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International economics and international politics: a framework for analysis

Published online by Cambridge University Press:  22 May 2009

C. Fred Bergsten ,
Robert O. Keohane  and
Joseph S. Nye
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Extract

Until August 1971, the United States categorically rejected any notion of devaluing the dollar and championed an international monetary system based on fixed but adjustable exchange rates. From August 1971 through February 1973, the United States aggressively sought massive devaluation of the dollar, and since early 1973, it has actively promoted the adoption of highly flexible exchange rates.

Type
Section I
Information
International Organization , Volume 29 , Issue 1 , Winter 1975 , pp. 3 - 36
Copyright
Copyright © The IO Foundation 1975

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References

1 For an attempt to argue that economic considerations were paramount in United States foreign policy after World War II, see Joyce, and Kolko, Gabriel, The Limits of Power: The World and United States Foreign Policy, 1945–1954 (New York: Random House, 1972)Google Scholar. The authors choose references to economic purposes as indicating “real” motivations, and ignore or discount references to security purposes. The limitations of their analysis are most graphically revealed by their failure even to mention the psychic effects of Munich-in over 700 pages about the first postwar decade of US foreign policy! Conservative historians have taken the opposite approach of regarding economic motivation as simply derivative from security concerns. In our view this represents an artificial and ultimately fruitless search for the “essential” element in an inextricably intertwined set of reasons and rationalizations.

2 See Bachrach, Peter and Baratz, Morton, “Decisions and Nondecisions: An Analytical Framework,” American Political Science Review 57 (1963): 632–42CrossRefGoogle Scholar.

3 See Keohane, Robert O. and Nye, Joseph S., “World Politics and the International Economic System,” in Bergsten, C. Fred, ed., The Future of the International Economic Order: An Agenda for Research (Lexington, Mass.: D.C. Heath, 1973)Google Scholar. The following six pages draw heavily upon this essay.

4 See Hoffmann, Stanley, Gulliver's Troubles, or The Setting of American Foreign Policy (New York: McGraw Hill, 1968)Google Scholar.

5 For one of the coauthors' views on these issues, see Bergsten, C. Fred, “The Threat from the Third World,” Foreign Policy, no. 11 (Summer 1973): 102–24Google Scholar; and Bergsten, , “The Response to the Third World,” Foreign Policy, no. 17 (Winter 1974–1975)Google Scholar.

6 In 1969 Kindleberger, Charles argued in a much-quoted (and probably much-regretted) phrase that “the nation-state is just about through as an economic unit” (American Business Abroad [New Haven, Conn.: Yale University Press, 1969], p. 207)Google Scholar. The most trenchant criticisms of this view can be found in the works of Waltz, Kenneth N., particularly, “The Myth of National Interdependence,” in Kindleberger, Charles, ed., The International Corporation (Cambridge, Mass.: Harvard University Press, 1970)Google Scholar; and Gilpin, Robert, particularly “The Politics of Transnational Economic Relations,” in Keohane, Robert O. and Nye, Joseph S., eds., Transnational Relations and World Politics (Cambridge, Mass.: Harvard University Press, 1972)Google Scholar. For an assessment of the controversy, see the essay by Keohane and Ooms in this volume, and Keohane, Robert O. and Nye, Joseph S., “International Interdependence and Integration,” in Polsby, Nelson and Greenstein, Fred, eds., Handbook of Political Science, vol. 7 (forthcoming in 1975)Google Scholar.

7 For one effort, see Bergsten, C. Fred, Completing the GATT: Toward New International Rules to Govern Export Controls (Washington, D.C.: British-North American Committee, 11 1974)Google Scholar.

8 For evidence of this in the case of Canada, see Nye, Joseph S., “Transnational Relations and Interstate Conflicts: An Empirical Analysis,” International Organization 28 (Autumn 1974): 961–96CrossRefGoogle Scholar. It should be noted that a serious future threat-not necessarily from the Soviet Union and not necessarily military-could restore greater cohesion. The steps taken in late 1974 toward an oil consumers organization provide an indication that events might move in this direction.

9 For two views of this problem, see Bergsten, C. Fred, “Crisis in U.S. Trade Policy,” Foreign Affairs, 07 1971, pp. 619–35Google Scholar; and Vernon, Raymond, “A Skeptic Looks at the Balance of Payments,” Foreign Policy, no. 5 (Winter 1971–1972)Google Scholar.

