At the same time that the world has reached unprecedented prosperity, issues of economic inequality have attained great political salience. In the wake of the 2008 global financial crisis, there are major differences in opinion regarding the responsibility of the United States and other wealthy countries and what the proper response should be. In July 2008, the Doha round of negotiations at the WTO broke down after developing countries could not reach an agreement with wealthy countries on agricultural trade. The IMF is under pressure to reform its governance to provide better representation to middle-income and poor countries. And development experts admonish the world about the growing gap between the world's affluent countries and “the bottom billion” (Collier 2007). It used to be that economic-development strategies would target economic growth and “let the rising tide lift all ships.” Now, there is growing concern that growth be inclusive in order to make optimal use of societal resources and mitigate the political volatility that results when substantial segments of societies are excluded from the benefits of development.
The global financial system is in the midst of an uncertain transition. While the global financial crisis has called into question the efficacy and legitimacy of the institutions of global finance, a redistribution of financial resources is transforming the balance of power within the realm of international finance. To understand the trajectory of change from the current scenario, one should understand the perspectives of key strategic actors, which we group into three mental models. Economic liberalism is the modal analytical framework for government and business circles in the United States and other wealthy democracies. Based on the premise that global markets provide efficient and socially optimal outcomes, it underscores the absolute gains they provide. Liberal institutionalism prevails in the academic community of the global "North." It emphasizes that international institutions and networks generate absolute gains by providing global public goods. Finally, economic realism is the dominant cognitive framework among government and academic circles throughout the global "South". It focuses on how the asymmetric control of strategic resources promotes relative gains that reproduce international inequalities. This essay demonstrates how these mental models illuminate debates over three key issues in global finance-capital account liberalization, the international role of the U.S. dollar, and the lessons of the 2008-9 international financial crisis. * The authors would like to thank Thomas, Oatley, Herman Schwartz, Layna Mosley, and Dale Murphy for their comments on earlier versions of this essay. We would also like to thank the members of the APSA Task Force on Difference and Inequality in Developing Societies for provocative deliberations that stimulated our early thinking on these issues. Absolute or Relative Gains? How Status Quo and Emerging Powers Conceptualize Global Finance The global financial system is in the midst of a transition. While the global financial crisis has called into question the legitimacy of the institutions of global finance, a redistribution of financial resources is transforming the balance of power within the realm of international finance. From 1990 to 2012, the G7's share of global GDP (in current US dollars) declined from 65 to 47 percent, while the share of emerging market and developing economies has grown from 20 to 38 percent (IMF/WEO 2013). From 1995 to 2012, the share of emerging market and developing countries in total foreign exchange holdings doubled from 33 to 66 percent (IMF/COFER 2013). In the midst of these changes, increasingly powerful emerging market countries have banded together into groups such as the BRICS (Brazil, Russia, India, China, and South Africa) to increase their leverage over the process of change. These countries, along with the emerging economies of Argentina, Indonesia, Mexico, South Korea, Saudi Arabia and Turkey, have gained a seat at the expanded G20 negotiating table.
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