2.4: At Home and Abroad - The Rise of the Liberal International Order (LIO)

Learning Objectives

By the end of this section, you will be able to:

• Appreciate how the Bretton Woods Agreement provides a framework for current global institutions
• Understand the goals and advantages of pursuing contemporary efforts of globalization
• Identify important supra-national institutions 
• Consider some important counter-points within the discourse on globalization 

Introduction: Contemporary Periods of Globalization 

In this section, we will cover a brief overview of contemporary globalization in terms of the major players and institutions that seek to promote it. This contemporary system has been referred to as the Liberal International Order (LIO), defined as global a system of rules and norms driven by the West through world politics and international relations (Kundnani, 2017). To participate, countries are encouraged to have democratic governments with open economies and trade policies, they generally agree to means of peaceful conflict resolution, and they are engaged with international institutions, like the United Nations, the World Bank, and the International Monetary Fund (IMF). The U.S. and its allies offer foreign aid in exchange for compliance, and can apply economic pressure, and in some cases military force, to ensure that the norms of the order are maintained. Supra-nationalism is a key concept to consider here, as this concept is important for globalization because it provides an avenue for sovereign states to enter into cooperative agreements and join organizations to address collective problems and conduct international relations. In this states states often give up some degree of sovereignty in exchange for mutual benefit, and do so voluntarily. We will consider the major geopolitical alliances of the Twentieth Century and discuss their relations in terms of geopolitical strategy. Finally, we further consider the economy, discussing the importance of monetary policy, and considering new innovations in technology that are further accelerating time-space compression. 

As the Second World War came to a close, several key geopolitical points were becoming clear. First, the nation-state was going to dominate as a political entity, whereby the countries of the world would act as their own sovereign entities. They would decide internal matters within their own borders and interact with one another through the process of international relations. Second, the countries of the world would largely be divided into three groups separated by ideological, political, and economic systems. Some states would practice democratic governance with market economies (countries aligned with the United States, also known as “The West,” or “The First World”) The second group were socialist states with command economies (countries aligned with the Soviet Union, or “The Second World”). The third group belong to what is known as the Non-aligned movement (the "Third World"). These were primarily former colonies that did not want to be under the sway of either the United States or the Soviet Union, though there were also more established nation-states such as Switzerland and Ireland that would fit the Cold War definition of Third World. 

Following the demise of the Soviet Union in the early 1990s, the term Second World has fallen out of use, while First World and Third World saw shifts in how they were defined. First World came to be associated with advanced economies that had gone through the Industrial Revolution, while Third World was defined as developing economies. Many of those states in First and Second Worlds, especially those in Europe, with the addition of Japan, the United States, Canada, Australia and New Zealand were placed together in the First World, while the Third World categorized countries remained largely the same. This post-Cold War categorization has fallen out of use as well and has been replaced by the terms Global North and Global South. Global North represents exactly what it sounds like, the states north of the equator, with some notable exceptions, while Global South refers to states south of the equator, again, with some notable exceptions. This is more a change in the naming convention rather than any sort of substantive change, as states formally known as First World tend to be in the Global North, and the former Third World denoted states are primarily in the Global South.

 

Figure \(\PageIndex{1}\): United Nations Conference on Trade and Development (UNCTAD)'s classification of economies. (Wikimedia by Specialgst is licensed under CC BY-SA 4.0)

  

For the market economies, a foundational agreement was adopted in 1944.  The Bretton Woods Agreement, named for the town where the conference took place, accomplished several critical points that would bring people in the various countries closer together.  It essentially set the stage for economic policies that would allow for more trade and exchange between and among the participants. After Bretton Woods, countries were required to adopt monetary policy to set rules and regulations and intervene in times of economic crisis. They were also required to maintain exchange rates within one percent, what is called a fixed exchange rate. The currencies of each participating state was initially pegged to the U.S. dollar, which itself was backed by gold.  

