Absolute or relative gains? How status quo and emerging powers conceptualize global finance

Abstract

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.

It’s a small, small, small world: The Icesave dispute and global orders of difference

“…The notion of small worlds thus complements the IPE and geography literatures by drawing attention to how statecraft is a response to (potentially unvoiced) power imbalances in ways that are crucial not only for state negotiations, but also for the refashioning of the state itself. In the process, I highlight the relevance of specific imaginations of global difference, thus providing further context of the power at play in the "mental models" of regulation (Armijo and Echeverri-Gent, 2014) and "the inside of events" (Germain, 2007: 130). The motivations, decisions, and conceptions of regulatory decisions are already informed by, and conceived within, particular and often rigid imaginations of the globe and related conceptions of the "right" kind of national difference, and the right kind of states.…”

“…In terms of the third IPE focus, important studies are also being conducted to further incorporate analysis of regulatory practices and foreign policy in the Global South. In this vein, Armijo and Katada (2014) and Armijo and Echeverri-Gent (2014) have expanded on the concept of "financial statecraft" to refer to the "intentional use, by national governments, of domestic or international monetary or financial capabilities for the purpose of achieving ongoing foreign policy goals " (Armijo and Katada, 2014: 2), with a focus particularly on the BRICs (Brazil, Russia, India, and China). Small worldings are employed in precisely this way, as a method of effecting foreign policy through finance, in this case by controlling the structure of regulatory organizations.…”