BSc in International Business and Politics Copenhagen

Global Political Economy
Exam April 2011
Student: Nenad Krstevski CPR: 131082-2945 ..................................... Project size: STU 18032 Number of pages: 9

Copenhagen, April 14th, 2011

Nenad Krstevski CPR: 131082-2945

Global Political Economy Spring 2011

Table of Contents
Introduction ................................................................................................................................................ 2 1.    2.  3. 4. Concepts on GPE ................................................................................................................................. 3 State ................................................................................................................................................ 3 Corporations ................................................................................................................................... 4 Globalization ................................................................................................................................... 4 Theories on GPE .................................................................................................................................. 5 Rational choice theory .................................................................................................................... 6 Context for business regulation .......................................................................................................... 6 The Shifting Power Equation ............................................................................................................... 7

Conclusion .................................................................................................................................................. 9 Bibliography .............................................................................................................................................. 10

Introduction
Question 3) “The sustainability of Davos hinged on the unanticipated but highly effective blending of voice and material capabilities, stylistic performances and operational delivery. In this light it seems particularly appropriate that the forums main theme in 2007 was “the shifting power equation”. (Cooper, p. 225)

If you want to see the world as a whole, the best view is from the moon. The second best is from Davos.1 The yearly meeting of the WEF gives a unique top-down picture of the world's possibilities and problems. The main reason for this is simple. Globalization is, in the first place, an economic phenomenon. No one has a wider global perspective than the participants there. All other kinds of globalization, cultural, legal, political, moral, trail behind the economic.

1

Garton Ash, Timothy: 2007;

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I will start discussing on the beginning about main concepts of the GPE focusing on state, the companies and globalization. After that will mention some perspectives and theories of GPE and explain the rational choice theory which is important for this paper. Main sources and institutions of international and global business regulation are going to be explained in the following chapter. This is important so we get familiar of the context for business regulation. My main analysis is in the last chapter and it is about the shifting power equation. I will talk about more ways how global governance has shifted from monopolar to multipolar centers and especially about celebrity diplomacy. On the end I will conclude my findings from the analysis.

1. Concepts on GPE
The six central concepts of global political economy are the states, corporations, capital, power, labour and globalization.2 In order to understand the phenomenon of global governance it is necessary to explore the complex relationship between state, business(corporations) and globalization, which are the main three concepts in global political economy.  State Good example how the state is the actor in international political economy is IMF. It is based from most of the world countries, but the most important are the ones who have the biggest percentage of the votes and those are the ones who contribute with money the most. Even its power is not based on hard power like laws and constitution, but on soft law e.g. regimes, which function on a base that if one member doesn’t obey the rules it can face some sanctions from another states. The biggest influence has US and the G-7 group with more than 47% of the votes, so if the US government wants to put some pressure to other country to open the market, and in the same time US market to stay not so available for the other states, it can easily do it because of its voting power. That is what happened in South Korea during the Asian crisis, when IMF loans made Korea to open the manufacturing and financial industries for foreign investors, many of whom were from US.

2

Ronen Palan; 2000;

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The states retains pivotal role in creating and maintaining governance in the global system because of the centrality if the connection between law and political authority. The state is the central legal actor and primary representative of individuals in the international system. Agreements binding the population of a country can only be made by a state. While its representative function is often imperfect, the state is the only institution that can make a legitimate claim to represent its entire population on its territory. Not all of the states are equally important in international political economy. The most developed and wealthy states are the most significant because they can veto or coerce other states to follow particular sets of policies. Thus, the US is the central actor because of its wealth and power.  Corporations Transnational corporations are seen as an increasingly influential factor in formulating the policies that are instituted at a global level and as an actor influencing the decisions of the state elites. A good example ho corporations can influence global governance is given by accepting from WTO the intellectual property rights.3 Copyrights for books and music, as well as patent protection for scientific discoveries and inventions, even that they don’t really fall under the roof of free trade since they will not increase the flow of goods between states, they got enforced as a responsibility to all members of WTO. In the run for profits the companies will try to influence the structures of global governance. Every corporation has different goal, and follows a different tactics to fulfill their goal. If the power of the company is big than they will try to shape governance structures by influencing states, international organizations, other corporations and civil society behavior so that they fulfill their goals.  Globalization The interests of the corporations are with no doubt the biggest driver of the globalization. In depth literature has been written on the topic of why corporations and countries should engage in international trade and activities. David Ricardo was the first to really formulate a model of the benefits of international trade on the country level, and this was the model of comparative advantage (Krugman and Obstfeld). Later classical economic theory also advocate that joint markets are more effective than two
3

