Paco García International Political Economy

Relevance of embedded liberalism to assess the global economy?

Introduction
The relevance of ‘embedded liberalism’, that emerged from the instauration of the
Bretton Woods System in the postwar era, has been questioned in the IPE literature because of
the transformation it suffered in the 1970s –freeing the exchange rate regime- and in the 1980s
-the rise of neoliberalism1- (Steffek 2006). However, despite these notable shifts, there are
remarkable legacies that persist and are decisive to comprehend current economic affairs. Jeffrey
A. Hart and Aseem Prakash (1997) compellingly depict how the concept has not lost its
relevance, on the contrary, it has increased with the past of time. Essentially, Ruggie (1982)
characterizes its essence as: “it would be multilateral in character…and its multilateralism would
be predicated upon domestic intervention” (Ruggie 1982: 393). This means that two
antagonizing pillars are reconciled: States pursue domestically interventionist policies whilst
operate in an international liberal order2.
Similarly, ‘embedded liberalism’ portrays that the institutions created in the postwar era
will advocate an “internationalist and market-oriented order” (Kirshner 1999: 317) that permits
employing “mechanisms, safeguards and escape clauses” (Kirshner 1999: 317) to preserve policy
autonomy and enlarge internal welfare policies. Consequently, this reflects the priority to attend
both national and international economic concerns. Utilizing Ruggie’s work is seductive in light
that it discloses the “central institutional feature” (Helleiner 2019) not just of the postwar
economic architecture but also of present times. Indeed, it’s remarkable relevance permits to
surgically understand the current affairs of the monetary system -IMF shift from monetarism 3
and the management of the financial crisis of 2007-2009- as well as international commerce
-World Trade Organization (WTO) framework, Preferential Trade Agreements (PTAs) and
agricultural trade policy-. It is noteworthy that since the 1980s IPE scholars have been captivated
by Ruggie’s theoretical contribution, it’s no surprise that is pervasively cited and still generates
fascinating debates in the discipline (Seabrooke & Young 2017).

1
Neoliberalism: “ubiquitous set of market-oriented policies” that advocate no government intervention in the
economy (Sally 2012)
2
Distinctive features of this order are: “penetrated American hegemony, semi-sovereign great powers and economic
openness” (Deudney & Ikenberry 1999)
3
Monetarism: “monetary authorities can control the nominal amount of money (USD) but cannot control the real
quantity of money” (Friedman & Paden 1982: 45).
 This essay argues that the concept of ‘embedded liberalism’ is persuasive and pertinent to
grasp the contemporary global economy phenomenon’s. The international monetary system as
well as the global trade regime are two paradigmatic issues that exemplify the main claim of this
essay. This paper is structured in four sections. The first part engages in a theoretical discussion.
The next two sections uphold ‘embedded liberalism’ to understand the current monetary and
trade policy events. Finally, the essay reviews the main arguments discussed and concludes.

I. Theoretical relevance and evolution

The concept of ‘embedded liberalism’ acquired prominence after the devastating saga of
the Great Depression and World War II. Ruggie’s (1982) purpose was to reconceptualize the
liberal nature of money and trade, which diverged to the established assessment of liberalism of
the 19th century that encouraged an orthodox economic interpretation: a self-regulating market
and the gold standard. It is worth precising that this concept resulted from Karl Polanyi’s (1944)
sophisticated analysis, which heralded the notion of ‘embeddedness’ to condemn how laissez-
faire policies, advocated by market liberals, provoked the collapse of the international economic
system. Therefore, he contends that “the [self-adjusting market] institution could not exist for
any length of time without annihilating the human and natural substance of society” (Polanyi
1944: 3). A consequence of this was that ubiquitous societal countermovement’s arose with the
aim of safeguarding society (Polanyi 1944). However, the academic literature (Lacher 1999;
Lang 2006) has warned against potential confusions of linking Polanyi’s (1944) accounts with
‘embedded liberalism’ and the perils of cataloguing him as the creator of it. Still, notably there
are vast explanatory strengths of ‘embedded liberalism’; considering that it “usefully challenges
prevailing assumptions” (Lang 2006: 84) of the monetary and trade regime as well as it recalls
that alternative liberal structures are feasible.
In addition, a pivotal component of ‘embedded liberalism’ is distinguished on the
treatment Ruggie (1982) gives to the monetary and trade arrangement. On the one hand, Ruggie
utilizes the concept of ‘double screen’ coined by Richard Cooper (1975) to address the monetary
system put in place. This means that the structural imbalances of the account were adjusted via a
correction of the country’s exchange rate whilst the temporary imbalances were assuaged with a
credit line from the newly created International Monetary Fund (IMF) (Cooper 1975). As a
result, “domestic economic policies were to be protected from the strictures of the balance of
payments” (Cooper 1875: 85). On the other hand, with regard to the postwar trade arrangement,
Ruggie (1982) stresses how multilateral principles and tariff reductions were at the center of the
system with the inclusion of escape instruments that permitted a protection of national welfare
policies. The principles of the GATT were based on non-discrimination such as the most-favored
nation and national treatment clauses that reduced tariffs and fostered international trade; albeit,
it also provided flexible instruments -exemptions and restrictions-4 in order to preserve internal
societal priorities (Woolcock 2012). For instance, sensible sectors like agriculture were
protected. This is why the commercial scheme is categorized as an “unprecedented experiment”
(Ikenberry 1993: 155) that contributed to the building of a resilient international economic
architecture.
Furthermore, with the rise of neoliberalism in the 1990s, the mainstream academic
literature shifted the focus to the ramifications of capital markets and globalization on the
‘embedded liberalism’ compromise (Ruggie 2003). Bearing in mind this change, Dani Rodrik
(1997) claimed that a redefinition of the concept was necessary to address the erosion of the
measures of social protection that were triggered by globalization forces. John G. Ruggie revisits
the concept and enlarges the scope of it by indicating that a ‘global public domain’ developed
that is pushing ‘embedded liberalism’ into the global arena with a close corporate connection
(Ruggie 2003; Ruggie 2004). This evidences the flexibility and resilience it has by providing a
middle ground between national and external stability underlying the preponderance of the social
purpose. Consequently, contemporary economic policymaking -monetary and trade- that
incorporates this pillar, represents the essence of ‘embedded liberalism’. Subsequently, this essay
views it as an evolutionary concept that is salient to assess contemporary economic events.

