How convincing are realist claims that the global economy is a 'zero-sum' game?

Essay written for the International Political Economy course at the London School of Economics - July 2016

In game theory, a zero-sum game is a situation in which each participant’s gain of utility is exactly balanced by the losses of the utility of the other participants. The sum of utility gained and utility lost will be equal to zero (John Nash 1951,287-289). The main idea underlying realist’s claims is that economic actors operate on the global economic landscape in order to obtain greater power relative to the one gained by their competitors. Even if cooperation with other actors could better them off, economic forces are not interested in increasing total wealth because they want to be the most powerful. Although the realist assertion can be considered partially true, especially in the implementation process of international norms and agreements, in this paper I will argue that this theory cannot be extended to the description of the whole global economy, since it is based on the idea that cooperation is not possible. To describe the current political and economical scenario in a broader way, the following paragraphs will deal with the development of the most important international institutions, emerged from the Bretton Woods conference, to see whether or not the idea of economic liberalism has overcome the problem of anarchy, substituting the struggle for power with rules. In particular, I will analyze institutions, such as the GATT/WTO, the IMF and the WB to demonstrate that they structure political, economic and social interaction in an inclusive way.

Firstly, it is hard to argue that the global political economy is a zero-sum game if we look at what has been accomplished since WWII. A globalized economy has emerged and developed thanks to countries’ cooperation to define and construct international institutions. According to realists, countries want power in order to rule in the international ground without being stopped. In this context, instutions would only be the mechanism through which powerful countries impose their rules on others. However, looking at the post-war settlement, it does not seem that major powers acted exclusively in their own interests. According to Ikenberry (1992), the Anglo-American agreements established rules for a relatively open and multilateral system of trade and payments, but they did so in a way that would reconcile openess and trade expansion with commitments of national governments to full employment and economic stabilization. Surely, the post-war agreements and settlements were guided by the hegemonic leader, USA, but the views of expert economists and politicians, together with recent post-WWI’s economic shocks, led to the implementation of the liberal Bretton Woods agreements. The post-war system’s pinciples, norms and procedures were then based on the idea of Embedded Liberalism, which associated a multilateral economic order with domestic interventionism (Ruggie 1982, 393-394). The system was constituted on three main ideas: Keynesianism, GATT and Internationalism. With the support of international institutions, world economy and world trade grew respectively at 5% and 8% in the period 1950-73, slowing down, but still increasing at 3% and 5%, from 1975 onwards (Maddison 2001: 262, 362). Moreover, according to Thun (2014), the development of transantional corporations and FDI favoured the integration of less developed countries into the international production networks. Although not all the countries equally benefited from it, multilateral cooperation extended the global market to developing economies.

Institutions in the post-war settlement guaranteed multilateral surveillance, specialization and constraints on policy sovereignity. In addition to these formal policies, informal norms flourished (symmetric adjustment responsibilities, mutual acceptance of domestic policy autonomy) in order to guarantee wealth maximization to the whole international economy. The main role of institutions in the global economy is to give a long shadow of the future, monitor state behaviour and enforce compliance. The GATT, established in 1947, is an example of this type of institutions. At the time of its foundation, it represented the values of its dominant leader, the US: liberal pro-business, favouring free-trade, multilateralism and the development of a code of international trade law. However, as the multilateral trade negotiations went on, shifts in power’s distribution have been of decisive influence on the trading system. In particular, the emerging of the European Community, then European Union, and the rise of Japan. After the Urugay Round in 1994, when the WTO was created, the agenda has been widened and developing countries have strengthened their position in the debate of new challenges (TRIPs, Labour and Environmental Standards). Realists could argue that the GATT/WTO not only developed under the influence of the USA, but, even after its evolution, it does not yet accord enough representation to developing countries. Nevertheless, the GATT/WTO is based on a series of principle that aim at ensuring that countries act in the international market without reinstituting protectionism. The MFN principle guarantees external non-discrimination, while National Treamtment oblige countries to follow internal non-discrimination. Reciprocity guarantees that if tariff reductions are given by one country to another, then this country must get similar benefits from its partner. For developing countries it was introduced the concept of special and different treatment (Winham 2014, 116-117). The Kennedy, Tokyo and Uruguay Rounds have been fundamental steps in order to effectively enforce these principles.

