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International economics and international

politics: a framework for analysis

C. Fred Bergsten, Robert O. Keohane and Joseph S. Nye

International Organization / Volume 29 / Issue 01 / December 1975, pp 3 - 36

DOI: 10.1017/S0020818300017884, Published online: 22 May 2009

Link to this article: http://journals.cambridge.org/abstract_S0020818300017884

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C. Fred Bergsten, Robert O. Keohane and Joseph S. Nye (1975). International
economics and international politics: a framework for analysis. International
Organization, 29, pp 3-36 doi:10.1017/S0020818300017884

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Section I
International economics and international
politics: a framework for analysis

C. Fred Bergsten, Robert O. Keohane, and Joseph S. Nye

Until August 1971, the United States categorically rejected any notion of devaluing
the dollar and championed an international monetary system based on fixed but
adjustable exchange rates. From August 1971 through February 1973, the United
States aggressively sought massive devaluation of the dollar, and since early 1973, it
has actively promoted the adoption of highly flexible exchange rates.
From 1962 until November 1967, the British government borrowed billions
of dollars and adopted dozens of policy measures to avoid devaluing sterling. In
June 1972, the British government floated sterling—to a sure depreciation-after
just two days of speculative attack on the currency.
Until late 1971, Japan adamantly refused to consider revaluation of the yen
and adopted numerous policy measures to avoid it. In 1973, Japan sold at least $6
billion from its reserves to keep the yen from depreciating back toward its earlier
level.
Since the early 1960s, the United States pressed Europe and Japan to lower
their barriers to US agricultural exports. In June 1973, the United States totally
embargoed its exports to Europe and Japan (and everywhere else) of some of those
very same agricultural products.
In the early 1960s, Brazil and other producing countries pleaded with
consuming countries to negotiate the International Coffee Agreement to keep
coffee prices from declining. By the middle 1970s, those coffee producers let the
agreement lapse because they felt sufficiently strong to force prices up on their
own.
What were the objectives of these international economic policies of some of
the leading countries in the world economy? Did these objectives change as
dramatically, over both longer and shorter periods of time, as appears to be the

C. Fred Bergsten is a senior fellow at the Brookings Institution in Washington, D. C, and is

coeditor of this volume. Robert 0. Keohane is an associate professor of political science at
Stanford University in Stanford, California. Joseph S. Nye is a professor of political science at
Harvard University in Cambridge, Massachusetts.
4 International Organization

case? If so, was this because the countries' preferences changed? Or because the
nature of the problem they faced changed? Or because their power to achieve ends
they had sought all along changed? Or because they were forced to alter their views
by other countries or by nonnational actors such as transnational enterprises? Or
were the objectives relatively constant, with the changes only in the means used to
pursue desired outcomes?
Indeed, why did the international order that had effectively structured world
economic relationships for the first postwar generation begin to collapse in the late
1960s and early 1970s? Did it no longer address the issues most critical to its
member countries? Did it no longer comport with the world economic environment
it sought to order? Did it no longer accurately reflect the constellation of national
power that must underpin any international system?
This volume seeks to answer such questions, and, in doing so, assist in the
construction of a new international economic order. This introductory essay
presents a conceptual framework for such analysis, and it examines the relationship
between international economic policies and international politics more generally,
discusses postwar United States predominance and its partial decline, and analyzes
the economic goals sought by governments in international relations. Governmental
economic policies and transnational behavior do not take place in a vacuum; the
political order strongly affects national decisions about economic goals and the
leeway given to transnational actors. It is appropriate, therefore, to begin with an
analysis of the impact of world politics on the international economic order, rather
than, as is too often done, introducing politics merely as a constraint on the
attainment of independently determined economic goals.

The international political context of world economics

Politics and economics in the contemporary system

Politics and economics are interwoven strands in the fabric of world order.
Two world wars, a depression, and the cold war have made us well aware of the
important causal effects of each on the other. Unless definitions of politics and
economics are arranged so that one category necessarily includes all fundamental
phenomena, neither economic nor political determinism can explain events success-
fully.
Debates about the origins of imperialism or about postwar United States
foreign policy, between analysts who stress security motivations and power compe-
tition and those who emphasize economic incentives, are inconclusive. The ener-
getic globalism of United States policy can be explained by either a genuine fear of
widespread totalitarian resurgence if it were not checked at all points, analogous to
contemporary perceptions of the lessons of Munich, or by a desire to make the
world safe for American commerce, or both. Indeed, the security and economic
motives were inextricably linked: the breakdown of the international economy in
A framework for analysis 5

the 1930s was widely viewed as a central element in the national economic
catastrophes, especially in Europe, which led to the installation of totalitarian
governments, which in turn produced World War II. Monocausal arguments founder
on the fact that policymakers usually have more than one set of reasons for their
actions and see intimate linkages between the different categories, which are often
isolated in scholarly writing.1
On the motivational level, therefore, political and economic factors are
frequently so closely intertwined that they cannot be disentangled. In addition,
regardless of motivations, politics and economics are almost inevitably linked at the
systemic level. An international economic system is affected by the international
political system existing at the time, and vice versa. The behavior of governments
on economic issues will be affected by their political calculations, which will in turn
be determined in part by the structure of world politics. At the same time, political
steps by governments must often rest on economic capabilities and, as we will see
shortly, are increasingly taking economic form.
The fact that a particular economic activity is characterized by nonpolitical
behavior (for instance, when transactions are carried on through a market system)
does not imply that politics is unimportant. Indeed, politics may have been crucial
in establishing the setting within which the activity took place, the structure of
relations in the overall system. This second "face of power" is extremely important
in determining what issues are raised for political decisions and what issues are
not.2
The importance of this aspect of power leads us to distinguish between two
levels of analysis: a process level, dealing with short-term behavior within a constant
set of institutions, fundamental assumptions, and expectations; and a structure
level, having to do with long-term political and economic determinants of the
systemic incentives and constraints within which actors operate. At this structural
level, we are interested in how the institutions, fundamental assumptions, and rules
of the game are created and how they support or undermine different patterns of
short-term economic activity.3

1
For an attempt to argue that economic considerations were paramount in United States
foreign policy after World War II, see Joyce and Gabriel Kolko, The Limits of Power: The
World and United States Foreign Policy, 1945-54 (New York: Random House, 1972). The
authors choose references to economic purposes as indicating "real" motivations, and ignore or
discount references to security purposes. The limitations of their analysis are most graphically
revealed by their failure even to mention the psychic effects of Munich-in over 700 pages
about the first postwar decade of US foreign policy! Conservative historians have taken the
opposite approach of regarding economic motivation as simply derivative from security con-
cerns. In our view this represents an artificial and ultimately fruitless search for the "essential"
element in an inextricably intertwined set of reasons and rationalizations.
* See Peter Bachrach and Morton Baratz, "Decisions and Nondecisions: An Analytical Frame-
work," American Political Science Review 57 (1963): 63242.
3
See Robert 0. Keohane and Joseph S. Nye, "World Politics and the International Economic
System," in C. Fred Bergsten, ed., The Future of the International Economic Order: An
Agenda for Research (Lexington, Mass.: D.C. Heath, 1973). The following six pages draw
heavily upon this essay.
6 International Organization

In some systems at some times, the levels of structure and process are
relatively well insulated from one another. Basic institutions and practices are
accepted as legitimate by ah1 major parties. Economic activity in these systems may
involve very little direct political intervention. On the international level, only
minor and infrequent attention may be paid to economic affairs by top government
officials. At other times, however, the rules of the game themselves are called into
question by major participants. The system becomes politicized as controversy
increases. In highly politicized systems, attention of top-level decision makers is
focused on the system, and nonroutine behavior dominates routine behavior.
Insulation between the structure of the system and particular processes breaks
down; specific quarrels become linked to arguments about appropriate institutions
and permanent arrangements.
It is when accepted structures, with their associated rules of the game, are
called into question that controversy, and therefore politicization, are likely to
increase most rapidly. During these periods, questions of who will exercise political
control, and how, become dominant. Thus one observes increasing disagreements
between a larger number of important contenders, over a greater number of specific
issues, with more direct linkage between immediate problems (e.g., the exchange
rate of the yen) and systemic issues (e.g., fixed versus more flexible exchange rates),
and an increase in the attention devoted to these issues by heads of government and
cabinet ministers. In recent years, we have witnessed increased politicization of
international economic affairs.
To some extent, this increased politicization is the result of secular trends
towards more governmental intervention in the economy as governments accept
responsibility for an increasing array of policy targets. The dramatic increase in
international economic interpenetration heightens the external threat to successful
pursuit of these government objectives, and thereby produces a tendency for
countries to seek to shield themselves from it. But, at the same time, outside forces
offer additional policy instruments, often of very high value, to governments that
can harness them effectively, which produces a tendency for countries to welcome
international exchange as long as they can assure that it points in desired directions.
Thus the increased policy role of national governments combines with the
increased internationalization of the world economy to force a blurring of the lines
between domestic and foreign policy, and an increase in the number of issues
relevant to foreign policy. International economic issues rise toward the top of
national policy agendas and become increasingly politicized in the process.

