Nations, Politics and Markets

Abstract

This article will focus on the ways in which globalization effects the interrelationship of nations, politics, and markets. It describes the relationships between nations, politics, and markets as well as the evolving political economy of nations, politics, and markets in the global arena. Examples of international economic governance approaches and practices, including the G-20, Financial Stability Board, the International Organization of Securities Commissions, the Organization for Economic Co-operation and Development (OECD), and the Basel Committee on Banking Supervision, are described and analyzed. Lastly, issues related to national representation in the development of economic governance practices are reviewed.

Overview

In the twenty-first century, nations, politics, and markets are deeply interconnected units of a global system. Nations—large aggregations of people sharing rules of law and identity based on common racial, linguistic, historical, or cultural heritage—rarely act unilaterally. Nations operate within a framework of international alliances and partnerships. Politics is defined as the art and science of government or governing a political entity and the administration and control of its internal and external affairs. Politics plays a crucial role in economic policy. The term “markets” refers to the social arrangement that allows buyers and sellers to discover and trade information and carry out the voluntary exchange of goods and services within politically defined systems and governmental institutions (Bowles, 1991). Markets are economic and political entities.

The interdependence between nations, politics, and markets has encouraged the development and implementation of global economic governance practices, methods, and standards. National and international economic reforms, such as implementing new financial architectures, market structures, and trade policies, result from political debate—and political turmoil—within countries and regions. The development of global economic governance tools is a complicated and contentious process involving multiple stakeholders with conflicting agendas (Helleiner, 2000). Global economic governance standards and recommendations are made within international institutions such as regulatory commissions, international trade organizations, European Union commissions, and United Nations agencies. Global stakeholders, such as national governments, multinational corporations, parties and public officials, interest associations, and citizen advocacy organizations, shape the new global governance models and related transnational political regimes (Bennett, 2004).

This article describes how the process of globalization impacts the relationships that exist between nations, politics, and markets. The following sections, including Globalization of Nations, Politics, and Markets and the Political Economy of Globalization, will serve as a foundation for later sections summarizing and analyzing economic governance practices developed by international economic organizations, including the G-20, the Financial Stability Board, the International Organization of Securities Commissions, the Organization for Economic Co-operation and Development (OECD), and the Basel Committee on Banking Supervision. Issues related to national representation in the development of economic governance practices are discussed.

Globalization of Nations, Politics, & Markets. Nations, politics, and markets have been brought together through the process of economic globalization. Economic and political environments around the world have changed because of globalization. Globalization in its modern form is characterized by the permeability of the traditional boundaries of nations, cultures, and economic markets. Some of the fundamental economic forces and political events influencing globalization around the world include the fall of the Soviet Union; the shift from a global economy based on natural resources to one based on knowledge industries; demographic shifts; the development of global shipping infrastructure; increased liberalization of trade policy; advancements in communication technology; and the threat of global terrorism. The modern trend of globalization, and resulting shifts away from centralized to market economies in much of the world, has created opportunities for increased trade between nations. This includes increases in foreign investment, multinational business partnerships, and access to once closed global markets for developing countries. Global markets are characterized by an increasing mobility in capital, research and design processes, production facilities, customers, and regulators. Global markets, created in part by socio-economic changes, political revolutions, and advanced communication technologies, have no borders.

Economic and political opportunities, including international investments and joint ventures, in the global economy are increasingly tied to alliances, partnerships, and trade pacts such as the North American Free Trade Agreement (NAFTA) between the United States, Canada, and Mexico, the Mercosur trade pact between Argentina, Brazil, Paraguay, and Uruguay, and the Asia Pacific Economic Cooperation (APEC) trade zone. In addition, international economic opportunities for some nations have been created by increasing privatization. Many countries have moved to privatize various state-owned industries and allowed foreign investors to purchase pieces of them through joint ventures. In many places, local operations have participated in these projects. Emerging markets have formed and expanded to capitalize on opportunities in new global economy. The term emerging markets refers to the capital markets of developing countries that have liberalized their financial systems to promote capital flows with nonresidents and become more accessible to foreign investors.