Bretton Woods was also important because it called for the founding of two major supra-national institutions with major influence in the finance world. These institutions were the International Monetary Fund (IMF) and the World Bank. The IMF is an organization that functions to surveil the global economy. It has the power to issue loans to avoid economic crises. The main purpose of the World Bank is to issue loans to low and middle-income states to aid in economic development. Its loans can be applied to projects related to infrastructure, education, healthcare, and poverty reduction, among others. Along with the IMF, the World Bank is a supra-national organization that works to bring economies closer together, favoring economic integration, and working toward a more global approach to solving economic problems (Boockmann & Dreher, 2003). Though there are also critiques that these institutions primarily serve the agendas of the Global North states, as these are the primary funders of the IMF and the World Bank. This has led to the formation of other institutions primarily driven by the wealthier Global South states. 

Other supra-national organizations and institutions have also been founded since Bretton Woods. Some, like the North Atlantic Treaty Organization (NATO) are military defense alliances. Others, like the European Union and the United Nations, are focused on political cooperation, which has obvious implications for security and development. Free trade agreements, such as the North American Free Trade Agreement (NAFTA), and its successor the United States-Mexico-Canada Agreement (USMCA), seek to limit the amount to which a country can protect its domestic products, thus promoting more trade among its signatory countries. While all these organizations bring countries together into common interest groups, some are more global in nature, while others are regional. However, these and other supra-national institutions have worked to bring economies together, encouraging global supply changes and regional specialization within the global economy.  

The Cold War

During the Cold War era (1947-1991), the world was essentially divided into blocs of influence that each wanted to expand their geopolitical influence and functioned in supra-national organizations in opposition to each other. It is from this situation that we derive the terms “First World,” “Second World,” and “Third World” described above. The Cold War hinged on the First World, functioning at odds with the Second World, both of which sought to bring countries from the Third World into their respective spheres of influence (Guan-Fu, 1983). Although the United States and the Soviet Union managed to avoid direct armed conflict during this time, there were several proxy conflicts over the course of the Cold War, notably the Korean War, the Vietnam War, and the Soviet invasion of Afghanistan (Hammond, 2006). 

The First World was led by the United States and included most of Western Europe and Japan. This group of industrialized countries featured multi-party democratic governments and practiced market economies. The Second World, led by the Soviet Union, held influence over Eastern Europe and parts of Eurasia. The countries aligned with the Soviet Union tended to be governed by Communist Parties and practiced command economies, where the state oversaw most aspects of production and distribution of goods and services. The two groups tended to avoid trade with the other and sought to expand their trade potential by encouraging countries in the Third World to adopt their systems (Guan-Fu, 1983). In most cases, former colonies tended to remain tacitly connected to others in their former colonial networks, including their former colonizers. While these countries were no longer ruled by colonial empires politically, they still tended to provide natural resources and practice primary sector activities and were thus considered quite valuable to have in the fold, suggesting continued dependence on their former colonizers (Bradshaw & Huang, 1991). 

The Second World was able to make headway in the Third World, particularly in East Africa with countries like Ethiopia, in the Caribbean with the notable example of Cuba, and throughout Southeast Asia (Guan-Fu, 1983). Supra-nationalism happened on both sides of the Cold War. NATO was countered by the Soviet-led Warsaw Pact. The European Community, which eventually led to the European Union was countered by Comecon, a trading pact which encouraged trade between and among the command economies of the Second World. After the collapse of the Soviet Union in 1991, the Western institutions continued, while the Soviet-focused institutions were either dissolved, or drastically changed. Some of the countries in the former Warsaw Pact have since joined NATO, but a few have continued operating their command economies, mostly in isolation. 

Contemporary Globalization 

In terms of finance and monetary policy, many of the ideals instilled by Bretton Woods have been abandoned in favor of an approach known as neoliberalism, which encourages international trade by reducing barriers to the movement of people, goods, and capital, thus making investment increasingly feasible in new markets, and stimulating business growth, and in the process increasing globalization. In 1971, the U.S. dissociated the dollar from the gold standard, resulting in floating currencies. Under the leadership of figures like U.S. President Ronald Regan, state policy began to focus on free market trade, deregulation, and privatization. Subsequent administrations in the United States and Western Europe have continued to advocate for such policies writ large. In addition, the end of the Cold War marked a new period in global political relations exemplified by the dominance of the United States and its allies, which has come to be known as the unipolar order (Brands, 2016). With no direct rival, and with the First World feeling triumphant, these mostly Western countries touted the Liberal International Order as the only alternative. Former Second World countries have been encouraged to join under these norms, with some embracing liberal capitalism at lightening speed, referred to as Shock Therapy programs in the 1990s.