Economic power and military force

The increased politicization of international economics, however, is also a
product of other long-term changes that have affected the relations among states,
the effective means at their disposal, and other aspects of their political-economic
milieu. One of these important long-run changes has been in the relative utility of
force and economic power for major states.
A framework for analysis 7

Political scientists for the past three decades have generally emphasized the
role of force, particularly organized military force, in international politics. Force
dominates other means of power in the sense that if there are no constraints on
one's choice of instruments (a hypothetical situation that has only been approxi-
mated in the two world wars), the state or states with superior military force will
prevail. Thus, American economic sanctions against Japan in 1940-41 were
countered by Japanese military action; to the military challenge, the United States
had to answer in military terms. If the security dilemma for all states were
extremely acute, military force and its supporting components, which, of course,
include a large economic dimension, would clearly be the dominant source of
power. Survival is the primary goal of all states, and in the most adverse situations,
force is ultimately necessary to guarantee survival. Thus military force is always a
central component of national power.
But insofar as the perceived margin of safety for states widens, other goals-
such as economic welfare, political autonomy, and status-become relatively more
important. This is in fact the situation at present, as widespread perceptions of
detente have rendered quite low most countries' fear of any use of force by the
major military powers. This situation is not necessarily permanent: the cold war
could reappear, or nuclear proliferation could again raise deep national insecurities.
But, at least for now, economic issues have become far more salient in international
affairs than at any point since the beginning of World War II, both because of their
increased importance in their own right and because of the decline in concerns
about survival and the traditional forms of security.
It is unlikely that military force will be an appropriate tool to achieve these
nonmilitary goals. Furthermore, as the nature of military force and
the consequence of its use change, it has become less efficacious even for achieving
the goals that it formerly served. The disproportionate destructiveness of nuclear
weapons limits the utility of this type of force for achieving positive goals, as
opposed to deterrent objectives. In addition, prevailing norms and the costliness of
ruling alien populations that have become socially mobilized increase the cost of
using conventional force.4 As these changes in goals and in the nature of force take
place, the roles of other instruments of power and influence tend to increase.
It is important to notice, however, that the effects of these increasing
constraints on the use of force are not felt equally by all actors in world politics,
nor are the constraints the same for all potential uses of force by the same actors. It
may be useful briefly to discuss the effects on three sets of actors: (1) the
superpowers—the US and the USSR, (2) other developed countries, and (3) other
actors, particularly Third World states and transnational organizations.
The superpowers have continued to use force or the threat of force to control
events within certain other states. The threat of force is probably most effective

4
See Stanley Hoffmann, Gulliver's Troubles, or The Setting of American Foreign Policy (New
York: McGiaw Hill, 1968).
8 International Organization

where it remains in the background. Military power based on undeterred local

preponderance and occasional military intervention helps to explain the high degree
of conformity of the economic systems of the states in the Council for Mutual
Economic Cooperation (COMECON) to that of the Soviet Union, and the substan-
tial trade preferences between those states. Similarly, the threat of open or covert
US military intervention has played a role in limiting revolutionary regime changes
in Latin American countries over the past three decades, and has therefore tended
to keep their economies more closely tied to that of the United States than might
otherwise have been the case. In some cases the use of force has been effective, as in
the United States intervention in the Dominican Republic in 1965 and the Soviet
intervention in Czechoslovakia three years later. In others, such as the United States
support of the Bay of Pigs invasion in 1961 or the American intervention in
Indochina, the policy of force led to disastrous results. On some disputes on which
force might have been used in the past, such as the Arab oil embargo against the
United States in 1973-74 or the Chilean expropriation, without significant compen-
sation, of American-owned enterprises under the Allende government in 1971, the
United States has resorted to other means of influence. "Gunboat diplomacy" is
widely regarded as dangerous and often counterproductive; force is seen as an
undesirable means of intervention, except as a last resort.
Force, however, can be used not only for intervention but for deterrence, and
here its utility does not seem to have diminished so sharply. Since each superpower
continues to use the threat of force to deter attacks by the other superpower on
itself or on its allies, the importance of these nuclear weapons for deterrence
remains a valuable resource that can be used by alliance leaders in their own
bargaining on other issues with their allies. This is particularly important for the
United States, whose allies are concerned about potential Soviet threats, and which
has fewer other means of influence over its allies than does the Soviet Union over
its Eastern European partners. The United States has, accordingly, taken advantage
of the Europeans' (particularly the Germans') desire for American protection with
regard to the issue of troop levels in Europe and their links to trade and monetary
negotiations. Sometimes this has taken place through calculated executive actions,
sometimes through congressional initiatives contrary to executive preference. Thus,
although the first-order effect of deterrent force is essentially negative—to deny
effective offensive power to a superpower opponent—the state within the alliance
controlling this force can gain positive political influence from its possession. Since
neither Europe nor Japan seems willing to undertake the expense and risk of
developing a major nuclear second-strike capability in the immediate future, this
form of militarily based power remains significant for the United States.
For other developed countries, in general, force is of less utility than for the
superpowers. Indeed, in relations between many developed countries, force is of
negligible importance, for instance, between Germany and Japan, Italy and Hol-
land, or New Zealand and the United Kingdom. Intense relationships of mutual
influence are developing in which force is irrelevant as an instrument of policy, and
these are not limited to common markets or members of a close-knit politico-
A framework for analysis 9

military bloc. Since economic instruments have largely supplanted the use or threat
of force in these relationships, the implications for the political relevance of
economic ties between these countries are considerable.
For the superpowers and developed countries generally, we have stressed the
declining role of force. For other actors in world politics, however, force remains
valuable. Indeed, in areas such as the Persian Gulf from which British or American
force has been partially withdrawn, force may be becoming more important than
formerly as a means of influence for small or middle powers. It is clear that force
remains important on the Indian subcontinent, in southeast Asia, and in the eastern
Mediterranean. National liberation movements, sometimes operating trans-
nationally, often rely heavily on force; witness the recently successful movement in
Mozambique and the various Palestinian paramilitary operations.
Yet limits on the use of force, although they operate unevenly, are frequently
important. To some extent, economic instruments are used in reaction to this
situation as a substitute for force, to achieve similar purposes when force is
unavailable or its use is deemed too costly. Using economic instruments in this way
is a well-established practice in world politics. Examples include the Allied blockade
against Napoleon, the League of Nations oil embargo against Italy, the near total
US embargo of exports to Cuba, and United Nations sanctions against Rhodesia, as
well as the recent embargo of oil sales to the United States and the Netherlands by
Arab states in 1973-74 in pursuit of a favorable political settlement in the Middle
East. The most sustained effort in this direction in the postwar period has been the
US effort to restrict trade in some strategic materials, and to limit Soviet access to
advanced technology. Here economic sources of power allow governments to carry
on "war by other means."
But there is a more straightforward function served by economic instruments:
to exercise influence on questions arising out of patterns of economic interdepen-
dence, for the sake of affecting economic transactions and benefits to be derived
from them. The monetary negotiations of the last decade, as well as negotiations on
trade and on foreign investment, have primarily reflected competition for economic
benefits, as well as to some extent for political influence or status within the
context of relatively intense economic intercourse. Where transactions are eco-
nomic, economic instruments are likely to be used first. They can be wielded by the
same bureaucracies that deal with the economic transactions, and they often appear
more legitimate to other governments than instruments that appear to "escalate"
the controversy to the political-military plane.
Yet much of the complexity, as well as much of the interest, in international
political-economic relations derives from the fact that linkages between issue areas,
both within the broad arena of economics itself and between economic and security
concerns, frequently do take place. In 1971, for instance, the United States linked
trade and monetary negotiations together for the sake of getting a better monetary
agreement, and there were also references to the need to attain a trade surplus to
permit the United States to maintain its worldwide political and military position.
About the same time, the United States linked the reversion of Okinawa to Japan
10 International Organization

to Japanese agreement to limit its textile exports to the United States; and US
troop levels in Germany have for fifteen years been linked, at least implicitly, to
German willingness to offset the costs of those troops to the US balance of
payments. The Arab oil producers' actions on behalf of their political goals of a
favorable Middle East settlement have often been almost indistinguishable from
their economic goals of increasing revenue from their petroleum resources. Within
the European Common Market, complex linkages and trade-offs between issues are
commonplace.
In general, whenever there is less than perfect congruity between various
sources of power for states involved in close and complex relations with one
another (for instance, where one set of states is stronger militarily, but the other
controls a valuable economic resource that is at issue), linkages between issue areas
are likely to be drawn. Arab oil producers used economic power—their only source
of major international leverage—to pursue their most urgent national security
objectives in 1973-74; and the United States has attempted to counter this by
implicitly threatening military force, and by Unking high petroleum prices to the
world food issue, where it is American resources (food surpluses for export) that
are sought by other governments.
In a period such as the present, with interdependence high, rapid shifts taking
place in governmental policies, and vast asymmetries between the economic and
military power of numerous states, linkages between issue areas are likely to
become particularly pronounced. One linkage breeds another, as the states disad-
vantaged by the first linkage seek to bring their sources of strength to bear upon the
problem at hand. In the immediate future, world economics will be increasingly
politicized, and vice versa.

New actors
In addition to changes in the relative utility of force and economic power as
instruments for major states, the international economic order must now encom-
pass two new sets of major actors that have emerged because of their economic
power: a number of countries that were unimportant to world economics when the
postwar world was organized, or even ten years ago; and transnational economic
actors, of which multinational enterprises are the most important and well known.
The postwar economic system was organized primarily by, and for, the
United States, Canada, and Western Europe, with some participation from Latin
America (and the Soviet Union, which soon dropped out). Many countries that play
a central role in today's world, including some of the oil-exporting countries, were
not even independent at that time.
But Japan, which entered the core group of international economic decision
makers in the early 1960s, and the oil countries have made the set of major
economic powers more heterogeneous. In addition, other states, largely from the
Third World, have become more important and more active. The participation, or at
A framework for analysis 11

least acquiescence, of many of these countries is necessary in at least some aspects

of any new international economic structure, not only because of their possession
of many key primary products but also because of their new awareness of their
needs and opportunities, which will prompt them to attempt to block international
economic reform unless their interests are taken into account.5 Indeed, this new
"middle class" has left behind a "Fourth World," which remains the hard-core
international welfare problem of the 1970s and beyond.
With regard to multinational enterprises, some incautious or enthusiastic
observers have gone too far in proclaiming the death of the nation state in a world
of interdependence.6 The nonstate actors do not supersede states, although they do
affect the system—particularly the monetary and trading systems, via the growth of
the Eurocurrency market and intracorporate trade—and create new problems for
governments. Outcomes in these issue areas can no longer be understood solely as
results of state action and policy.
It is clear that, at a minimum, these transnational actors have greatly speeded
the transmission of economic events from one country to another. The Eurocur-
rency and Eurobond markets provide a truly international center for financial and
capital transactions. Multinational firms increasingly scan the globe for production
and marketing opportunities and hence speed shifts in national comparative advan-
tage. As a result of this acceleration of the pace of international economic change,
the threats and opportunities generated for national policies by external events have
become much more acute. Questions arise as to whether the pace should be
deliberately slowed, perhaps by placing restraints on the growing economic inter-
dependence of nations, including these very transnational forces that have pro-
moted its acceleration.