The new global market is based on a capitalist model in which business, and to some degree politics, is responsive primarily to economic forces. Capitalism is a type of economic system in which individuals or companies in the private sector own and control the majority of a state’s means of production. Capitalism applies market principles, such as the concepts of profit incentive and private property, to all aspects of economic activity within and between nations. Capital markets are the financial institutions that channel people's savings from households to business firms for the purposes of productive investments and economic growth. The market capitalism model requires the interrelationship and cooperation of nations, politics, and markets. Issues of government regulation of public sector and private sector activities, property ownership, ethics, investments, corporate behavior, and social well-being between national and international stakeholders in the global economic and political arena are constantly updated and negotiated.

National political arenas and environments, intimately connected to and motivated by economic conditions, are characterized by the regulatory environment, local attitudes toward corporate governance, reaction to international competition, and labor laws. Political environments around the world are continually changing due to the forces of globalization. Economic interconnectedness creates a turbulent global sociopolitical environment characterized by competing political actors, shifting power relations, and politically driven changes in national economies around the world.

The Political Economy of Nations, Politics, & Markets. Political economy is a subfield of economics dating back to the eighteenth century that analyzes the interactions between political processes and economic variables and policies. Political economy describes how political institutions, the political environment, and market forces and structures—such as capitalism—influence each other. Thus, the political economy of globalization is an examination of the relationship between nations, politics, and markets.

Globalization has created a new model of political economy forged by corporations, communities, markets, and national governments that is characterized by innovations such as participative leadership, client-driven marketing, decentralized structures, entrepreneurship, democratic corporate governance, strategic alliances, deregulation, privatization, and business-government partnerships. The following innovations in the political economy of globalization represent an era of increased competition and cooperation (Hallal, 1990):

• Democratic model of the firm: A large number of companies are now accountable to a variety of stakeholders, including workers, customers, suppliers, distributors, investors, and the public. Some companies operate through collaborative governance rather than traditional top-down, hierarchical governance.
• Research consortia: Corporations are increasingly practicing cooperative research. Companies, including some competitors, often pool resources to undertake collaborative large-scale or highly technical projects.
• Strategic alliances among competitors: Some large corporations—particularly in the auto, steel, and electronics industries—have become increasingly connected with each other and formed strategic alliances that encompass both cooperation and competition.
• Government-business partnerships: Working partnerships between corporations, universities, labor unions, and civic groups are increasingly common.
• Economic blocs: Geographic-based economic alliances, such as the Pacific Basin Alliance and the European Union, are examples of common entities formed to create and foster economic advantages for member nations.

Applications

Global Financial Governance. Global financial governance, including the development and management of international financial architecture, plays a central role in the world economy. As the relationship between capital markets and international standards for financial governance has evolved, emerging markets and developed nations have become more interconnected. Beginning in the mid-twentieth century, international economic organizations began forming to manage and promote economic growth. Economic development has been a primary motivating force in international relations since the end of World War II. The modern era of aid to developing countries began in the 1940s as World War II ended.

In the modern era, developing countries, found primarily in Africa, Asia, and Latin America, are characterized by low per capita income, widespread poverty, and low capital formation. After World War II, world leaders and governing bodies put structures into place, such as the World Bank, United Nations, World Trade Organization, and International Monetary Fund, to prevent the economic depressions and instability that characterized the years following World War I and to help rebuild and repair the widespread devastation in Europe that resulted from the war.

Modern international economic organizations work to respond to the economic and political forces of globalization. International lending institutions, both corporate and nonprofit, use the recommendations and standards created and promoted by various international economic institutions, including the G-20, the Financial Stability Board, the International Organization of Securities Commissions, the Organization for Economic Co-operation and Development (OECD), and the Basel Committee on Banking Supervision.

G-20: International Finance Architecture. The G-20, an international organization formed in 1999 to strengthen international financial architecture, promotes open and constructive discussion between industrial and emerging-market countries on key issues related to global economic stability. The G-20 has a stated mission to provide opportunities for dialogue between industrial and emerging-market countries on national policies, international co-operation, and international economic and financial institutions. G-20 members include finance ministers and central bank governors of nineteen countries, including Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, Mexico, Russia, Saudi Arabia, South Africa, South Korea, Turkey, the United Kingdom and the United States of America, plus the European Union. The G-20 member country representatives meet annually. G-20 policy recommendations require consensus from member countries.