II. Contemporary global monetary structure

Jonathan Kirshner (1999) narrates the changes the monetary regime has suffered since its
instauration in the postwar era, particularly how the collapse of the exchange rate system in the
1970s distanced the system from the golden era of ‘embedded liberalism”. However, the author
claims that in order to understand the consequences of this modification an interpretation based
in this concept is compulsory. In view of the liberalization of capital movements, the exchange
rate of countries become an attractive target for speculation, which trapped countries in recurrent

4
Article XX of the GATT
financial crisis and jeopardized their economic development. Therefore, these chronic crises
experienced in the global economy had “the potentially destabilizing effects of their force if left
unchecked - are more relevant than ever before” (Best 2004: 404). Hence, the concept of
‘embedded liberalism’, in words of Jacqueline Best (2004), has regained is attraction to
understand this economic phenomenon’s. This argument is traced in how prioritizing technique
-pure economic analysis- over political and social dimensions became toxic for the legitimacy of
policymakers in handling the economic affairs. Therefore, the change of the IMF’s stance on
capital controls as well as the significant policies pursued by monetary and fiscal authorities
during the financial crisis reveal the prevalence of ‘embedded liberalism’.
Likewise, the first evidence that corroborates the prevalence of ‘embedded liberalism’ in
the monetary architecture is the notorious transformation of the IMF’s stance on capital controls
and financial liberalization. In another compelling article Jaqueline Best (2003) elucidates that
the contemporary financial system should be assessed under the logic of Ruggie’s concept. “A
closer look at recent Fund proposals reveals that there is in fact an attempt underway to re-embed
global liberalism” (Best 2003: 364). The academic literature has been vocal against the IMF for
sponsoring the liberalization of the capital account, which provoked recurring financial crisis in
Latin America, East Asia and Eastern Europe. In response to these criticisms, it has shifted away
from a pure monetarist standpoint and adopt “a surprisingly normative tone in their policy
statements” (Best 2013: 365). This is supported by Jeffrey Chwieroth (2013) who divulges the
organization’s treatment on the capital controls following the East Asia financial crisis.
Accordingly, the organization “became more open to the use of temporary and non-
discriminatory price-based controls on inflows to address financial stability risks” (Chwieroth
2013: 453). The normative shift has also been traced on the its policy statements that now
include vocabulary such as: “good financial citizenship, civility and the goal of civilizing
globalization” (Best 2003: 363); a reflection of ‘embedded liberalism’.
Additionally, another emblematic representation of ‘embedded liberalism’ can be traced
on the response to the financial crisis of 2007-2009. The policies that were implemented by
Federal governments and Central Banks -United States, EU, Japan and others- involved engaging
with unorthodox instruments such as quantitative easing to tackle the crisis. For instance,
“between 2008 and 2015 the Fed increased its balance sheet from $900 billion to $4.5 trillion
USD” (CNBC 2017). Eric Helleiner (2010) describes this as a constitutional moment in terms
that those policies became the antithesis of monetarism since there was a major intervention in
the international markets to safe the world’s economy. The analytical dimension of ‘embedded
liberalism’ permits to explain how these measures provided: “social investments, safety nets, and
adjustment assistance whilst pushing international liberalization within a framework of
multilateral principles, norms, and institutions relations” (Ruggie 2008: 37) that enabled the
global economy to mitigate the pernicious effects of the crisis. Clearly, the shift of the IMF and
the policy toolkit to face the financial crisis of 2007-2009 reflects the resurgence and present-day
significance of ‘embedded liberalism’.

