Economic Discrimination and Political Exchange

World Political Economy in the 1930s and 1980s

Kenneth A. Oye

• Éditeur: Princeton University Press
• Année: 2021
• ISBN:
  9780691227801
• Sujet: Volkswirtschaftslehre
• Sous-sujet: Wirtschaftspolitik

Did bilateral and regional bargaining choke off international commerce and finance in the 1930s and prolong the Great Depression? Is the open world economic system now being placed at risk by explicitly discriminatory practices that erode respect for the GATT, the IMF, and the IBRD? Most political economists would answer in the affirmative, warning that bilateral and regional preferences are at best inefficient and at worst catastrophic. By contrast, Kenneth Oye shows how economic discrimination can foster international economic openness by facilitating political exchange.

PART I

Introduction

Chapter One

THE ECONOMIC STATE OF NATURE REVISITED

UNRESTRICTED BARGAINING AND ECONOMIC ORDER

THIS BOOK offers a qualified defense of unrestricted bargaining as a form of international economic management. To write of ad hoc bargaining as a mode of management may seem oxymoronic. Unrestricted bargaining is inextricably associated with practices that are commonly viewed as pernicious. It engenders economic discrimination as nations turn toward bilateralism and regionalism to extract concessions from negotiating partners. It breaks down orderly distinctions between issues as nations couple unrelated problems to increase leverage. In fact, ad hoc bargaining erodes respect for nondiscriminatory rules and undermines functionally defined international regimes. Yet, at times, these seemingly destructive practices can promote rather than preclude realization of mutual economic interests.

At an abstract level, this book is an inquiry into the economic state of nature. Unrestricted bargaining is a reference point defined by the absence of order. Like their namesakes, modern Grotians and Hobbesians imagine a world without rules or rulers to legitimate their conceptions of governance. Proponents of economic regimes and of hegemonic order use the economic state of nature as a common benchmark.¹ This study resurveys the reference point. It uses elementary microeconomic methods to identify conditions under which ad hoc bargaining can and cannot perform as a reasonably efficient mode of political management. It also offers a revisionist interpretation of the most recent period of unrestricted bargaining—the 1930s. Conventional wisdom holds that decentralized bargaining was the principal cause of global economic disaster during the interwar years. By contrast, this study suggests that ad hoc bargaining slowed and ultimately reversed movement toward economic closure.

At a more pragmatic level, this book evaluates the potential role of economic discrimination and political exchange in contemporary foreign economic policy. With few exceptions, political economists contend that discriminatory foreign economic policies yield outcomes that are inefficient at best and catastrophic at worst.² Political economists divide over whether the practice of joining substantively unrelated issues impedes or facilitates economic diplomacy.³ This study suggests that ad hoc bargaining has played a pivotal role in lowering barriers to trade and in drawing third parties into trade negotiations, and may come to play a significant role in restoring international lending in the aftermath of the Third World debt crisis. In fact, the most significant examples of commercial liberalization in the past decade have been achieved through bilateral and regional bargaining. Although unrestricted bargaining and economic closure are commonly equated, this study proposes that economic discrimination and political exchange can promote economic openness.

THEORY AND RESEARCH DESIGN

An elemental tension between rule-based and bargaining-based modes of economic management is at the core of these abstract and pragmatic controversies. Political bargaining generally entails economic discrimination. To confer benefits or impose costs on negotiating partners, nations offer access to markets, repayment of loans, access to credits, and conversion of currencies to some nations at the expense of others. By contrast, management by rules entails impartiality and generality. Nations cannot selectively comply with a rule while fostering respect for a rule by other nations. Substantive rules limit the scope of bargaining, while bargaining erodes compliance with substantive rules. The content of most international economic regimes is shaped by this fundamental tension. Regimes typically consist of primary rules proscribing impediments to economic exchange and secondary rules limiting political exchange. This tension is accentuated by a second attribute of unrestricted bargaining. Ad hoc bargaining often spans issues as nations couple commercial, financial, and monetary problems or join economic and security concerns to confer benefits or impose costs on negotiating partners. International regimes are typically organized along functional lines. Regimes may facilitate side payments within issue areas,⁴ but discourage linkages between issue areas. For these reasons, rule-based and bargaining-based modes of international economic management cannot readily coexist. This tension defines pragmatic debates over the effects of economic discrimination and political exchange on economic openness as well as abstract scholarly controversies over the quality of life in the economic state of nature.