G-20 member countries represent around 85 percent of gross world product, 80 percent of world trade, and two-thirds of the world's population. The economic and political influence of G-20 member countries legitimizes the G-20's efforts to manage the global economy and financial system. The heads of major international political and economic organizations like the United Nations, the International Monetary Fund (IMF), the World Bank, and the World Trade Organization also participate in G-20 meetings to promote institutional cooperation, coalition building, and information sharing.

Formed in 1999, the G-20 is part of a longer historical tradition of international economic forums. For example, the G-7, which includes the world's major financial nations of Britain, Canada, France, Germany, Italy, Japan, and the United States, formed in 1976 as a forum for Western industrial economies to discuss and resolve economic imbalances among member countries. The G-20 differs from the G-7 in its broader membership of upper income as well as upper-middle income countries. Ultimately, the G-20 is a carefully built and managed forum. The goals and objectives of the G-20 require the G-20 to be both powerful and representative of a wide range of nations and markets.

Financial Stability Board: International Market Stability. The Financial Stability Board (FSB), like the G-20, is an international organization concerned with managing and improving international economic governance. Founded in 2009 as a successor organization to the Financial Stability Forum (FSF), the FSB has a mission to accomplish the following goals and objectives:

• Promote international financial stability through sound regulation and supervision
• Monitor and advise on the functioning of financial markets
• Reduce the tendency for financial shocks to propagate from country to country and destabilize the world economy
• Assess vulnerabilities affecting the international financial system
• Improve coordination and information exchange among the various authorities responsible for financial stability

The original organization, the Financial Stability Forum, was founded by the G-7 in 1999 to bring together representatives from the financial authorities of about a dozen nations, as well as from international financial institutions, international regulatory and supervisory groupings, committees of central bank experts, and the European Central Bank. The FSF promoted the adoption of international financial standards articulating good principles, practices, and guidelines in multiple economic areas. In 2009, the leaders of the G-20 sought to expand the membership of the FSF and, in view of the evolving global financial crisis of the time, enable it to better able to address vulnerabilities and create strong regulatory and supervisory policies. The resulting Financial Stability Board incudes members from two dozen nations, in addition to all members of the FSF; organizational membership includes representatives from the Bank for International Settlements (BIS), the European Central Bank, the European Commission, the IMF, and the World Bank, as well as the organizations discussed below. The FSB is headquartered in Basel, Switzerland, and is funded by the Bank for International Settlements. Intended national benefits of the FSB's work include better regulation, more supervision, greater transparency, and stronger institutions, markets, and infrastructure. Intended international benefits include better informed lending and investment decisions, improved market integrity, and reduced risks of global financial distress or panic.

Securities Regulation. The International Organization of Securities Commissions (IOSCO), an international organization committed to high standards of regulation in order to maintain just, efficient and sound markets, promotes the adoption of their Objectives and Principles of Securities Regulations by industrialized and developing countries. These principles and regulations, developed in 1998 and revised in 2002, include thirty principles based upon three main objectives:

• The protection of investors
• Ensuring that markets are fair
• Efficient and transparent and the reduction of systemic risk

The principles are grouped into eight categories including regulator, self-regulation, enforcement of securities regulation, cooperation in regulation, issuers, collective investment schemes, market intermediaries, and the secondary market.

Corporate Governance. The Organization for Economic Co-operation and Development (OECD) is an international organization founded in 1961 with thirty-five member nations as of 2018, committed to democratic government, a market economy, and world trade. The OECD promotes its Principles of Corporate Governance. The OECD principles, developed in 1999 and revised in 2004 and again in 2015, serve as the international standard and reference for corporate governance practices. The OECD principles cover six main areas, including ensuring the basis for an effective corporate governance framework, the rights of shareholders, the equitable treatment of shareholders, the role of stakeholders in corporate governance, disclosure, transparency, and the responsibilities of the governing board.

Banking Supervision Standards. The Basel Committee on Banking Supervision, an international economic forum for regular cooperation on banking supervisory matters with representatives from Belgium, Canada, France, Germany, Italy, Japan, Luxembourg, the Netherlands, Spain, Sweden, Switzerland, the United Kingdom and the United States, promotes the use of Core Principles of Effective Banking Supervision. These twenty-five principles, developed in 1997, define the treatment and requirements for preconditions for effective banking supervision, licensing and structure, prudential regulations and requirements, information requirements, formal powers of supervisors, and cross-border banking. These principles encompass the basic elements of an effective bank supervisory system. These principles are intended to serve as a reference for public authorities worldwide that are responsible for supervising banking institutions. Ultimately, the Basel Committee operates to promote common understanding on national and international bank supervisory issues.