10 See, for instance, Calleo, David P. and Rowland, Benjamin M., America and the World Political Economy (Bloomingtoh, Ind.: Indiana University Press, 1973)Google Scholar. Their first section, on “interdependence and American hegemony” (pp. 3–8), fails to define either term.

11 See Keohane, Robert O., “The Big Influence of Small Allies,” Foreign Policy, no. 2 (Spring 1971)Google Scholar.

12 See Kindleberger, Charles, The World in Depression 1929–1939 (Berkeley, Calif.: University of California Press, 1974)Google Scholar. A parallel argument is found in the literature on regional economic and political integration, in which it is often held that either clear preponderance by one power or relative equality between several may be conducive to integration but that an intermediate situation is less auspicious. See Nye, Joseph S., Peace in Parts (Boston: Little, Brown & Co., 1971)Google Scholar, for a full discussion of these issues.

13 For the figures, see McKay, John P., Pioneers for Profit: Foreign Entrepreneurship and Russian Industrialization, 1885–1913 (Chicago: University of Chicago Press, 1970), table 2, p. 5CrossRefGoogle Scholar.

14 Calleo, David P., “American Foreign Policy and American European Studies: An Imperial Bias?,” in Hanreider, Wolfram, ed., The United States and Western Europe (Cambridge, Mass.: Winthrop, 1974)Google Scholar.

15 See particularly Kindlebeiger, Charles P., “The International Monetary Politics of a Near-Great Power: Two French Episodes, 1926–1936 and 1960–1970,” Economic Notes (Siena) 1, no. 2–3 (1972)Google Scholar; or Kindleberger, The World in Depression.

16 Hirsch, Fred, An SDR Standard: Impetus, Elements, and Impediments, Princeton Essay in International Finance No. 99 (Princeton, N.J.: International Finance Section, Department of Economics, Princeton University, 06 1973), p. 3Google Scholar.

17 Bergsten, C. Fred, The Dilemmas of the Dollar: The Economics and Politics of United States International Monetary Policy (New York: Council on Foreign Relations, forthcoming 1975)Google Scholar, which also covers in depth some of the points discussed in this section.

18 Cooper, Richard N., “Trade Policy is Foreign Policy,” Foreign Policy, no. 9 (Winter 1972–1973)Google Scholar.

19 Snyder, Glenn H., Stockpiling Strategic Materials: Politics and National Defense (San Francisco: Chandler Publishing Co., 1966), p. 267Google Scholar.

20 Bauer, Raymond A., Pool, Ithiel DeSola, and Dexter, Lewis Anthony, American Business and Public Policy: The Politics of Foreign Trade, 2nd ed. (Chicago: Aldine-Atherton, 1972), p. 144Google Scholar.

21 Wolfers, Arnold developed the seminal discussion of this issue in “National Security as an Ambiguous Symbol,” in Political Science Quarterly 67 (12 1952)CrossRefGoogle Scholar, which was later reprinted in Wolfers, Discord and Collaboration (Baltimore: The Johns Hopkins Press, 1962), chapter 10.

22 For the constructive interpretation, see a variety of official reports, including particularly the International Economic Report of the President, February 1974, transmitting the second annual “International Economic Report” of the Council on International Economic Policy (Washington, D.C.: Government Printing Office, 1974)Google ScholarPubMed. For representative adverse reactions, see the essays by Calleo and by Cohen in Hanreider, ed., The United States and Western Europe.

23 For a fuller discussion, see Robert O. Keohane and Joseph S. Nye, “World Politics and the International Economic System”; and the works cited in footnote 6.

24 Keohane, and Nye, , “World Politics and the International Economic System,” p. 138Google Scholar.

25 Henry A. Kissinger, Address before the Sixth Special Session of the United Nations General Assembly, 15 April 1974, Department of State, Office of Media Services, News Release, 15 April 1974, p. 2; reprinted in International Organization 28 (Summer 1974): 573–83.

26 Ibid., p. 1.

27 See Kaplan, Morton, System and Process in International Politics (New York: Wiley, 1957)Google Scholar.

28 Tinbergen, Jan, On the Theory of Economic Policy, 2nd ed. (Amsterdam: North Holland Publishing Co., 1963)Google Scholar.