O’Brien and Williams; 2007; p.392

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separate markets, in terms of output, lower price and higher welfare (Krugman and Obstfeld). Furthermore, extensive research also attempts to explain the behavior of corporations and their cross country activity.(Dunning’s OLI-paradigm and Vernon’s product cycle (Ougaard, 2010)) Both texts stress the desirability of being able to operate on global markets and thus gaining access to competitive advantages, wherever they may exists, tech know-how in Denmark and cheap labour in China. Within the world of business there are of course different views on global governance depending on how each firm or industry can benefit from global governance, as shown by Falkner (2010). However, there can be little doubt about the assertion of TNC are indeed a key player in pushing the process of globalization forward. As the globalization becomes more and more complex, the economies of the world also become more and more integrated. There also seems to be made a convincing argument for the fact that business as a whole has considerable power to influence national policy and interest as well as global governance. This is evident in the financial sector as shown by Tsingou(2010), where the private sector indeed exercised much influence technical support in setting up the Basel II accord.

2. Theories on GPE
For this paper the main difference between neo-liberalism and neo-realism as perspectives can be summarized in the following sentence: Whereas neo-liberalist scholars explain international cooperation and institutions as a result of mutual interest among participants, the neo-realist scholar will put his or her emphasis on at the single states interest, especially the powerful state’s interest. I will provide a short note on why int. institutions occur before I explain the specifics for some prominent methodologies for GPE. Explanations about this has been given by Ougaard’s chapter of global persistence functions and by Zacher and Sutton(1996) through the notion of mutual interest. In Ougaard’s chapter, the national persistence function (the state’s “responsibilities” to the country) can be translated to the context of international cooperation and institutions. That is, there are elements such as (re)production and qualification of the labour force and population, facilitation of preconditions of a global market economy, the maintenance of global social order and a global responsibility for environmental issues (Ougaard, 2004, p. 144). Zacher and Sutton go along the same lines, and have an emphasis of the existence of int.
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institutions due to the benefits of cooperation in theirs notion of mutual interest. An obvious example is in particular in environmental and economic issues, where states realize that by int. cooperation most market failures can be best corrected. One example is recently seen in the financial crisis, where some central banks coordinated their efforts to fight the recession.  Rational choice theory For my paper important theory is the rational choice theory. Rational choice theory or rational choice analysis focuses on individual choice under conditions of uncertainty. It is dominant in contemporary neoclassical economic scholarship, and extremely influential in US political science.(O’Brien and Williams, p.34) It explains the outcomes in the GPE on the foundations of the preferences of individual actors (or individual person or group who are supposed to be acting as individual). Inside this framework, actors are assumed to be utility maximizers (they try to maximize their benefits and minimize their losses). Individuals attempt to, by calculating benefits and costs before they chose the best path of action, to make themselves better off. Rational choice theory has been used extensively to analyze trade and cooperation problems in IPE (Carlson, 2000). Other prominent theories of GPE are neo-institualism, game theory, development theory and others, but because of time and space for the project I’ll not go into them.

3. Context for business regulation
The authors, scholars John Braithwaite and Peter Drahos, 4 draw seven general conclusions about the actors involved in the globalization of business regulation. USA and EU are by far the most influential actors in the globalization of business regulation. OECD is the single most important builder of business regulation epistemic communities. Large USA corporations are the most consistently effective actors in enrolling states and powerful int. organizations, The Int. Chamber of Commerce (ICC) is an important actor in the globalization of business regulations which has successful strategies: o Use interests groups, o Collect information from members on customary practices and then release these practices in the form of model rules and agreements.