Issues

Representation in International Economic Organizations. Criticisms of the G-20 forum focus on issues of representation and procedures. For example, Helleiner (2000) argues that the G-20's membership is not fully representative, its mandate is much too narrow, and its procedures lack provisions for nongovernmental participation, accountability, or transparency. The G-20 country membership also does not contain representation from either the poorest or smallest countries. These small and poor countries remain voiceless in international economic governance forums. Much of the criticism made against the G-20 can be extended to the international economic governance forums, described above, in general.

The G-20, and international economic governance forums in general, may resolve many of its issues related to representation and transparency through the adoption of the following practices and remedies (Helleiner, 2000):

• The G-20 should alter its membership to improve range of countries represented and institute a constituency system to ensure full reporting and a sense of ownership and participation even for nonmember countries.
• The G-20 should declare its accountability jointly to the UN secretary-general, the managing director of the IMF, and the president of the World Bank.
• The G-20 should make its discussion papers, documents, and reports publicly available, and encourage public and parliamentary debate thereon throughout the world.
• The G-20 should significantly expand its agenda to address the full range of problems and issues in the international monetary and financial system.

Exclusive economic, political, and national alliances, while they influence the membership and agendas of international economic institutions, do not benefit global stakeholders in equal ways.

Ultimately, economic institutions, such as G-20, the Financial Stability Board, the International Organization of Securities Commissions, the Organization for Economic Co-operation and Development (OECD), and the Basel Committee on Banking Supervision, have the challenge of representing, to varying degrees, the needs of all countries and populations.

Conclusion

In the final analysis, nations, politics, and markets are deeply interconnected entities that increasingly operate within geopolitical partnerships and alliances. Globalization creates deep political and economic linkages that require the support of international economic governance standards, requirements, and methods. Numerous international economic institutions representing the interests of upper and upper-middle income countries and populations, such as those discussed here, are actively responding to the force of economic globalization by developing economic governance standards and financial architecture to strengthen global markets and facilitate the economic participation of industrial and developing countries alike.

Terms & Concepts

Capitalism: An economic system in which individuals or companies in the private sector own and control the means of production.

Developing countries: Countries characterized by an underdeveloped industrial base, low per capita income, and widespread poverty.

Emerging markets: The capital markets of developing countries that have liberalized their financial systems to promote capital flows with nonresidents and are broadly accessible to foreign investors.

G-20: An international organization formed in 1999 to strengthen international financial architecture that promotes open and constructive discussion between industrial and emerging-market countries on key issues related to global economic stability.

Globalization: A process of economic and cultural integration around the world caused by changes in technology, commerce, and politics.

Markets: A social arrangement that allows buyers and sellers to discover information and carry out a voluntary exchange of goods and services.

Nations: Large aggregations of people sharing rules of law and an identity based on common racial, linguistic, historical, or cultural heritage; rarely act unilaterally.

Political economy: A subfield of economics dating back to the eighteenth-century; refers to the interactions between political processes and economic variables such as economic policies.

Politics: The art or science of government or governing a political entity, and administration and control of its internal and external affairs.

Private sector: All enterprises that are outside of government control including micro, small, medium, and large enterprises.

Public sector: The economic and administrative enterprises of a local, regional, or national government.

World Bank: An international economic development assistance organization that was founded in 1944.

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Suggested Reading

Birdsall, N., Rodrik, D., & Subramanian, A. (2005). How to help poor countries. Foreign Affairs, 84, 136-152. Retrieved May 11, 2007, from EBSCO online database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=17327842&site=ehost-live

Checa, N., Maguire, J., & Barney, J. (2003). The new world disorder. Harvard Business Review, 81, 70-79. Retrieved May 11, 2007, from EBSCO online database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=10256891&site=ehost-live

Wibbels, E. (2006). Dependency revisited: International markets, business cycles, and social spending in the developing world. International Organization, 60, 433-468. Retrieved May 11, 2007, from EBSCO online database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=20832669&site=ehost-live