The principal purpose of this study is to probe the strengths and weaknesses of rule-based and bargaining-based modes of management. How do economic discrimination and political exchange affect the openness of immediate parties to negotiation and of the international economic system taken as a whole? Stripped of most caveats and qualifications, the central line of argument reduces to the following points.

First, economic discrimination generally has liberalizing effects on the immediate parties to a preferential commercial or financial agreement. By facilitating political exchange, economic discrimination may facilitate the negotiation of bilateral and regional zones of openness. By intent and in effect, discriminatory international bargaining strategies may promote international economic liberalization by offsetting, at least in part, domestic biases toward closure. In the absence of economic discrimination, import competing sectors have a clear particularistic interest in lobbying for protection, while export-oriented sectors have a more diffuse interest in lobbying against protection. Conventional Olsonian biases toward overrepresentation of concentrated interests and underrepresentation of diffuse interests are manifested in a tilt toward protection. If market access is explicitly tied to market access, export-oriented interests develop a narrow interest in lobbying against protection. For these reasons, discrimination may increase economic openness between bilateral or regional negotiating partners. The liberalizing effects of discrimination on the principals to negotiations are strongest when domestic biases toward closure are significant. However, the effects of economic discrimination extend well beyond immediate parties to negotiations. Conclusions on whether discrimination will increase or decrease systemic openness hinge on the direct and indirect effects of discrimination on others.

Second, economic discrimination in favor of the principal parties to an agreement is generally at the expense of third parties. An importer may favor one exporter at the expense of other exporters and a debtor may favor one creditor at the expense of other creditors. In fact, Most Favored Nation (MFN) clauses in trade agreements and cross default clauses in lending agreements exist precisely to minimize such negative third-party externalities by proscribing discrimination. Yet, as the historical and contemporary chapters of this book suggest, negotiators rely on a remarkable array of techniques to exclude third parties from the effective benefits of concessions granted to parties to agreements. Where effective discrimination exists, liberalization between the parties to a bilateral or regional agreement generally comes at the expense of others. The gains from liberalization between the principals are offset, in whole or in part, by losses imposed on others. As a consequence, conventional wisdom holds that effects of economic discrimination on global openness are at best indeterminant and at worst negative. However, the effects of economic discrimination and political exchange on levels of openness are not confined to immediate costs and benefits to principal parties and third parties.

Third, discrimination can have inadvertent liberalizing consequences on global movements of goods and capital by creating a strong incentive for third parties to enter into discriminatory negotiations. As noted previously, preferential bilateral or regional agreements come at the expense of third parties. Third parties do not sit idly and accept the loss of markets for goods or capital. They turn to economic discrimination and political exchange to defend their economic position. The effects of economic discrimination on systemic openness will hinge on the extent of openness or closure of the international economic system prior to the proliferation of discriminatory practices. As discriminatory practices spread through an international economic environment, nations pursuing nondiscriminatory economic strategies—whether liberal or illiberal—operate at an increasing disadvantage. If an international economic order is open, then the spread of discriminatory economic practices will impede movements of goods and capital. However, if substantial barriers to the movement of goods and capital exist, then economic discrimination and political exchange may generate self-sustaining movement toward systemic openness by encouraging all parties to negotiate. These indirect and long-term effects of discriminatory economic practices on global openness are a focus of my studies on the 1930s and the 1980s.

The general argument on the merits of economic discrimination and political exchange presented earlier must be qualified. Although the benefits of unrestricted bargaining are underrecognized by academic political economists, if not by practicing commercial and financial negotiators, this book places explicit limitations on the case for ad hoc bargaining. The qualifications are as important as the central argument. The theoretical chapters in this volume identify the conditions under which economic discrimination and political exchange will and will not function as an effective mode of management. The merits of unrestricted bargaining relative to institutionalized systems of rules are not constant.