The emergence of new international economic issues

Reference to these transnational actors leads us to the final key change in the
political milieu for international economic relations: the emergence of important

5
For one of the coauthors' views on these issues, see C. Fred Bergsten, "The Threat from the
Third World," Foreign Policy, no. 11 (Summer 1973): 102-24; and Bergsten, "The Response to
the Third World," Foreign Policy, no. 17 (Winter 1974-75).
'In 1969 Charles Kindleberger argued in a much-quoted (and probably much-regretted)
phrase that "the nation-state is just about through as an economic unit" {American Business
Abroad [New Haven, Conn.: Yale University Press, 1969], p. 207). The most trenchant
criticisms of this view can be found in the works of Kenneth N. Waltz, particularly, "The Myth
of National Interdependence," in Charles Kindleberger, ed., The International Corporation
(Cambridge, Mass.: Harvard University Press, 1970); and Robert Gilpin, particularly "The
Politics of Transnational Economic Relations," in Robert 0. Keohane and Joseph S. Nye, eds.,
Transnational Relations and World Politics (Cambridge, Mass.: Harvard University Press, 1972).
For an assessment of the controversy, see the essay by Keohane and Ooms in this volume, and
Robert 0. Keohane and Joseph S. Nye, "International Interdependence and Integration," in
Nelson Polsby and Fred Greenstein, eds., Handbook of Political Science, vol. 7 (forthcoming in
1975).
12 International Organization

new international economic issues that were ignored, or inadequately covered, in

the postwar structure, such as nontariff barriers to trade, agriculture, business and
government cartels, the variety of issues relating to multinational enterprises, and
adjustment assistance to domestic groups adversely affected by international trans-
actions.
The most important new issue is access to supplies. When the postwar
economic order was constructed, the attention of virtually all countries was riveted
on the fear of unemployment. Hence, the International Monetary Fund (IMF), the
General Agreement on Tariffs and Trade (GATT), and the World Bank systems
aimed to avoid national efforts to export unemployment (through competitive
depreciations of exchange rates, import controls, and export subsidies), as had
occurred with such devastating effect in the 1930s, and in fact to maximize
national opportunities to expand production and to sell to other countries.
In the 1970s, however, inflation has emerged in virtually all countries as an
economic (and hence political) problem at least as severe as unemployment, if not
more so. Indeed, in recent years numerous countries have been seeking to insulate
their economies against imported inflation and even export their inflation to others
by upvaluing their exchange rates, unilaterally liberalizing their import controls,
and instituting export controls. Access to supplies has come to rival, if not surpass,
access to markets as a major issue of international economics. But because of the
previous focus on unemployment, by both governments and outside analysts, there
exist no effective international rules and arrangements to govern these new policy
approaches and few ideas for developing them.7 Thus the international economic
agenda has broadened at the same time that it has become more complex due to
underlying political and economic changes.

United States predominance and the distribution of power

A number of essays in this volume refer loosely to shifts in the distribution of

power among states. Positing that power abhors a free market, Diaz-Alejandro
argues that multipolar deterrence has now made free markets more plausible than
before. Gilpin speaks of the need for the United States to adjust to "the shifting
balance of power." Clearly, there is a relationship between the distribution of
states' military power and international economic order, but the discussion of this
relationship is often marked by confusion resulting from failure to make necessary
distinctions.
A simple reductionist theory of international economic affairs could hold
that they are merely reflections of political-military developments. Changes in
international economic relations would therefore be explained by shifts in military

7
For one effort, see C. Fred Beigsten, Completing the GATT: Toward New International
Rules to Govern Export Controls (Washington, D.C.: British-North American Committee,
November 1974).
A framework for analysis 13

power. This explanation, however, does not hold up well against the pattern of
recent events. The United States position in the world economy and its dominance
in policymaking have clearly declined since 1944. At Bretton Woods the United
States could construct the system largely according to its specifications; now it can
only veto proposals it dislikes. Yet during this period, the United States has
remained, militarily, the most powerful state in the world, and its lead in this
respect over its major economic partners, Japan and Europe, has been maintained.
Although it has become more costly for the United States to intervene effectively
in other countries over the past 30 years, American deterrent power has remained
intact.
Thus, although the distribution of military power is an important underlying
factor affecting the international economic order, by itself it provides only a partial
explanation. Two other major factors particularly must be taken into account to
explain changes in international economic relations: changes in perceptions of the
threat of military aggression, and changes in the relative economic strength of
countries within US-led alliances.
Perceptions of threat are important. Many of the major advances in interna-
tional economic relations came during the long period of maximum cold-war
tension, between 1947 (Truman Doctrine) and 1963 (Test Ban Treaty). In these
years, the IMF, the World Bank, the GATT, and the Organization for Economic
Cooperation and Development (OECD) began to function, currency convertibility
was achieved and major tariff cuts were implemented, and the Common Market was
established. United States security leadership was prized by its allies, and the
American perception of high threat from the Soviet Union encouraged United
States policymakers to grant a variety of economic concessions to the Europeans
and to the Japanese in the interest of systemic progress. The sharp reductions in
perceived threats in recent years have reduced the ability of the United States to
translate its military leadership of the alliance into economic leaderhip without
resorting to overt and highly resented linkages between economic and military
issues. American allies became less inclined to accept the roles of junior partners
once they had perceived the external threat as diminished.8 At the same time,
United States willingness to accept trade barriers against American goods, or
exchange rates that had similar effects, was also declining.
These changes in perceptions were reinforced by increases in European and
Japanese economic capabilities relative to those of the United States. In the early
postwar period, Europe was largely supine, and, although it was able to bargain and
resist on particular issues, it usually complied with US leadership, particularly on
the overall economic structure. In later years, the European economies had recov-

8
For evidence of this in the case of Canada, see Joseph S. Nye, "Transnational Relations and
Interstate Conflicts: An Empirical Analysis," International Organization 28 (Autumn 1974):
961-96. It should be noted that a serious future threat-not necessarily from the Soviet Union
and not necessarily military-could restore greater cohesion. The steps taken in late 1974
toward an oil consumers organization provide an indication that events might move in this
direction.
14 International Organization

ered tremendously. Indeed, their recovery alone, and the confidence it gave them at
least on economic issues, provide the primary explanation for the closely related
advent of the Dillon Round tariff cuts, currency convertibility and subsequent
reduced reliance on the dollar, and the construction of the Common Market. The
latter steps were also motivated by a desire to boost the relative strength of Europe,
politically as well as economically, so that it could better stand on its own against
the Soviet Union (and later, the United States).
In the United States, the increased difficulties encountered in exercising
leadership also reflected the increased relative economic strength of Europe and
Japan. As the economic strength of America's partners grew, so did the price paid
for a leadership role. European and Japanese exports did not significantly threaten
American jobs in the 1950s, but they certainly did so by 1971; and domestic
American interest groups reacted accordingly.9 Earlier, the ability of the executive
to persuade Congress and resist the demands of disadvantaged groups had been
enhanced by the shared perception of a serious external threat to national security.
Thus, perceived threat diminished while the costs of leadership were rising.
As the preceding discussion indicates, we reject an interpretation of con-
temporary international economic relations that attributes changes solely, or even
primarily, to the declining military hegemony of the United States. Even in a simple
model, changes in relative economic situation and perception of threats would have
to be taken heavily into account. Too often, furthermore, the concept of hegemony
is loosely defined and used largely as a pejorative term for preponderance or a
leadership style of which the author disapproves.10
Nevertheless, hegemony can be a useful concept, since it focuses on the
political structure of an international economic system, and since it draws attention
to inequality, which tends to be a pervasive condition of international systems. Yet
it is necessary to specify quite precisely to what range of phenomena an analysis of
hegemony is meant to apply. Some writers use the term to imply dictation by one
country on all issues. At the other extreme, the term is applied to any situation
where one state has more influence than others. We will regard a hegemonic system
as one in which one state is able and willing to determine and maintain the essential
rules by which relations among states are governed. The hegemonical state not only
can abrogate existing rules or prevent the adoption of rules that it opposes but can
also play the dominant role in constructing new rules. A distinguishing character-
istic of a hegemonical system, therefore, is that the preponderant state has both
positive and negative power.
When changes take place requiring adjustments by actors in the system, the
hegemonic power is in a particularly strong position, since it can change the rules
rather than being forced to adjust its policies to the existing rules. This is well
9
For two views of this problem, see C. Fred Bergsten, "Crisis in U.S. Trade Policy," Foreign
Affairs, July 1971, pp. 619-35; and Raymond Vernon, "A Skeptic Looks at the Balance of
Payments," Foreign Policy, no. 5 (Winter 1971-72).
10
See, for instance, David P. Calleo and Benjamin M. Rowland, America and the World
Political Economy (Bloomingtoh, Ind.: Indiana University Press, 1973). Their first section, on
"interdependence and American hegemony" (pp. 3-8), fails to define either term.
A framework for analysis 15

illustrated by Britain's position as a defender of "freedom of the seas" in the

nineteenth century. Britain played a dominant role in determining and maintaining
rules guaranteeing freedom of the seas, but this did not deter it from interfering
with neutral shipping when a war occurred in which it was a belligerent.
Yet the inference should not be drawn that a hegemonical power is never
required to compromise, or that it never loses on specific issues. Possession of
dominant rule-making power does not necessarily imply control over every political
process taking place within those rules. Furthermore, degrees of dominance can
vary from issue area to issue area, or between geographical regions. United States
dominance in the petroleum-supply issue area has eroded more rapidly than it has
on issues of international monetary policy; such dominance was never so complete
in Europe as in Latin America. Finally, the alliance leader is always subject to special
demands by client states, which may have a variety of techniques at their disposal
for persuasion or pressure, particularly within the context of active superpower
competition.11
With these caveats in mind, we use the concept of hegemony with particular
reference to the international monetary system of the postwar world. In this
analysis, a hegemonical system serves as an ideal type against which one can view
changes in the extent of United States dominance. As a way of analyzing changes in
the international monetary system since Bretton Woods, it leads to some revealing
insights. The centrality of the international monetary system for overall inter-
national economic relations provides a sound reason for concentrating our attention
there.
Hegemonic systems have certain advantages. As Charles Kindleberger has
argued, during the last century monetary systems in which there has been sufficient
preponderance of power to enable one state to claim leadership have tended to be
more stable than systems where this was not the case, and have been associated
with more prosperous economic conditions.12 Although not a necessary condition
for leadership, hegemony certainly facilitates it. In the nineteenth century, the
financial strength of Great Britain provided the basis for a monetary system that
was largely managed by the Bank of England through the key-currency role of
sterling. From World War II until the 1960s, the economic preponderance of the
United States enabled it to manage monetary relations among non-Communist
countries through the Bretton Woods system, largely through the key-currency role
of the dollar. By contrast, the unhappy international monetary experiences of the
interwar period took place in a context of United States unwillingness to exercise
strong leadership and British inability to do so.