29 See Cooper, Richard N., “Macroeconomic Policy Adjustment in Interdependent Economies,” Quarterly Journal of Economics 83 (02 1969): 1–24CrossRefGoogle Scholar.

30 Numerous examples beyond the obvious US dependence in imports of oil and other raw materials can be cited. The overvaluation of the dollar was probably costing the United States 500,000 jobs by mid-1971, raising the rate of unemployment by 0.7 percentage points (from near 5 percent to about 6 percent), a jump of great political as well as economic importance. Conversely, the dollar devaluations of 1971–73 contributed at least one-fourth of the rise in the US inflation rate during that period, and growing foreign demand for US agricultural goods added to this total. About one quarter of all investment by US-based firms now takes place in other countries. These foreign direct investments provide a like share of US corporate profits, and well over one-half of the profits of many major US firms. Over one quarter of US farm output is exported.

31 On the last point, see Bergsten, C. Fred, “Coming Investment Wars?,” Foreign Affairs, 10 1974, pp. 135–52Google Scholar.

32 Mundell, Robert A., International Economics (New York: MacMillan Co., 1968), especially pp. 282–88Google Scholar.

33 The charter of the abortive International Trade Organization provided a far clearer statement of objectives than did the charters cited in the text. It included a full chapter on “employment and Economic Activity” as well. See Mikesell, Raymond, “The ITO Charter,” American Economic Review 37 (06 1947): 353–56Google Scholar.

34 Welfare can of course have several different meanings, in terms of both economics per se and at the broader societal level. Indeed, each of the goals described in this article represents a different aspect of welfare, broadly defined. For a useful comparative analysis of the different concepts of economic welfare, see Myint, Hla, Theories of Welfare Economics (New York: Sentry Press, 1965), especially chapter 12Google Scholar.

35 Johnson, Harry G., Comparative Cost and Commercial Policy Theory for a Developing World Economy, Wicksell Lectures 1968 (Stockholm: Almquist & Wicksell, 1968), p. 10Google Scholar.

36 For an enumeration of these deviations and a subjective judgment that their quantitative impact is not large, see Cooper, Richard N., “Economic Assumptions of the Case for Liberal Trade,” in Bergsten, C. Fred, ed., Toward A New World Trade Policy: The Maidenhead Papers (Lexington, Mass.: D.C. Heath, 1975)Google Scholar.

37 Hairy G. Johnson, “The Probable Effects of Freer Trade on Individual Countires,” in Bergsten, ed., Toward a New World Trade Policy: The Maidenhead Papers.

38 It is true that the United States tolerated discrimination against it in the early postwar period, which detracted from global economic efficiency. This was done for reasons of national security, however, rather than to meet any other economic criteria (except, perhaps, for an application of “infant industry” reasoning to the postwar reconstruction of Europe and Japan). In addition, many of the discriminatory steps were viewed by the United States as necessary but temporary way stations en route to a world of multilateral free trade and payments, which proved correct at least in the monetary area where the European Payments Union paved the way for European convertibility.

39 The shift from fixed parities to managed flexibility of exchange rates resulted from the widespread conclusion that markets could set equilibrium exchange rates better than governments, more than from any shift in notions about which system was more efficient. We will see shortly, however, that changes in the views of key countries about the relative importance of the different criteria had a major impact on that change.

40 Bergsten, “Coming Investment Wars?”

41 Pen, Jan presents a “non-exhaustive” list of 21 alternative objectives of income distribution in his Income Distribution (New York: Praeger, 1971), pp. 291–316Google Scholar, a lucid and witty presentation particularly useful for noneconomists.

42 Assuming that the rate itself reflects long-term equilibrium conditions, and by contrast with a rate fluctuating around that same equilibrium point.

43 Such a view can be found in Friedman, Irving S., Inflation: World-Wide Disaster (Boston: Houghton Mifflin Co., 1973), especially chapter 5Google Scholar.

44 On the other hand, some observers view the present system of managed flexibility of exchange rates as equally, if not more, inflationary.

45 For a comprehensive analysis, see Ingo Walter, “Environmental Management and the International Economic Order” in Bergsten, ed., The Future of the International Economic Order: An Agenda for Research.

46 See also the discussion in this volume in the last essay by Krause and Nye.