International Political Economy: An Intellectual History. Princeton University Press. Feb. 25, 2008. Foley, Donough (2011). What’s Behind China’s Direct Investments in the US ? A Taste Of Red, November 9, 2011. Retrieved from http://www.atasteofred.com/index/2011/11/what%E2%80%99s-behind-china%E2%80%99s-direct-investments-in-the-us/ Frieden, Jeffry and Martin, Lisa L. (2003). International Political Economy: Global and Domestic Interactions. Political Science: The State of Discipline. (Ira Katznelson, Helen V. Milner, Eds.)., New York: W.W. Norton Griffith, Wally (2008). McDonald’s Has A Big Appetite For China. CNBC, August 15, 2008. Retrieved from http://www.msnbc.msn.com/id/26226387/ns/business-cnbc_tv/t/mcdonalds-has-big-appetite-china/#.T1GBg4eO0l8 Howenstine, Ned G. (2001). Foreign Direct Investment in the United States New Investment in 2000. Survey of Current Business. US Bureau of Economic Analysis. June 2001. IMF (2011). The United States Spillover Report – 2011 Article IV Consultation. IMF Country Report No. 11 / 203. IMF Publication Services. July 2011. IMF (2011b). Reginal Economic Outlook Middle East, North Africa, Afghanistan, and Pakistan Highlights. International Monetary Fund Report. October 25, 2011. Levi, Maurice D. (2009). International Finance. Taylor and Francis. May 11, 2009. 582 pages. Norton, M. B., Blight, D. W., Sheriff, C., Chudacoff, H.P., Katzman, D.M., Logevail, F. , and Bailey, B. (2011). A People and a Nation: A History of the United States. Cengage Advantage Books, Vol. 2. Jan. 13, 2011. 624 pages. Stephey, M.J. (2008). A Brief History of Bretton Wood System. Time Business News. October 21, 2008. Retrieved from http://www.time.com/time/business/article/0,8599,1852254,00.html . The Economist (2012). When The Supply Shocks Are Demand Shocks And The Demand Shocks Are Supply Shocks. Free Exchange Economics – Oil. Feb. 26, 2012. Retrieved from http://www.economist.com/blogs/freeexchange/2012/02/oil . Wallace, William McDonald (2010). The Decline and Fall of the US Economy: How Liberals and Conservatives Both Go Wrong. Greenwood Publishing Group. July 1, 2010. 134 pages. Read More