" See Robert 0. Keohane, "The Big Influence of Small Allies," Foreign Policy, no. 2 (Spring
1971).
"See Charles Kindleberger, The World in Depression 1929-1939 (Berkeley, Calif.: University
of California Press, 1974). A parallel argument is found in the literature on regional economic
and political integration, in which it is often held that either clear preponderance by one power
or relative equality between several may be conducive to integration but that an intermediate
situation is less auspicious. See Joseph S. Nye, Peace in Parts (Boston: Little, Brown & Co.,
1971), for a full discussion of these issues.
16 International Organization

It should also be pointed out that hegemonical powers do not necessarily

exploit secondary powers economically. During the heyday of the sterling standard,
industrial production in France, Germany, Russia, and the United States increased
from 50 percent to 400 percent faster than in Britain.13 Under the United
States-dominated monetary system of the postwar period, Europe and Japan grew
more rapidly than the United States. Even so severe a critic of US hegemony as
David Calleo admits that "it was difficult to argue that the [dollar] system was
causing economic harm to its members."14
Ironically, it is the benefits of a hegemonical system, and the extent to which
they are shared, that may bring about its collapse. As their economic power
increases, the assumptions of secondary powers change. No longer do they have to
accept a one-sided dependence that, no matter how prosperous, adversely affects
their national autonomy and political status. As the possibility of gaining autonomy
and status evolves, these values are taken from the closet of "desirable but
unrealizable goals" and made operative. At least for some leaders and for some
countries (good examples are provided by the international monetary policies of
France in.the 1920s and 1960s), prosperity is no longer enough.15
These changes in state policy are complemented by the natural cycle of a
reserve currency system. As Fred Hirsch has described it:

In an expanding world economy with an upward trend to the price

level, accruals of gold to monetary reserves tend to diminish, leaving the
system increasingly dependent for incremental liquidity on the further expan-
sion of reserve-currency balances. Since such expansion involves a further
deterioration of the reserves-to-liabilities ratio of the reserve center, the
process cannot be sustained and must eventuate in suspension of converti-
bility.16

Before convertibility is suspended, however, there may be a period of time

during which the reserve currency country is dependent on decisions of foreign
central banks: since liquid liabilities so far exceed liquid assets, central bank
decisions to convert holdings of the reserve currency into gold could force suspen-
sion of convertibility. Of course, if the benefits they receive from the system are
high enough, secondary powers may fear system collapse as much as the hegemonic

"For the figures, see John P. McKay, Pioneers for Profit: Foreign Entrepreneurship and
Russian Industrialization, 1885-1913 (Chicago: University of Chicago Press, 1970), table 2, p.
5.
14
David P. Calleo, "American Foreign Policy and American European Studies: An Imperial
Bias?," in Wolfram Hanreider, ed., The United States and Western Europe (Cambridge, Mass.:
Winthrop, 1974).
15
See particularly Charles P. Kindlebeiger, "The International Monetary Politics of a Near-
Great Power: Two French Episodes, 1926-1936 and 1960-1970," Economic Notes (Siena) 1,
no. 2-3 (1972); or Kindleberger, The World in Depression.
"Fred Hirsch, An SDR Standard: Impetus, Elements, and Impediments, Princeton Essay in
International Finance No. 99 (Princeton, N.J.: International Finance Section, Department of
Economics, Princeton University, June 1973), p. 3.
A framework for analysis 17

state, or even more so since the hegemonic state may rely less on international
economic transactions than do the secondary powers. However, insofar as the
secondary powers are willing to run the risk of forcing a change in the system, they
can gain some political leverage from the weak balance-sheet position of the
dominant state.
Thus, as hegemony begins to erode, the policies of secondary powers are
likely to change. But so are the policies of the leading state. An atmosphere of crisis
and a proliferation of ad hoc policy measures will be found not only undignified
but unsettling to many; dissenters will begin to wonder about the costs of leader-
ship. Further, this leadership will less and less appear to guarantee attainment of
economic and political objectives, as other states become more assertive. In the
particular case of leadership of a key-currency monetary system, the prohibition
against devaluation of the key currency will loom increasingly large if domestic
unemployment becomes a major problem (as in Britain in the middle 1920s and the
United States in the early 1970s). The renewed emphasis of these secondary
governments on status and autonomy will add a further complication, since these
values have a zero-sum connotation that is much less pronounced where economic
values are involved. More status for secondary states means relatively less for the
dominant power; increases in the autonomy of weaker powers bring concomitant
declines in the positive influence of the system leader.
Thus the systemic orientation natural to hegemonic power, which identifies
its interests with those of the system it manages, is challenged by a more national-
istic perspective. The alternatives of bilateralism and autarky, formerly rejected on
political as well as on efficiency grounds, are once again considered. Their adherents
stress the benefits of economic security, or risk aversion. Where power seems to
assure that risks are minimal, this argument carries little weight; but where cracks
appear in the hegemonical construction, prudence now counsels what efficiency
formerly proscribed.
When this point is reached on both sides, the hegemonic equilibrium has been
broken and a spiral of action and counteraction is likely to set in. As the system
changes, assumptions change. Considerations of risk aversion on one side and
greater independence on the other counsel policies that are less international, or less
systemic, in their implications. The uncertainty thus created may be difficult to
stop.
Yet there is no inevitability in the process. In the leading state, interests in
maintaining systemic leadership and in paying its costs will persist, particularly
among the transnational actors based there, in the financial elite, and in govern-
mental bureaucracies charged with maintaining economic order and good relations
with allies. In the governments of secondary powers as well, no firm consensus is to
be expected: the benefits of dependency may provide comforts for some interests,
necessities for others. Leaders may not wish to embark on a perilous adventure into
a newly plural world. Thus the analysis cannot predict confidently that hegemony,
once its bases begin to erode, will necessarily decline, although there will certainly
be serious pressures in that direction. Indeed, inertia and resistance to change play a
18 International Organization

major role, at least in international monetary affairs, as indicated by the continued,

and even growing, roles played by sterling and the dollar long after their underlying
relative strength clearly turned down.
This indeterminancy is reinforced if the perceived erosion in position in an
issue area is based on a decline in indices of power whose importance can be
minimized by systemic change itself. In 1971, the decline in US international
monetary power was symbolized most vividly by the sharp decline in US monetary
reserves, relative to US international needs, in relation to the reserves of most other
countries. But reserves are of cardinal importance only in a monetary system based
on fixed exchange rates where they have to be used to defend a given parity. In a
world of flexible exchange rates, other indicators of monetary power become far
more important than reserves, and it so happens that the United States outstrips all
other countries on those indicators.17 Thus the preponderant power still had
enough clout to change the de facto rules of the game, but it lacked hegemonic
power sufficient to compel agreement on a new set of rules. In this situation of
uneven erosion, we are confronted with the politics of linkage between issue areas
internationally, and the ambiguities of changing symbols and perceptions in the
domestic politics of foreign policy.

Domestic politics and leadership symbols

It has become fashionable to refer to protectionist policies in advanced

industrial nations as mercantilist. However, the implicit analogy with seventeenth
century economic policies is misleading. By and large, the major political source of
the recent resurgence of economic nationalism, particularly in the United States,
has not been governmental elites concerned with using foreign economic policy to
enhance the relative power positions of their states, but relatively immobile domes-
tic groups pressing the government for protection of their share of welfare in the
competition with transnational competitors. It is not a situation in which foreign
economic policy is used to enhance state power but in which short-term problems
of the distribution of economic welfare, particularly for groups whose interests are
hurt by increasing international transactions, exert strong pressure on foreign
economic policy, regardless of the implications for interstate power or even the
aggregate welfare of the national society.
The recent upsurge of economic nationalism is partly a response to the
disruptive challenge of rising transnational interdependence. But as we indicated
earlier, it is also a function of changing perceptions of military security.
Demands by domestic groups for government protection against transnational
disturbance have existed throughout the postwar period. Under the two-track

" C. Fred Bergsten, The Dilemmas of the Dollar: The Economics and Politics of United States
International Monetary Policy (New York: Council on Foreign Relations, forthcoming 1975),
which also covers in depth some of the points discussed in this section.
A from ework for analysis 19

Bretton Woods-GATT system, however, economic and security issues were usually
handled quite separately.18 This absence of linkage in the international arena was
the product of a hierarchical linkage of security and economic issues in the
domestic US political arena. During the cold war, national security was used by
American political leaders to generate support for their policies of bolstering the
economic, military, and political structure of "Free World" systems for which the
United States worked so hard and on which it spent so much. National security
justified international cooperation in economic and functional areas and support
for the United Nations, as well as providing the rationale for alliances, foreign aid,
and extensive military involvements around the world. It became the favorite
symbol of those who favored increased United States involvement in world affairs.
The intellectual ambiguity of national security became more pronounced as varied
and often contradictory forms of involvement were sheltered under a single rhetori-
cal umbrella.
The pervasiveness of the national security symbolism profoundly affected
American foreign policy: through linkage to this symbol, certain sectoral economic
interests were suppressed and controlled. The Truman administration used the
alleged Soviet threat to American security to push the loan to Britain and then the
Marshall Plan through Congress; the Kennedy administration employed the argu-
ment that an Atlantic partnership would strengthen United States security to
promote the 1962 Trade Expansion Act. Congressmen who protested adverse
economic effects on their districts or increased taxes could be assured, and could in
turn explain to constituents, that the national security interest required their
sacrifice.
This is not to argue that national security symbolism was always used against
special interests. Powerful industries were frequently able to manipulate the sym-
bolism for their own purposes, as in the case of the petroleum import quotas
justified on national security grounds. Similarly, Glenn Snyder concluded that a
major theme in the stockpiling of strategic materials between the end of World War
II and the early 1960s was "the gradual and increasing corruption or distortion of a
national security program by the pressures of subnational interests."19
Yet the postwar mood of internationalism-in the service of which national
security symbolism was used by leaders-did have an effect on policy. It was not
simply a facade behind which interests hid. Bauer, Pool, and Dexter concluded that
self-interest and internationalism in the 1950s were "independent forces operating
on tariff attitudes."20 National security symbolism helped to construct a favorable
global environment for transnational economic actors as well as for the large
governmental bureaucracies of the Agency for International Development, the