To evaluate bargaining-based and rule-based modes of management, I begin by defining the problem of management in terms of the internalization of policy externalities. Because the effects of commercial, financial, fiscal, and monetary policies extend beyond national boundaries, nations struggle to induce others to take account of policy externalities. Coasians contend that unrestricted bargaining will generate politically (if not economically) efficient outcomes.⁵ By contrast, international regimes theorists reason that public goods problems, transaction costs, and imperfect information degrade the efficiency of unrestrained bargaining.⁶ In their view, international regimes facilitate realization of mutual interests by mitigating these sources of political market failure. This study suggests that the efficiency of unrestricted bargaining will hinge on the following factors.

First, the public, private, or divertable character of policy externalities affects the efficiency of unrestricted bargaining. After reviewing more or less standard points on the distinction between externalities with the properties of public and private goods, the study presents a third class of externality. It examines the effects of privatizable or divertable externalities on the efficiency of political exchange and on the nature and pace of discriminatory bargaining. These issues are discussed in Chapter Two, “The Management of Spillover Effects: Public, Private, and Divertable Externalities.”

Second, unrestricted bargaining encompasses more political exchange. Nations may extort, exchange, or explain within single issue areas and across issues. Because the welfare implications of these forms of contingent action vary substantially, one cannot analyze the efficiency of ad hoc bargaining without accounting for their incidence. The study analyzes the incidence of these forms of contingent action under complete and incomplete information conditions, and suggests that actors are likely to rely far more heavily on exchange and explanation than on extortion. These issues are discussed in Chapter Three, “The Logic of Contingent Action: Exchange, Extortion, and Explanation.”

Third, conventional Olsonian biases in the representation of diffuse and concentrated domestic interests tilt nations toward undervaluing both economic openness and reputations for making good on commitments, whereas shifts in economic beliefs can produce radical changes in policy preferences. When domestic biases exist, external bargaining processes may influence internal preference formation. Specifically, bilateral discrimination may concentrate formerly diffuse interests within negotiating partners and thereby partially offset biases toward protection.⁷ These issues are discussed in Chapter Four, “The Concept of Preference: Bias and Instability in the Valuation of Outcomes.”

The logic behind my selection of the 1930s and the 1980s as the subject of empirical studies is straightforward. The two periods differ markedly in terms of the distribution of international power and the content of international regimes. The three basic elements of the theory of unrestricted bargaining previously sketched are not driven by these variables, whereas competing theories of hegemonic stability and regimes hold that these variables are central. The dissimilarity of the periods permits me to set up something approaching a critical test.

The public, private, or privatizable character of international policy externalities are intrinsic attributes of issues. If the efficiency of unrestricted bargaining is in fact influenced by the characteristics of policy externalities, then regularities in the management of public macroeconomic externalities and in the management of divertable commercial and financial externalities should carry across both periods.

The tendency of actors to favor exchange and explanation and shy away from extortion follows from conventional assumptions of rational choice theory. The argument hinges on attributes of actors and the quality of information on adversarial intentions. If the argument is valid, then extortion should be uncommon in both periods.

The effects of discriminatory international bargaining on domestic preference formation follow from conventional Olsonian analysis as extended by theorists of endogenous protection. If the argument is correct, then bilateralism and regionalism should have liberalizing effects in situations where domestic biases toward protection are strong during both periods.

In truth, this logic is something of a post hoc rationalization. Because the theories and case studies developed together, the evidence presented on the 1930s and 1980s cannot be said to comprise an independent test of the theory. Every original element of the theory was spurred by an observation at variance with an earlier version of the theory while the evolving theory structured my search for evidence on these periods. A truly independent test must wait until the 1990s.

DEPRESSION AND DISCRIMINATION: EVIDENCE FROM THE 1930S

Charles Kindleberger and others hold that decentralized bargaining was an important cause of global economic disaster. By contrast, this study submits that unrestricted bargaining slowed and ultimately reversed movement toward...

Table des matières

• Cover Page
• Title Page
• Copyright Page
• Contents
• List of Figures and Tables
• Preface
• Part I: Introduction
• Part II: Toward a Theory of Unrestricted Bargaining
• Part III: Depression and Discrimination
• Part IV: Prosperity and Hypocrisy
• Part V: Conclusion
• Bibliography
• Index