Out of the Bretton Woods conference came two international institutions, eventually at the core of the BWS, which deal with financing. On one hand, the IMF that is a lender of last resort, necessary in a system based on capital control to finance short-term loans. On the other, the WB is nedeed to finance long-term investment, especially considering that private investors may not be willing to take the risk in conditions of uncertainty. Governments joining this order committed themselves to currency convertibility for current account payments, a gold exchange standard, an adjustable peg exchange rate regime, an acceptance of capital controls and support for IMF and WB (Helleiner 2014, 177-179). Realists insist that, within these institutions, there is distributional inequality that derives from the political preponderance of certain nations. Many emerging markets have criticized the IMF on three different aspects: the domestic economic costs of conditionality, placing the blame for crisis on domestic policy errors and lack of representation in the Board. Moreover, the continuous shift in demand and the variation in the lending composition throughout the years may have compromised Public Good Provision from both IMF and WB. The main point, according to Boughton (2004), is that the evolution of the IMF has been driven almost entirely by shifts in world economic and political conditions, not by forces from within seeking to reinvent the institution on their own needs once the original purpose had faded away. Moreover, the 2010 IMF governance reform led to a shift in Shares and a change in Chairs, which made China, India and Brazil part of the largest shareholders respectively with 6.07%, 2.63% and 2.23% of shares (IMF Data, 2010). US still remains the largest shareholder, but its quota is not large enough to explain the use of the IMF as a political tool, and its vote share ratio to GDP remained stable, while China, India and Brazil’s ones increased. Arguing that these international organizations are used by dominant nations to pursue their interests does not seem fair, especially considering that not only these institutions have been precious in the post-war reconstruction, but they are also evolving in a more inclusive and equally-distributive way. Supporting countries’ debt and investment, favouring structural reforms in emerging markets and the adjustment of representation testify to their positive-sum game intents.

Summing up, the realist position on the global economy’s perspectives is not convincing. If we were in a zero-sum game economy, then the whole growth of the world economy after WWII would have been completely dominated by the US and the Western economies. On the contrary, the multilateralism initially exhorted by the hegemonic power has developed in a wider direction. Furthermore, the hegemonic stability theory has been discredited by countries’ active cooperation to create institutions that have gained supranational powers. These institutions have then evolved in an inclusive way characterized by the mutual acceptance of normative principles. Even if the implementation problems increase as institutions embrace new markets and challenges, a regime-based cooperation ensure that developing countries are represented, but also create incentives for structural reforms. WTO, IMF and the WB guarantee that, even after the collapse of the BWS and the cyclical crises, the world economy is not fragmented. They have been developed in accordance to “economic demand”, but they still are at the core of global economy. This scenario seems to me more inclusive and positive than the one described by the realists.

References

Boughton, J. M. (2004). The IMF and the Force of History: Ten Events and Ten Ideas that have shaped the Institution. IMF Working Paper No. 04/75.
Helleiner, E. (2014). The Evolution of the International Monetary System and Financial System. In J. Ravenhill (ed.), Global Political Economy. Oxford: Oxford University Press, 173-197.
International Monetary Fund. 2010. Executive Board and Consents to 2010 Quota Increase. Available at: http://www.imf.org/external/np/sec/misc/consents.htm. [Accessed 30 June 2016].
Ikenberry, J. (1992). A World Economy Restored: Expert Consensus and the Anglo-American Postwar Settlement. International Organization, 46:1, 289-321.
Maddison, A. (2001). The World Economy: A Millennial Perspective. Paris: Development Centre of the Organisation for Economic Co-operation and Development.
Nash, J. Non-Cooperative Games (1951). The Annals of Mathematics, Volume 54, Issue 2, 286-295.
Ruggie, J. G. (1982). International Regimes, Transactions and Change: Embedded Liberalism in the Postwar Economic Order. International Organization, 36:2, 379-415.
Thun, E. (2014). The Globalization of Production. In J. Ravenhill (ed.), Global Political Economy. Oxford: Oxford University Press, 283-304.
Winham, G. R. (2014). The Evolution of the Global Trade Regime. In J. Ravenhill (ed.), Global Political Economy. Oxford: Oxford University Press, 109-138.