18
Richard N. Cooper, "Trade Policy is Foreign Policy," Foreign Policy, no. 9 (Winter
1972-73).
"Glenn H. Snyder, Stockpiling Strategic Materials: Politics and National Defense (San
Francisco: Chandler Publishing Co., 1966), p. 267.
"Raymond A. Bauer, Ithiel DeSola Pool, and Lewis Anthony Dexter, American Business and
Public Policy: The Politics of Foreign Trade, 2nd ed. (Chicago: Aldine-Atherton, 1972), p. 144.
20 International Organization

Central Intelligence Agency, and the military services. National security was an
ambiguous symbol, but it was also a force.21
As the cold-war sense of security threat slackened, foreign economic competi-
tion and domestic distributional conflict increased. National security symbolism
became even more ambiguous in policy terms. Secretary of the Treasury Shultz
proclaimed that Santa Claus was dead, but his pronouncements were mild com-
pared to those of his predecessor, John Connally. The question of whether the
United States should aspire to lead others or merely provide for itself came to the
fore. United States policies on monetary questions were subject to divergent
interpretations: they could be seen as bold attempts to lead the world toward a
beneficial future of more flexible exchange rates with changes to be based on
objective indicators, or as brazen unilateral moves to establish a dollar standard or
to launch a "total economic offensive" against the Europeans.22
As the ambiguity of national security has increased, its power as a symbol has
declined. This presumably reflects not only the increased ambiguity itself, but also
the reaction in the United States to Vietnam and detente. National security has
become a secondary symbol. The prime symbolism of the internationalists now
focuses on interdependence. When used by analytical scholars, interdependence
focuses on sensitivities of societies and policies to one another, and on the
vulnerabilities that patterns of transactions may create.23 Since it may be asym-
metrical, it does not imply equality; since both sensitivity to external economic
events and vulnerability to changes in the world economic system can be painful, it
does not guarantee a reduction of conflict. From a policy viewpoint, the analysis of
interdependence may even yield the conclusion that "systems should be designed
consciously to reduce interdependence at politically sensitive points as a means of
protecting not only national autonomy in the short term, but adverse politicization
as a result of the actions of disgruntled groups."24
The use of interdependence rhetoric by policymakers is quite different. Here
overtones of equality are clear, and the plea is for greater cooperation with other
governments and greater openness to the world. Interdependence is viewed as a
natural necessity, as a fact to which policy must adjust, rather than as a situation
partially created by policy itself. Furthermore, it is held that conflicts of interest
are reduced by interdependence, and that cooperation alone holds the answer to

21
Arnold Wolfers developed the seminal discussion of this issue in "National Security as an
Ambiguous Symbol," in Political Science Quarterly 67 (December 1952), which was later
reprinted in Wolfers, Discord and Collaboration (Baltimore: The Johns Hopkins Press, 1962),
chapter
21
10.
For the constructive interpretation, see a variety of official reports, including particularly
the International Economic Report of the President, February 1974, transmitting the second
annual "International Economic Report" of the Council on International Economic Policy
(Washington, D.C.: Government Printing Office, 1974). For representative adverse reactions,
see the essays by Calleo and by Cohen in Hanreider, ed., The United States and Western
Europe.
23
For a fuller discussion, see Robert 0 . Keohane and Joseph S. Nye, "World Politics and the
International Economic System"; and the works cited in footnote 6.
24
Keohane and Nye, "World Politics and the International Economic System," p . 1 3 8 .
A framework for analysis 21

world problems: "We are all engaged in a common enterprise. No nations or group
of nations can gain by pushing its claims beyond the limits that sustain world
economic growth. No one benefits from basing progress on tests of strength."25
These words are clearly the stateman's rhetoric rather than objective reality,
and they are composed for the legitimate purpose of influencing public attitude.
For those who wish to maintain United States leadership, interdependence has
become the new symbolism, to be used both against economic nationalism at home
and assertive challenges abroad. One may well approve the general tone. Yet one
must also recognize that, as in the case of national security, noble purposes are
subject to corruption by particular interests: no political symbol remains pure for
long.
Interdependence symbolism suggests that conflicts of interest are passe.
Traditional balance of power models of world politics, by contrast, regard such
conflicts as fundamental; and the political-military focus of these models tends to
lead analysts into stressing the severity of the resulting conflicts. Gains in military
power in a balance of power system are sought for the relative advantages a state
may thereby gain over its potential adversaries.
Neither of these views is fully satisfactory as a framework for the analysis of
international political-economic relations. Interdependence rhetoric erroneously
suggests that conflicts of interest do not exist because of a common threat: we are
all involved, it is alleged, in a kind of grand "game against nature." The conclusion
would only follow if three conditions were met: if the "single international
economic system on which all of our national economic objectives depend"26 were
in danger of collapse; if all countries were significantly vulnerable to such a
catastrophe; and if there were only one unique solution to the problem (so that no
room would be left for bargaining about how to solve it). Merely to list the
conditions for the assertion to be correct indicates its fallaciousness.
Balance of power imagery is little better for analyzing political-economic
questions. It is correct in pointing to the permanence of conflict, but it fails to
account for a crucial difference between economic and military competition.
Economic gains are generally sought not merely or even chiefly for the advantages
they bring relative to others, but are desired primarily for their absolute benefits
(greater income, increased economic security, etc.). Thus a chief prediction of
classical balance of power theory—that states will act to protect themselves by
limiting the capabilities of strong states or coalitions27 —may not hold where states
pursue a substantial gain in wealth or employment. Domestic political pressures will
frequently lead governments to approve international economic arrangements that
will help others as much as, or even more than, themselves, as long as they stand to

" Henry A. Kissinger, Address before the Sixth Special Session of the United Nations General
Assembly, 15 April 1974, Department of State, Office of Media Services, News Release, 15
April 1974, p. 2; reprinted in International Organization 28 (Summer 1974): 573-83.
"Ibid., p. 1.
" See Morton Kaplan, System and Process in International Politics (New York: Wiley, ] 957).
22 International Organization

benefit as well. Thus the politics of economic relations resemble a mixed-motive

game with incentives for both cooperation and conflict.

Economic objectives and world order

We now turn to an analysis of the different economic objectives that individ-

ual countries, and different groups within countries, may seek either through
cooperation or through conflict. For there is a wide array of "purely" economic
goals, which can be sought through a variety of domestic and international means.
The creation of any set of international economic arrangements presupposes fairly
wide agreement between countries on the hierarchy of economic objectives, and
how the different economic objectives are ranked.

The theory of economic policy

Before turning to a detailed discussion of the individual economic criteria,
however, it is necessary to outline the theory of economic policy. As developed by
Tinbergen28 and others, this theory posits that the number of economic policy
instruments must at least equal the number of policy targets that can be met; it is
usually impossible to achieve a greater number of policy targets than one has
available policy instruments. In view of the vast proliferation over the last few
decades in the number of policy objectives, this means that governments are
actively seeking additional policy instruments, notably including those that can
influence external economic events, in order to block unwanted effects and to
actively promote domestic goals. At a minimum, they actively seek to limit external
constraints on their pursuit of internal economic (and social) objectives.
The original theory of economic policy, however, related to a single country.
New problems arise when one opens the model to include external events that can
be influenced by the country being considered, which in turn feed back on the
probability of successful use of its own policy instruments.29 Country A may be
able to force a depreciation (appreciation) of its exchange rate and thereby transmit
some of its unemployment (inflation) to country B. If so, country A obviously
possesses a valuable additional policy instrument.
But what about country B? It must turn one or more of its policy instru-
ments either to countering directly the change effected by country A in the
exchange rate or to offsetting the induced change in the level of unemployment
(e.g., through expansive fiscal policy). Its choice will be determined by the relative
effectiveness of its policy tools. But whichever tool it chooses, the ratio of policy
instruments to policy targets in country B has been adversely affected. It has been

"Jan Tinbergen, On the Theory of Economic Policy, 2nd ed. (Amsterdam: North Holland
Publishing Co., 1963).
"See Richard N. Cooper, "Macroeconomic Policy Adjustment in Interdependent Econ-
omies," Quarterly Journal of Economics 83 (February 1969): 1-24.
A framework for analysis 23
forced either to adopt a new economic target (avoiding the induced change in its
exchange rate) or to assign at least one more of its policy instruments to the target
upset by the action of country A.
This example leads us back into the political thicket. The relative success of
countries A and B in attaining their goals will depend not only on the structure of
their economies and the intelligence of their economic policies but also on their
relative power. If country B happens to be the world's premier military power,
whose armed forces are protecting A from potential aggression, it may be able to
prevent A from using a policy instrument that would be damaging to B, or at least
to compel compensating adjustment of policy by other dependent countries or by
A itself in other areas. On the other hand, country B may have a strong national
interest in seeing a strong economy in country A, to shore up their alliance and
reduce the risk that B will ever have to actually fight for A, and may let A get away
with its effort to export its economic problem even when B has the power to block
such a step.
By contrast, if B is a peripheral, minor state, it may not have such leverage
and indeed might be afraid to offend powerful states upon which the security and
prosperity of its governmental elite may depend. Equally plausible, it may be able
to get away with aggressive economic actions simply because it is small and does
not much matter. Whichever outcome occurs in each case, the politics of the
situation have at least as important an impact as the economics.
In a securely hegemonical international system, extremes of power are very
great, but the stability of the system is likely to be high. One fears repression and
inequity more than protracted and damaging international economic conflict. In a
system of eroding hegemony, as in the present, on the other hand, conflict becomes
more likely as weaker states are increasingly able and willing to oppose the wishes
of the leading power.
In the real world, there are well over 100 countries, at least two dozen of
which are relevant to most major international economic issues. Thus the oppor-
tunity, indeed the likelihood, of such external upset of internal economic policies is
very great. No country, including the United States,30 is immune from such upsets.
It would thus be desirable, from the global standpoint, to devise an international
economic system that avoided such upsets, especially if they result from aggressive
actions by individual countries, as in the universally scorned beggar-thy-neighbor