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Based on their interviews of 500 individuals across 13 business arenas, scholars John Braithwaite and Peter Drahos draw a series of conclusions about the processes of the globalization of business regulation

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Individuals may exert a tremendous influence over business regulation by enlisting the support of the CEO of a powerful corporation who, in turn, enlists the support of a powerful state actor Obscure technical committees of powerful international organizations and standard-setting bodies serve as potent forums for shaping global regulation In the 1980s and 1990s many governments moved away from directly regulating behavior to monitoring the self-regulatory organizations of the business arenas, known as the “regulatory state”5 Authors Braithwaite and Drahos, describe the places where business regulations are created as forums. These forums have a wide variety of features, depending on the circumstances and the actors involved. Also, actors can use different forums strategically. Some examples of different forums in which rules for global business are made include: 6 Organizations of states include UN, WTO, OECD and some int. courts or tribunals, NAFTA, NATO. Int. financial institutions include entities as IMF, World Bank, EBRD. Business organizations like the Int. Chamber of Commerce which are important because include important forums for mediating disputes Professions are defined by their areas of expertise and professionals participate across other forums. Organizations based on shared commitments like NGOs with interest in how int. business occurs

4. The Shifting Power Equation
2007's theme at the WEF yearly meeting - the shifting power equation – just confirmed the opinion of many participants that power is running away from the US to multiple centers since countries as BRIC which moved beyond emerging market status and establish themselves as major players on the world scene.7 The conference topic has also confirmed the panic in traditional business circles as power moves away from the producer and goes to the consumer thanks to the Internet and the digital distribution revolution. We should look the shifting of power on two ways, both horizontal and vertical. The horizontal shift brings a new multipolarity, and it’s the one that is more obvious. Even, for most of mankind history the world was multipolar. But the global poles in the past say, the Ming, Ottoman and Mughal empires in the XVIth century - only cooperated at
5 6

Braithwaite, John and Drahos, Peter: Center for Law and Globalization; Braithwaite, John and Drahos, Peter: Center for Law and Globalization; 7 Gardels, Nathan: 2007;

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the edges.8 Now every great power interacts with every other great power, in a multilateral, globalised geopolitics. A globalised world that is a product of more than 500 year long dominance of the west, and what by the historian Theodor von Laue is called "the world revolution of westernisation". But as always what goes up has to go down and that supremacy is seeing the end. What we are witnessing, after half a millenium, is the renaissance of Asia and some other emerging markets. BRIC are playing the economic game on terms largely invented by the west, but they are better than the west at its own field. Now, their growing and already huge economic power is beginning to be shown into political and military power. Now, the emerging economic giants from Asia are competing with the profligate consumer economies of N. America and Europe for finite hydrocarbon energy sources and raw materials. This strengthens another category of powers, which one might call the exploitative powers. The real example is Russia. Now, Russia with its leadership of Putin is strong because of gas and oil. The same reasons why S. Arabia, Iran, and other exploitative powers are. The interaction of these two major trends - Asian renaissance and energy race - shapes the new multipolarity.9 Other important shift is the vertical shift, from states to individual (non-state) actors, very often empowered from new technologies. Int. terrorism is one noticeable example, using new technologies both of destruction and communication. But there are lots of other. International NGOs like Oxfam, Human Rights Watch, Transparency International and Soros's Open Society have the power to move things and create attention for some issues. Most of the corporations heavily represented in Davos are most of the time more powerful than lots of smaller states. To connect the leaders of these companies with our theory from the curriculum, some literature with Carlyle-like orientation says that the leaders of these companies are like business superman 10. Just to name some of them like Jack Welsh/GE, Jeff Bezos/Amazon who are concentrated only in successful leadership in their companies mostly for their personal gain. International organizations, communities and networks, from UN and EU to the WB and the Int. Criminal Court, all take their slice of the power cake. At the other end, some individuals like bloggers or citizen-journalists are making history by posting a blurred video sequence from his or her mobile phone on YouTube, Twitter or Facebook. Interesting phenomenon is the multilocation which is a tendency of business leaders to stretch their boundaries, or sites of activity, beyond the boardroom to some very crucial areas of transnational social representation. One aspect of this tendency of leading
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Garton Ash, Timothy: 2007; Garton Ash, Timothy: 2007; 10 Cooper, A.F.: 2008;

