International Financial Governance – Time for a radical institutional transformation and economic reorientation (by Henning Schmidt) PART 1

110811girouxAn article on the neoliberal reaction to the global financial crisis in 2007/8 and its severe long-term effects: Harsh austerity policies, an ongoing recession and mass unemployment.

Part 1 (4th of June 2015)

a) Aim of this blog post

b) Daniel Drezner’s claim around the great reaction of the global governance infrastructure to the global financial crisis in 2007/8.

Part 2 (5th of June 2015): Rejecting Drezner

a) Shared sets of belief:
Responsible for the immediate turnaround to austerity which caused the ongoing economic recession

b) Global governance mechanisms and the new financial architecture:
Precursors of the economic crisis

Part 1

a) Aim of this blog post

Last year, Daniel Drezner (Professor of International Politics at the Fletcher School of Law and Diplomacy at Tufts University) fueled the debate around the global governance infrastructure’s reaction to the global financial crisis in 2007/8 and its consequences. Did this complex web of networks, supervisory boards and international fora of governments (G7/8 and G20) react properly to the financial crisis? Drezner admitted that some areas of governance are open to improvement, but generally stated: “On the whole, the system has worked”.

In terms of the immediate rescue mechanisms that hindered the crisis to unfold in a similar severe manner as in the early 1930s, many scholars agree with Drezner. However, several among them attempt to broaden the context of analysis. Therewith, they widen the room for fundamental critiques on the advocacy of the neoliberal global governance infrastructure in general that emerges when reading Drezner’s description of how well the things have been going on in terms of rescue mechanisms.

While accepting Drezner’s claim that initial measures indeed prevented a much more severe depression, this blog post criticizes the long-term successfulness of the rescue attempts. It reproaches Drezner for an underestimation “of the serious and protracted nature of the global economic crisis that began in August 2007” (Callinicos 2012: 66) and from which particularly the traditional ‘core’ regions of advanced capitalism haven’t recovered at all. Going further, it states that the bail-outs and fiscal stimuli have been enabled by the same neoliberal institutional arrangements which actually are responsible for the emergence of the crisis itself. In order to avoid future crashes, the “liberal international order as an organizational logic of world politics” (Drezner 2014: 157), in other words: the institutionally embedded neoliberalism and financialization have to be fought at every level of global governance – joint with the necessary extensive economic reorientation!

So far, so good, let’s introduce Drezner’s claim!

b) Daniel Drezner (2014): “On the whole, the global economic governance system has worked”.

What does Drezner mean with ‘Global Economic Governance’? Which institutional arrangements does he address? Which reasons does he finally present?

First of all, when talking about ‘Global Economic Governance’, Drezner simply means the “set of formal and informal rules that regulate the global economy and the collection of authority relationships that promulgate, coordinate and enforce said rules” (Drezner 2014: 123).

He primarily addresses four institutions: The IMF, the WTO, the BIS (Bank for International Settlements) and the ‘G’ country meetings (G7/8 as well as G20). The starting point of his assessment is game theoretic: Well-functioning global economic governance reduces the transaction costs of policy coordination, hence making it more efficient, faster and comprehensive – particularly important in situations of emergency (see 125). Drezner points out that prior to the crisis, concerns about the functionality have been reasonable according to the shortcomings that all four mentioned institutions have had (for instance: China vetoed against a discussion on exchange rate issues at the IMF, the Basel II arrangements even exacerbated the banking crises and the G8 Doha Round famously failed, see 126).

However, when the burst of the asset bubble caused a crisis with a potential no less severe than the Great Depression, the global governance arrangements reacted fast and efficient – a new Great Depression could be provided. Indeed, they met the famous ‘Kindleberger’s criteria’ of how to stabilize the global economy during severe financial crises (maintaining a relatively open market for distress goods and providing liquidity to the global financial system through countercyclical long-term lending and discounting, see Kindleberger 1971: 292).

They did so, thanks to the decisive action of the major economies’ central banks. As a reaction to the escalating subprime mortgage crisis, the central banks acted concerted and coordinated. Initially they slowly cut interest rates, than more consequently. Following, the complementary action was to announce currency swaps in order to ensure liquidity. Again, important central banks (USA, Canada, UK, Switzerland, Eurozone) acted decisively and concerted. Not only that the IMF, WTO and BIS were crucial players, but also the G20 summits in late 2008 and early 2009 have been vital in terms of “advocating fiscal and monetary expansion” (Drezner 2014: 129) and providing currency wars. These proceedings even tempted the economic journalist and author Neil Irwin to claim the “first globally coordinated monetary easing in history” (Irwin 2013: 161). Drezner further illustrates the robustness of the post-2008 rebound with the rapid recovery of the WorldTrade Volume which, in 2014, actually is to be located 5 per cent higher than prior to the crisis in early 2008:

World Trade Volumes Great Depression vs Great Recession Figure 1 (see Drezner 2014: 133)

The initial fear of an increase in national protectionism turned out to be unfounded. Markets have been driving towards closure at the very beginning, expressed by measures such as antidumping cases. However, these cases decreased rapidly in the course of the crisis:

Trade Restrictions 2006 - 2011 Figure 2 (see Drezner 2014: 136)

In this context, Drezner also elaborates how not only the central banks provided the economic conditions for this recovery, he also points to the international governance arrangements mentioned above. Drezner directly links the crucial collaboration of the G8 and G20 groups in the aftermath of the crisis (e.g.: in 2009 the G20 agreed to triple IMF’s reserves to $750 billion) to the efforts of international financial institutions like the IMF. This agreement enabled the IMF to provide for further countercyclical lending. Another indicator for their success is the decline in investor protectionism immediately to the IMF-approval of the “Santiago Principles” in September 2008 (see 140 f.).

Moreover, Drezner also refers to the arrangements and mechanisms that have been improved ever since the crisis appeared (e.g. Basel III, G20 membership rules). Finally, in its monitoring and role as an unswervingly fighter and apologist for free trade, the WTO (“a focal point for plurilateral liberalization”, 146) played another crucial role in 2008 and beyond.
Finally – to answering the third question – why, according to Drezner has the system actually worked?

To answer it very briefly, since his suggestions will be discussed tomorrow: Firstly, policy coordination has been facilitated by ideational convergence (“the shared sense of crisis spurred the major economies into joint action”, 152). Secondly, the process of globalization has locked-in powerful interests that strongly support an open global economy. Thirdly, the ongoing power of the American state and the hegemony of its currency gave the USA the financial power to decisively push for the measures that have been undertaken as well as for the incremental institutional improvements since the crisis appeared.

To be continued…

Tomorrow’s Part 2: Drezner’s arguments are truly convincing! What the hell is wrong with his claim??

Literature

Callinicos, A. (2012): “Contradictions of austerity”. In: Cambridge Journal of Economics, 36. 65 – 77.
Drezner, D.W. (2014): “The System Worked – Global Economic Governance during the Great Recession”. In: World Politics, 66. 123 – 164.
Kindleberger, C. (1971): “The World in Depression, 1929 – 1939”. Berkeley, Calif.: University of California Press.
Irwin, N. (2013): “The Alchemist: Three Central Bankers and a World on Fire”. New York, N.Y.: Penguin Press.

About the author: Henning Schmidt (23) is a proud Graduate of Democracy (’15) and currently pursuing an MA in Political Economy at King’s College London.

Advertisements

One thought on “International Financial Governance – Time for a radical institutional transformation and economic reorientation (by Henning Schmidt) PART 1

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s