30
Numerous examples beyond the obvious US dependence in imports of oil and other raw
materials can be cited. The overvaluation of the dollar was probably costing the United States
500,000 jobs by mid-1971, raising the rate of unemployment by 0.7 percentage points (from
near 5 percent to about 6 percent), a jump of great political as well as economic importance.
Conversely, the dollar devaluations of 1971-73 contributed at least one-fourth of the rise in the
US inflation rate during that period, and growing foreign demand for US agricultural goods
added to this total. About one quarter of all investment by US-based firms now takes place in
other countries. These foreign direct investments provide a like share of US corporate profits,
and well over one-half of the profits of many major US firms. Over one quarter of US farm
output is exported.
24 International Organization

policies of competitive exchange rate depreciations and adoption of new trade

barriers in the 1930s. The traditional risks that countries will seek to export
unemployment to each other through import controls and exchange rate deprecia-
tions have now been joined by risks that countries will seek to export inflation to
each other through export controls and exchange rate appreciations, and they use
their policies toward foreign direct investment to do both.31
A long line of observers, from David Ricardo forward, have proposed systems
that would avoid such international economic conflict. The doctrine of free trade
would in essence assign to trade policy the objective of maximizing global effi-
ciency, which should in turn both help counter inflation and, at least over the
longer run, boost growth and employment. (Whether it can achieve that goal in
practice is examined by Baldwin and Kay in their essay in this volume; it depends,
inter alia, on the existence of market imperfections such as business and labor
oligopolies.) Free trade would eschew any conscious efforts at distributing that
enhanced global welfare, though it should help raise living standards at all income
levels by maximizing aggregate output. In a more recent formulation, based on the
view that the dollar dominates world finance and the restoration of fixed exchange
rates, Mundell would assign to the United States the responsibility for restraining
world inflation and to other major countries the responsibility for providing
adequate but not excessive growth of world reserves (through gold transactions
with the United States when US payments imbalances, either surpluses or deficits,
become excessive).32
It is too early in this volume to discuss the merits of these, or other,
particular approaches. Yet they reveal three significant (and closely related) ele-
ments that are germane to the present discussion. First, they ignore such issues as
income distribution and economic security, which, as we will shortly see, are among
the criteria against which any international economic order must be judged.
Second, they ignore the fact that the world is not a decision-making unit and that
the pursuit of global welfare, however appealing to many economists, is an ex-
tremely difficult concept to implement in practice. Third, they ignore the innate
tendencies of virtually all states to try to use their power to seize an increased share
of the benefits of any order, in some cases through subtle identification of world
welfare with their own welfare rather than through any crude seizure of benefits
which their power might permit, and the resulting high probability of conflict in
international economic relations.
Since the political dimensions of international economic relations are so
significant, essential elements of the situation and necessary analytical distinctions
are often obscured by symbolism, rhetoric, and ideology. The theory of economic
policy indicates that we must distinguish clearly, for instance, between economic

31
On the last point, see C. Fred Bergsten, "Coming Investment Wars?," Foreign Affairs,
October 1974, pp. 135-52.
" Robert A. Mundell, International Economics (New York: MacMiUan Co., 1968), especially
pp. 282-88.
A framework for analysis 25

objectives and economic instruments. The president of the United States announces
that he wants to devalue the dollar or the prime minister of Japan professes a desire
to reduce his country's trade surplus, but the underlying objectives of these actions
remain unstated or are deliberately concealed. Thus a trade surplus or deficit, or a
devalued or revalued exchange rate, often comes to be regarded, erroneously, as an
end in itself. When certain economic indicators (such as a trade surplus or a "strong
currency") become regarded as sources of internal or external prestige for govern-
ment or nation, the confusion of instruments with objectives becomes even more
pronounced.
The failure to distinguish between independent and instrumental variables-
ends and means—has confused much of the debate over alternative international
economic arrangements. Differences in viewpoints can occur at two levels. First,
there can be differences about the goals themselves, the independent variables. Rich
countries (and rich groups in poor countries) may seek a system that maximizes
economic efficiency, while poor countries (and less affluent groups in rich coun-
tries) may seek a system that redistributes income in their direction. Second, there
can be disagreement about the means for achieving agreed goals, the instrumental
variables. A small country quite open to the world economy may view free trade as
the best route to full employment, while a large country relatively closed to the
world economy may view import barriers as best achieving the very same goal.
Since the nature of any international economic arrangements (fixed or flexible
exchange rates, free trade or protectionism) greatly influences the likelihood of
alternative outcomes, these disagreements produce very different views on what
systemic arrangements should prevail.
The charters of the major postwar international economic institutions per-
haps surprisingly dwelt primarily on instrumental rather than independent objec-
tives. All six of the purposes in Article I of the IMF charter, for example, are
instrumental; the basic goal "to contribute thereby to the promotion and mainte-
nance of high levels of employment and real income" appears only as a derivative
clause in one of the six. The six purposes of the World Bank as stated in Article I of
its charter are similarly instrumental, again with the exception of a single derivative
clause-"assisting in raising . . . the standard of living and conditions of labor. .. ."
The GATT was much more explicit, advocating trade relations that would be
effective in " . . . raising standards of living, assuring full employment and a large
and steadily growing volume of real income and effective demand. . . ." 33 None of
these documents revealed whether their authors confronted (much less, made) the
hard choices between the different economic objectives, although their references
to full employment were certainly more explicit than their references to price
stability ("real income").

"The charter of the abortive International Trade Organization provided a far clearer state-
ment of objectives than did the charters cited in the text. It included a full chapter on
"employment and Economic Activity" as well. See Raymond Mikesell, "The ITO Charter,"
American Economic Review 37 (June 1947): 353-56.
26 International Organization

It is quite natural to find designers of new international regimes concentrating

on instrumental rather than on fundamental purposes. Practical results may thereby
be achieved and sterile conflict over abstractions avoided. In the later essays of this
volume, there is much discussion of instruments. This would, however, be relatively
fruitless except in the context of an appreciation of the independent variables—the
economic criteria in light of which policy instruments must be chosen and evalu-
ated. We therefore turn next to an analysis of those criteria, and how they relate to
one another.

The economic criteria

In this section we consider, in turn, seven criteria against which to judge the
effectiveness of any international economic system: efficiency, growth, full em-
ployment, income distribution, price stability, quality of life, and economic secu-
rity. In each case we examine the nature of the objective, how its pursuit is affected
by the international economy, and how important it has been in the international
economic arrangements that have existed through the postwar period. It will
become apparent both that it may be difficult to achieve any of these objectives
and that there may be sharp conflicts between them.

Efficiency
The standard focus of positive economic analysis is the degree to which
existing arrangements achieve the most efficient possible allocation of economic
resources. The objective is to maximize welfare, defined as maximizing consump-
tion of goods and services.34
Reliance on market forces—free trade, freedom for international capital
movements, and equilibrium exchange rates—is the traditional approach of inter-
national economic policy to pursuing this goal. Several complications arise imme-
diately, however.
First, reliance on the market may not always promote economic efficiency.
Economics has long recognized the existence of market imperfections. At the
macroeconomic level, for example, imperfections in the international capital mar-
ket may distort output. At the microeconomic level, oligopolists and oligopsonists
(such as many multinational corporations, state enterprises, and producer country
cartels) may pervert the market mechanism and require countervailing checks if
efficiency is to be maximized. Harry Johnson has indicated that "the scientific issue
is whether observed deviations of fact from assumptions are empirically significant •

34
Welfare can of course have several different meanings, in terms of both economics per se
and at the broader societal level. Indeed, each of the goals described in this article represents a
different aspect of welfare, broadly defined. For a useful comparative analysis of the different
concepts of economic welfare, see Hla Myint, Theories of Welfare Economics (New York:
Sentry Press, 1965), especially chapter 12.
A framework for analysis 27

enough to destroy the validity of the conclusion of the (traditional) theory,"35 and
no one has yet answered the question.36
Second, the pursuit of efficiency through reliance on market forces often
produces dislocations that themselves reduce total output and even produce de-
clines in efficiency elsewhere. Free trade, for example, generates dislocations that idle
plants and workers and reduce output by suppliers of the affected plants and
workers. In addition, many modern societies accept a responsibility for helping
these idled factors adjust, which in turn requires spending by the government (and
perhaps by the private sector), which may divert resources from uses that are more
efficient, at least in the short run.
Third, long-run efficiency may be maximized by introducing short-run ineffi-
ciencies. This is because optimum allocation may never eventuate unless con-
sciously promoted by policies that admittedly depart from optimum allocation for
a while to get there. (For such an approach to represent "rational" policy, increases
in efficiency over the long run, suitably discounted, must exceed the reduction in
efficiency in the short run.) The classical case for tariff protection of infant
industries is based on this notion. The modern importance of economies of scale in
achieving optimum allocation of resources has probably heightened the importance
of the argument. For any single country, however, this focus can suggest policies
either of (1) trade protectionism (to promote exploitation of a sufficiently sizeable
domestic market by limiting foreign competition), or (2) free trade, at least within
a regional grouping, and undervalued exchange rates (to help smaller countries
exploit foreign markets). Its implications for the international economic order as a
whole are indeterminate.
Hence, even the pursuit of economic efficiency as the chief objective of
international economic policy does not necessarily call for total devotion to the
judgment of the marketplace. Such considerations as the need to check excessive
concentrations of market power (e.g., through global antitrust policies), the trans-
formation costs of adjusting to new patterns of production, and economies of scale
may both dominate the static maximization of efficiency from a given set of factors
of production (including technology) and suggest that even static maximization
may require intervention. On the other hand, it may often prove more efficient to
deal with these considerations through direct government subsidies or other domes-
tic devices than through changes in international economic policy. Thus, their
existence by no means rules out an essentially liberal international economic
system.
A final consideration is the quantitative importance of international eco-
nomic considerations for the efficiency of national economies (and hence the world