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business elite is their representation as celebrity icons, because of their success as transnational representatives and not only as a successful business leader. There is another element and that is the connection between corporate elite and other elements from entertainment world, which collectively is defined as celebrity diplomacy. 11 Together they create a special distinctive network which has a distinctive ability to connect to wide audiences and to grab the attention of extremely important international leaders. Example of this celebrity diplomacy is a partnership between George Soros and Bill and Melinda Gates with the frontman of U2 Bono and the actress Angelina Jolie. This group doesn’t need to use formal institutional settings such as UN or the G8 to attract attention but they can do that on forums like the World Economic Forum at Davos. As celebrities push for recognition and support, by becoming connected in the transnational policy making, the political elite use celebrities to boost their own credibility. This interplay is consolidated by the combination of public and symbolic and material resources that celebrities can generate. Celebrity diplomacy emphasizes global reach in terms of for activity when and where is needed and for problem solving.

Conclusion
So after the small analysis and the introduction of the main terms I can conclude that the new power equation is a complex one. This means of course that the world is more difficult to "manage" in the way the old power once was managing. The existing international institutions no longer reflect today's complex realities and that’s why they are under constant reforms. This world needs badly new structures of global governance, but the very multi-level, multipolar diffusion of power makes that harder to achieve. According to a report in the International Herald Tribune, a couple of years ago the NIC of US played lots of scenarios for the World in 2020. The only reasonably attractive option was one in which multiple powers addressed global challenges jointly with nonstate actors. They called it "Davos world".

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Cooper, A.F.: 2008;

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Bibliography
-Tsingou, Eleni, 2010; Transnational Governance Networkd in The Regulation of Finance – The making of Gloobal Regulation and Supervision Standards in The Banking Industry; In Ougaard and Leander; -Ougaard, M; Introduction to Business and Global Governance; in Ougaard and Leander (2010); Zacher and Sutton, 1996; Governing global networks. International regimes for transportation and telecommunication; Cambridge: Cambridge university press, chapters 1-2.; -Ougaard, M; Political Globalization; Houndmills: Palgrave Macmillan 2004 -O’Brien, Robert and Williams, Mark; Global Political Economy, 2 nd edition; 2007; Palgrave MacMillan, New York; -Krugman, Paul and Obstfeld, Maurice; International Economics; 8th edition (international edition), 2009, Person, Addison Wesley; -Falkner, Robert, 2010: A Neo-pluralist Perspective on Business power in Global Environment Governance in Ougaard and Leander (compendium in business and global governance); -Ronen Palan, "Global Political Economy: Contemporary Theories (Routledge/Ripe Studies in Global Political Economy)", 2000; -Davos Forum Discusses 'Shifting Power': Radio Free Europe; 2007; http://www.rferl.org/content/article/1074266.html; -Cooper, A.F.: Beyond the Boardroom: "Multilocation" and the Business Face of Celebrity Diplomacy; 2008; -Garton Ash, Timothy: Davos 07: how power has shifted; The Guardian; January 24, 2007;

http://www.guardian.co.uk/commentisfree/2007/jan/24/davos07howpowerhasshifted ;
-Gardels, Nathan: America no longer owns globalization; The New York Times; January 24, 2007;

http://www.nytimes.com/2007/01/24/opinion/24iht-edgardels.4324766.html?_r=1;
-Braithwaite, John and Drahos, Peter: General Features of Global Business Regulation; Center for Law and Globalization; http://clg.portalxm.com/library/evidence.cfm?evidence_summary_id=250029; -Braithwaite, John and Drahos, Peter: General Features of Global Business Regulation; Center for Law and Globalization; http://clg.portalxm.com/library/keytext.cfm?keytext_id=57; 10