III. Current international trade regime

The IPE conventional literature has signaled that out of all the institutions that were
created in the postwar era, the multilateral trading system has remarkably showed “cooperation
under anarchy” (Axelrod & Keohane 1985). Andrew Lang (2006) reveals that if ‘embedded
liberalism’ is characterized, under the logic of balancing trade liberalization and providing
countries with policy space for internal priorities, is relevant to explain the current trade system.
Acknowledging that the collapse of the Doha Development Round increased the difficulty to
achieve a multilateral agreement that balanced domestic policy space and trade liberalization, the
sole fact that it crumpled, as Robert Wade et al (2006) illustrates, reflects the logic of ‘embedded
liberalism’: not sacrificing the internal welfare being over trade liberalization. Besides, there are
other significant issues under the WTO framework such as Special and Differential Treatment
(S&D) provisions that also echo it. In effect, it permits nations a more favorable treatment than
developed countries of the WTO in order to increase their trading capacity and protect their
national interests. The provisions include: retaining higher-bound tariffs, larger transition periods
of implementation, technical assistance and support from the WTO, support on capacity building
and less onerous obligations (WTO 2020).
A distinctive characteristic of the global trading system is the proliferation of PTAs,
which have become a dominant commercial instrument. Meredith Kolsky (2018) discloses that
“recent international economic agreements have incorporated values other than opening markets
and these is consistent with embedded liberalism” (Kolsky 2018: 124). Notwithstanding that
most of these treaties do not operate under the WTO’s framework, they permit the possibility of
achieving comprehensive deals that whilst they pursue relatively open markets they also permit
policy space to undertake certain measures and protections of internal issues. There are
innumerable illustrations that validate this claim. For instance, the cooperation and commerce
framework of the European Union (EU) with the African, Caribbean and Pacific Group of States
(AFC), which provides trade preferences -special concessions on products and technical
assistance- to protect sensible sectors whilst also engaging in global trade (Farrell 2005). Also,
the EU via the Generalized Scheme of Preferences (GSP) has eradicated import duties from
products of developing countries to tackle poverty and unemployment and enhance labour and
human rights (Zhou & Ludo 2011). Lastly, the Association of Southeast Asian Nations
(ASEAN), depending on the development of the country, also offers assistance and different
implementation periods that protect national interests (Wei-Yen 2007).
Furthermore, Grace Skogstad (2015) illustrates that a striking issue in the international
trading system that operates under the logic of ‘embedded liberalism’ is agricultural policy
because countries respond to the concerns of farmers and find policy space to protect them. The
EU’s is a persuasive case of this in light that it has transformed its Common Agricultural Policy
(CAP) by reorienting the financial resources: “from trade-distorting subsidies to support for
farmed in ways that improve biodiversity, environmental protection and food safety” (Skogstad
2015: 153) whilst also bolstering the role of markets in food production. Similarly, another
evidence is the United States agricultural policy. The support given from the government, which
from 1998 to 2004 has been $17 billion USD per year (Kirwan 2009), has enable a protection of
the farmer’s production. Subsequently, major economic trading actors such as the EU and the
United States whilst engaging in international trade at the same time they their agricultural trade
policies reveal how they protect national groups by providing subsidies and this is undoubtedly a
faithful representation of ‘embedded liberalism’.

Concluding remarks
Despite that John G. Ruggie (1982) introduced the concept of ‘embedded liberalism’
almost four decades ago, its contemporary relevance is captivating in view of the valuable
lessons it offers in understanding the current global economy. As it was exposed in the essay, it
provides a convincing and significant theoretical framework to comprehend the present-day
realities of the monetary and trade regimes. Firstly, ‘embedded liberalism’ was revisited in order
to validate its existing theoretical significance by showing its roots, underpinning characteristics
and evolution. Secondly, it was demonstrated how despite the dominance of monetarism the shift
in the behavior of the IMF and the policies enacted to mitigate the financial crisis of 2007-2009
are aligned with ‘embedded liberalism’. Thirdly, current international issues such as S&D, the
consolidation of regional economic integration and agricultural policy were examined to evoke
the premises of Ruggie’s concept. Evidently, ‘embedded liberalism’ has evolved since its
creation; albeit, the essence of it will continue to permit to understand not just current economic
affairs but the upcoming events.
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