35
Harry G. Johnson, Comparative Cost and Commercial Policy Theory for a Developing
World Economy, Wicksell Lectures 1968 (Stockholm: Almquist & Wicksell, 1968), p. 10.
36
For an enumeration of these deviations and a subjective judgment that their quantitative
impact is not large, see Richard N. Cooper, "Economic Assumptions of the Case for Liberal
Trade," in C. Fred Bergsten, ed., Toward A New World Trade Policy: The Maidenhead Papers
(Lexington, Mass.: D.C. Heath, 1975).
28 International Organization

economy). The gains from trade (and, presumably, from free capital movements as
well) are usually deemed to be quite small relative to gross national products. But
they may be quite significant for small countries and even for a few big ones, such
as Japan. Conversely, big countries can best improve their national positions
through optimum tariffs or other controls over international economic flows simply
because they are sufficiently important in the world economy to reap monopoly/
monopsony gains through unilateral action. In addition, most countries can prob-
ably achieve greater efficiency gains (in static terms) from changes in their inter-
national economic policies than from virtually any other policy instruments at their
command.37 International economic policy is thus a highly significant issue for
virtually all countries, and its importance may be growing in view of the increasing
share of external transactions in the economies of virtually all countries.
The postwar economic system placed a relatively high emphasis on efficiency.
Despite deep concerns that massive unemployment might recur, the IMF-GATT
machinery relied heavily on the market, though with a few exceptions, as for
capital movements in general and import flows for countries with balance-of-
payments problems. The most plausible explanation for this outcome is its virtual
dictation by the United States, which believed that barriers to international eco-
nomic transactions produced major tensions between countries and hence inter-
national conflict, which was devoted to free markets ideologically, and which was
fully confident of its ability to maximize its national economic interests in such a
world.
The trend toward freeing markets continued into the middle 1960s, with
successive trade liberalizations, the freeing of capital flows, and the elimination of
exchange controls attendant to the advent of widespread currency convertibility.
But from the middle 1960s into the middle 1970s, controls over capital movements
again proliferated and, after the conclusion of the Kennedy Round, trade controls
began to emerge once more. In addition, most home and host countries began to
levy explicit controls on foreign direct investment, which was rapidly becoming one
of the major engines of international economic exchange. The erosion of US
hegemony was an important factor in this shift away from a focus on efficiency and
market forces,38 and we will see shortly that other criteria were now being given
greater priority, relative to efficiency. But again in the middle 1970s, a notable
liberalization of some kinds of controls, frequently on a unilateral basis, began to
occur once more due to concerns for more efficiency, to help fight inflation.39
37
Hairy G. Johnson, "The Probable Effects of Freer Trade on Individual Countires," in
Bergsten,
38
ed., Toward a New World Trade Policy: The Maidenhead Papers.
It is true that the United States tolerated discrimination against it in the early postwar
period, which detracted from global economic efficiency. This was done for reasons of national
security, however, rather than to meet any other economic criteria (except, perhaps, for an
application of "infant industry" reasoning to the postwar reconstruction of Europe and Japan).
In addition, many of the discriminatory steps were viewed by the United States as necessary
but temporary way stations en route to a world of multilateral free trade and payments, which
proved correct at least in the monetary area where the European Payments Union paved the
way for European convertibility.
39
The shift from fixed parities to managed flexibility of exchange rates resulted from the
A framework for analysis 29

Growth
A second criterion against which to judge international economic systems is
their impact on economic growth. Growth obviously raises total future output, and
is thus likely to be the chief criterion of success for those who seek maximum
output over time above all else.
Just as efficiency can contribute to growth, growth can contribute to effi-
ciency. It can minimize the costs of adjustment to an improved allocation of
existing resources by providing new opportunities for dislocated plants and work-
ers. It contributes to the achievement of economies of scale, and hence to more
efficient production processes. It often provides scope for new entrants and may
thus even help break down undue market concentration. Growth contributes to the
possibility for better distribution of income, both among and within countries,
since it is politically far easier to divide up a growing pie than a static one. It may
also contribute directly to income inequality by raising the share of savings in
national income, although income inequalities have diminished in most countries
during the unprecedented period of growth since World War II.
On the other hand, it has now been widely recognized that growth may entail
significant costs, which economists often call external diseconomies. Some world
resources are limited, and unbridled growth may jeopardize life itself, or at least life
as we know it now, within a relevant period of time. The costs of environmental
pollution should be explicitly considered as a cost of some kinds of growth. And
excessive growth can trigger rapid inflation, which generates many costs directly
and can in turn stunt growth itself.
International economic arrangements can contribute to growth in two ways.
They can help countries avoid restrictive economic policies by reducing the con-
straints of external events, such as balance-of-payments deficits, on internal pol-
icies. Going further, they can provide opportunities for rapid growth by positively
facilitating expansive policies, for example, through reductions in trade barriers that
promote growth via world trade and through reductions in barriers to capital flows
that promote infusions of savings.
Like all postwar economic policies, the international economic structure was
heavily oriented toward growth. Generous financing for balance-of-payments defi-
cits in the IMF and through foreign aid programs, and the automatic financing
accorded reserve currency countries, tended to reduce the need for restrictive
internal policies, and indeed permitted excessively expansionary policies at least in
the United Kingdom in the early 1960s and in the United States in the late 1960s.
Trade and investment barriers were steadily reduced through the middle 1960s,
opening world goods and factor markets for increased expansion. The system paid
virtually no attention to the adverse manifestations of growth: the possible deple-

widespread conclusion that markets could set equilibrium exchange rates better than govern-
ments, more than from any shift in notions about which system was more efficient. We will see
shortly, however, that changes in the views of key countries about the relative importance of
the different criteria had a major impact on that change.
30 International Organization

tion of resources, environmental pollution, possible maldistribution of income, and

the build-up of inflationary pressures from steadily rising demand and the resulting,
even faster, rise in popular expectations.

Full employment
Closely related to the criterion of growth is full employment, which has been
elevated to a (if not the) top spot in the hierarchy of national policy goals since the
Great Depression. However, rapid growth and full employment are not identical;
developing countries are now learning that one can have rapid growth with rising
unemployment.
One can also have full employment without rapid growth. This can be done at
the price of relatively high inefficiency, as is apparently the policy of the People's
Republic of China at present, which reduces the welfare of some portion (pre-
sumably a majority) of the population in order to avoid excessive hardship for any
portion. Or full employment can be achieved without rapid growth in a society not
experiencing much growth in productivity, as in Britain during much of the postwar
period. The cost in that case is the concomitant loss in real income in the future,
and possibly also a deterioration in the country's international competitiveness,
which will eventually force depreciation of its exchange rate and losses of real
income relative to a situation in which its productivity grew more rapidly. Never-
theless, sufficient attachment to the goal of full employment could render either
aspect of relative inefficiency acceptable.
The same kinds of international policies that foster growth, as just cited, also
foster full employment. In addition, external policies can be used by individual
countries to try to export unemployment via exchange rate depreciations, import
controls, and export subsidies. Such policies were widely pursued in the 1930s,
with the resulting lesson that they would quickly feed back negatively—via reduced
world incomes and hence reduced exports for every country, as well as direct policy
emulation and retaliation—even on countries that gained from them in the very
short run. Therefore, the postwar arrangements sought to erect barriers against
national efforts to export unemployment.
These efforts succeeded, on the whole, in blocking destructive actions. But
they did not compel constructive actions. Thus, part of the postwar success of such
countries as Germany and Japan in maintaining full employment was due to their
maintenance of undervalued exchange rates (and, in the case of Japan, a number of
residual import controls). From August 1971, when the United States concluded
that a significant share of its unemployment had been imported as a result, it took
drastic unilateral action both to restore exchange rate equilibrium immediately and
to create a monetary system that would maintain equilibrium for the future. Nor
did the system compel policies that would enable developing countries to escape
increasing unemployment, despite impressive growth rates in some cases.
Another gap is the absence of international rules to govern shifts in jobs
resulting from government policies toward foreign investment, which are becoming
A framework for analysis 31
increasingly important.40 Given the obvious continuing importance of the unem-
ployment criterion, it will be a major consideration in the construction of any new
international economic arrangements.

Income distribution
Income distribution has two key aspects: distribution within individual coun-
tries, and distribution among different countries. The two can vary inversely. The
income gap between developed countries (DCs) and less developed countries
(LDCs) could be reduced while internal disparities within both were growing. And
internal redistribution within individual developing countries could slow their
overall national progress in reducing the DC-LDC gap (though it need not do so).
Hence, the criterion must be further defined before one can use it operationally.
Another fundamental conceptual problem with income distribution is its
basic objective. What is a better distribution of income? Does it seek equal income
for all (countries or people)? Or simply a reduction in the disparities that currently
exist? If the latter, how much better is enough? When the issue is extended to the
international plane, it becomes increasingly complicated: Should below-average
earners in DCs transfer part of their income to above-average earners in LDCs who
earn less in absolute terms? Should the resource-rich and/or successfully industrial-
izing countries of the Third World transfer to the resource-poor countries of the
Fourth World, now additionally faced by the heavily increased costs of energy and
food? In short, what is the optimum distribution of income?41
This final question in turn raises the link between policies to redistribute
income and policies to increase total (world or national) income. Many (though not
all) policies that seek primarily to redistribute also cut growth, and many policies
that pursue growth exacerbate income disparities. Thus an individual (country or
person) may be better off, in absolute terms, with a smaller share of a bigger pie.
The time dimension is of critical importance in answering this question: Are
societies, or sectors of societies, willing to forego income redistribution now in
order to generate larger total incomes for all sectors, and hence more to redistrib-
ute, in future generations?
On the other hand, income distribution has become more equal in several
rapidly growing developing countries, such as Taiwan, and may even have boosted
their rates of growth. Thus, it may be quite possible to find policies that simulta-
neously foster growth and better income distribution.
In pursuing this issue, we cannot avoid a question that probes beneath
economics: Do people seek (1) the highest possible standard of living, in absolute
terms, or (2) the least possible disparity in income vis-a-vis their neighbors, even if

40
Bergsten, "Coming Investment Wars?"
41
Jan Pen presents a "non-exhaustive" list of 21 alternative objectives of income distribution
in his Income Distribution (New York: Praeger, 1971), p p . 291-316, a lucid and witty
presentation particularly useful for noneconomists.
32 International Organization

their resulting income is lower in absolute terms than under (1)? The answer to the
question may change as the size of the pie grows. The search for absolute
improvement may dominate at lower levels of income, but the quest for equality
may become ascendent at more comfortable absolute levels. Whatever the answer, it
obviously mixes psychology and sociology with economics, and is probably not
amenable to any simple generalizations.
International economic relations can have a major impact on income distribu-
tion both within and among countries. Trade and investment flows affect both
importantly. International aid flows are analogous to transfer payments within an
economy, and there have been proposals for a minimum world income as well as
guaranteed annual incomes for all citizens of individual countries. Indeed, a major
complaint of the LDCs throughout the postwar period has been that the interna-
tional economic system was biased against them and exacerbated the North-South
gap through such devices as high effective tariffs against their products, terms of
trade that steadily turned against them, and distribution of the major share of new
international liquidity (whether via dollar balances, special drawing rights, or gold
revaluation) to those already rich. In the recent past, of course, the oil exporters
and some other commodity-rich developing countries have sharply improved their
terms of trade and redistributed world income dramatically in their favor.
The postwar economic system ostensibly placed income redistribution high
on its priority list. The World Bank was created to reconstruct Europe. Foreign aid
programs from the Marshall Plan forward sought to promote living standards in the
contemporary developing countries. Germany and several other European countries
now approximate the US level of per capita income, and Japan will do so within a
few years. The relatively liberal regimes for trade and capital flows supported the
rapid progress of scores of countries, from Japan through Brazil, in cutting the gap
between their national products and those of the United States and Europe.
On the other hand, the international dollar standard enabled the richest
country, the United States, to appropriate at least some real resources from the rest
of the world. The ongoing maintenance of an increasingly overvalued dollar arti-
ficially inflated US living standards (as American tourists abroad have now painfully
learned). The absolute DC-LDC gap has continued to grow. Therefore, the effects
of the present international economic order on international income distribution
are ambiguous.
Its effects on income distribution within countries are equally unclear. Free-
dom for foreign investment probably raises the income share of labor in capital-
importing countries, and cuts it in capital-exporting countries. Fixed exchange rates
subsidize the foreign sector of an economy at the expense of the domestically
traded sector,42 but the controls often undertaken on external transactions to
preserve such rates tax the foreign sector itself directly. Free trade generally helps
the most efficient, and thus increases the existing wage disparities between groups

" Assuming that the rate itself reflects long-term equilibrium conditions, and by contrast with
a ratefluctuatingaround that same equilibrium point.
A framework for analysis 33

(such as skilled versus unskilled labor). But it also promotes consumer welfare,
which is generally most valuable to the least efficient (and hence lowest paid).

Price stability
Price stability is a complex economic goal because, in our terminology, it is
both an independent and an instrumental variable. It is an independent variable
because some observers fear that excessive inflation can itself destroy fundamental
institutions of society, including existing political structures. They point to histor-
ical instances, particularly in Europe in the interwar period, as evidence for this
view.43
Economists, however, without necessarily regarding inflation as any less
serious, primarily view it as an instrumental variable. It clearly redistributes income
to those able to keep their money incomes rising faster than prices (some business-
men, workers whose contracts encompass escalator clauses, and countries whose
terms of trade can be kept rising over time) and away from those whose incomes
are relatively fixed in money terms (such as private pensioners and some salaried
workers). In addition, it can distort factor markets, particularly the financial
system. Hence, it can lead to restrictive economic policies, which will still further
undermine efficiency, growth, and full employment. The likelihood of such an
outcome is increased to the extent that high rates of inflation are unstable,
inevitably spiraling into hyper-inflation unless quickly restored to relatively modest
levels. The problem is reduced to the extent that societies can accommodate to
inflation, through such devices as widespread indexation.
International economic policy could be oriented primarily toward maintain-
ing price stability. This is easiest to see for individual countries. Revaluations,
reductions in import barriers, and export controls help a country fight inflation, at
least in the short run. Germany has in fact consciously used exchange rate policy to
fight inflation in recent years, and Japan used massive sales of its dollar reserves to
do so throughout most of 1973. A number of countries have unilaterally cut their
import barriers, and even eliminated some of them entirely, to help fight inflation.
At the systemic level, competitive revaluations and export controls could in
fact replace competitive devaluations and import controls as the primary sources of
international economic conflict, if rapid inflation became endemic. And interna-
tional economic arrangements can accelerate world inflation through such means as
excessive creation of international liquidity and promotion of rising commodity
prices.
On the other hand, the international economic order could incorporate joint
policies to fight inflation. For example, the level of world reserves could be reduced
through a cancellation of special drawing rights. Sales of gold by central banks
could reduce the price of gold in the free market, which might lead to reductions in

43
Such a view can be found in Irving S. Friedman, Inflation: World-Wide Disaster (Boston:
Houghton Mifflin Co., 1973), especially chapter 5.
34 International Organization

other commodity prices as well. The trading community could adopt new rules to
limit export controls, and perhaps retaliate against them, as in the GATT they
developed rules to limit import controls and sanctioned retaliation against them.
Even more ambitiously, better coordination of domestic policies—including incomes
policies, as well as monetary and fiscal policies—could improve the effectiveness of
the individual national efforts against inflation.
The existing international economic system pays virtually no explicit atten-
tion to inflation. Indeed, the dollar-based monetary system that emerged from
Bretton Woods came to be widely viewed as an engine of inflation, because it
placed no control over the growth of world liquidity and no meaningful external
constraint on inflationary policies in the United States, the most important single
country in determining the rate of world inflation.44 As already noted, the postwar
economic order aimed primarily to foster growth and combat unemployment, and
thus its inattention to inflation is understandable. Nevertheless, its absence of
effective rules and institutions to govern the means through which countries seek to
export inflation, such as export controls, represents a major gap in its intellectual
and political structure.

The quality of life

A further economic criterion encompasses the increasing array of issues
generalized under the heading "improving the quality of life." We have already
mentioned the external diseconomies of untrammeled economic growth. Indeed,
new measures of "gross national welfare" have been devised to take account of such
qualitative factors as the value of leisure time and of interesting jobs, and the costs
of pollution and job dislocation. The most important single aspect of the issue is
probably environmental management: pollution of both air and water can occur
both through the processes of production and through consumption of final
products.45
Attention to such concerns probably rises with the level of income. It is thus
generally higher in the affluent industrialized countries than in the developing
world, and is an issue over which there is wide disagreement between different
countries. There has been very little effort at international regulation of these issues
in the past, partly because of these differences in national views and partly because
ecological concerns have only been raised at all quite recently.

Economic security
The final economic criterion is economic security. In its international mani-
festations, the concept encompasses a wide variety of specific interests: assured
44
On the other hand, some observers view the present system of managed flexibility of
exchange rates as equally, if not more, inflationary.
45
For a comprehensive analysis, see Ingo Walter, "Environmental Management and t h e
International Economic Order" in Bergsten, ed., The Future of the International Economic
Order: An Agenda for Research.
A framework for analysis 35

access to foreign supplies, especially of needed foodstuffs and raw materials;

assured access to foreign markets, so that exports and hence domestic employment
are not suddenly jeopardized; protection against dislocations stemming from rapid
penetration by foreign goods, labor, or capital, like the other economic issues, it
has an important time dimension. For example, the US import quotas on oil may
have enhanced US economic (and military) security in the short run by keeping
higher levels of domestic capacity in operation, but they clearly undermined that
security in the longer run by depleting US resources and hence increasing US
vulnerability to foreign suppliers.
All of these issues have already been considered under the discussions of price
stability and full employment and in other sections. In some senses, the search for
economic security is thus not a separate objective at all but represents an effort to
increase the probability that other objectives will be achieved.
Nevertheless, we single out the issue for separate treatment for three reasons.
First, it has become a major concern of many governments. The oil crisis drama-
tized the vulnerability of most of the world, including the United States, to supply
interruptions of a single key commodity. The various suggestions of physical or
artificial (i.e., cartelized) shortages of other commodities has broadened that
concern. Short-term food shortages, and an uncertain outlook for world food
supplies for the longer run, have led to famine conditions in a few places and real
risks of starvation (an issue that is not part of any of our other criteria) and hence
call for new arrangements for world security.
Second, economic security is closely related to traditional military security
and thereby links economic and political considerations even more closely than do
the other economic objectives.46 Oil and other raw materials are obviously needed
to avoid excessive inflation, unemployment, and constraints on military capabil-
ities. Food shortages could lead to such severe domestic political outbursts that
they could cause major international security problems. Barriers against steel (or
oil, or electronic) imports may be adopted both to protect workers and to preserve
a national economic capability to produce goods needed by the military. Some
countries, most notably China and the Soviet Union, have consciously pursued
policies of autarky to shield themselves against virtually all economic disturbances
from abroad.
Third, the international economic order could play an important role in
improving the economic security of nations, through new arrangements to govern
trade, commodity flows, investment, and other international economic transac-
tions. This is because assurances of many kinds of economic security for all
countries require sacrifices on the part of other countries, sacrifices that are, by
comparison, quite marginal. The United States could cut back on its consumption
of food or fertilizer sufficiently to alleviate substantially world shortages of those
products, and several of the Arab states could guarantee adequate oil for the world
at marginal cost to their total earnings (and even less cost to their real needs, since
their earnings already so far exceed those needs). This is not to say that such

46
See also the discussion in this volume in the last essay by Krause and Nye.
36 International Organization

international arrangements would be easy to negotiate; we know that they would

not. But we can also see the bases for new arrangements, to promote an objective to
which previous international economic orders have given little attention.

Summary and conclusions

We have now reviewed the criteria against which any international economic
system must be judged.
There are sharp conflicts between the criteria. A focus on efficiency or price
stability may create unemployment, at least in the short run; there is an interna-
tional dimension to the Phillips curve, which economists sometimes use to describe
trade-offs between inflation and unemployment, as when a depreciating exchange
rate (or import controls) helps combat unemployment but at the same time raises
prices. A focus on income redistribution, or economic security, may create ineffi-
ciency. A focus on the quality of life may reduce growth, which in turn may
generate unemployment. A focus on any of the political criteria, whether currying
favor with a particular domestic interest group or denying trade to a foreign
adversary, will almost by definition run counter to at least some of the economic
criteria. Numerous other conflicts have been mentioned. The essays in Section II of
this volume judge how both the existing functional systems (monetary, trade, etc.)
and possible new systems reconcile, or fail to reconcile, some of these conflicts.
Those in Section III analyze differences in national policy preferences, and national
situations, that affect attempts to reach collective international judgments on
economic issues. But even the cryptic analysis presented here illustrates the com-
plexity of the problem.
This essay has not presented a comprehensive analysis of international eco-
nomic policies and institutions; it is, after all, only an introduction. Yet enough has
been said to indicate both the complexity of the issues and the pervasiveness of
conflicts between objectives both at the political and economic levels and between
the two levels. Simple solutions are unlikely to be found to such complex problems.
Plans that focus on only a few objectives would generate vociferous objections from
groups whose cherished values had been ignored. Amidst this complexity, the
challenge is to develop economic policies that are both effective in attaining the
desired economic objectives when applied and politically feasible, so that they can
be applied in the first place and maintained. If one wills the economic end, one
must also will the political consequences as well as the political and economic
means.
Yet it is obvious that the present difficulties of the international economic
order will not be dispelled by generalities. If only complex solutions are likely to be
feasible, detailed technical work and specific proposals will be necessary. The
suggestions in the essays that follow represent a series of attempts to work toward
the construction of feasible regimes for ordering international economic relations
and of specific means for implementing them, taking into account the conflicts that
necessarily arise in a politically diverse and decentralized world.