Following the end of the Second World War, Western European states worked towards integration through trade as a means of bolstering economies that had been damaged during the war. The various treaties have led up to the current manifestation of integration, the European Union. The European Union (EU) is perhaps the best example of neoliberal ideals put into action. The EU has 27 member states, all of which have agreed to meet certain standards requisite for membership, notably opening their borders with other member states and abiding by common trade regulations. Headquartered in Brussels, Belgium, the European Union conducts policy as a group, essentially combining the economies of its member states to function as one integrated entity, in part to compete with economies like the United States and Japan. Increased levels of integration have led to greater efficiency within the European economy, promoting stability and cooperation. Nineteen countries within the EU (and six outside of it) have gone a step further in terms of integration and adopted a common currency, the Euro, further increasing levels of interconnectivity, although recent events, such as the withdrawal of the United Kingdom from the European Union (known as Brexit) suggest that neoliberalism may see some resistance in the future. 

 

Figure \(\PageIndex{2}\): A map of Europe showing EU member states in blue and non-member states in gray. (Wikimedia by Kolja21 is licensed under CC BY 3.0)

 

During the second half of the Twentieth Century, economies in the West underwent the Third Industrial Revolution.  As was the case with the first two subdivisions of the Industrial Revolution discussed in Section 2.2, the Third Industrial Revolution featured great advancements in technology and facilitated further degrees of time-space compression. The Third Industrial Revolution was focused on the transition from analog to digital technology, and information technology became a signification factor within the economy. Computing advanced rapidly, and innovations like the personal computer and the internet drastically changed people’s ability to work, socialize, and communicate. The demand for services rose sharply at this time as well, and developed economies tended to focus heavily on their service sectors. The infrastructure that had supported the Second Industrial Revolution, particularly heavy industry, was often abandoned in favor of new investments in places and countries where labor was less expensive. Major infrastructural achievements were involved with the Third Industrial Revolution as well, such as investments in commercial air travel and massive amounts of internet infrastructure which included running undersea cables to connect hubs on different continents. Wireless communications also advanced rapidly, allowing for developing countries to essentially bypass the need for older telecom technology and cross the digital divide with less intensive investments than it took to initially establish this kind of interconnectivity during the Second Industrial Revolution. 

Over the past few decades, the global economy has further advanced to the point of what some refer to as the Fourth Industrial Revolution, notably led by the United States and China. The term was coined by Klaus Schawb, chairman of the World Economic Forum, in reference to an economy where online and offline domains have merged (Miller and Wendt, 2021).  The Fourth Industrial Revolution focuses mainly on fourth order economic sector activities, such as consulting, business services, information technology, digital finance, big data analysis, biotechnology, automation, and artificial intelligence. A good example of a Fourth Industrial Revolution concept is the Internet of Things (IoT), whereby devices can easily collect data and communicate among themselves via the Internet. Just like innovations that preceded them, new possibilities presented by the Fourth Industrial Revolution have the potential to further increase levels of efficiency and drive down costs, making the economy more accessible to more and more people across the globe. 

The Liberal International Order, along with advancements from the Third and Fourth Industrial Revolutions, have worked to undermine the power of the nation-state to a large degree. As efforts toward increased integration and deregulation continue, so does the general process known as deterritorialization. Access to the economy, culture, and in some cases politics, is becoming decreasingly dependent on geographic context. This condition was made clearly apparent during the COVID-19 pandemic and the shift to remote work. Also, firms are no longer tied to a single country, hence the emergence of trans-national corporations (TNCs).  Also referred to as multi-national corporations, some TNCs are massive in terms of their market share and economic output. For example, companies like Coca-Cola, Apple, Microsoft, and Toyota all have valuations larger than the gross domestic products of some countries. TNCs operate in multiple countries, allowing them to modify their operations to fit into the most hospitable sets of regulations possible, including tax avoidance (Picciotto, 2018). They take advantage of global supply chains and infrastructure while not being held accountable to the laws and regulations of any single state. 

Critics of neoliberalism and the Liberal International Order make note of several downsides that have resulted from these policies. The Bretton Woods Agreement was largely an attempt to provide stability in market economies, and eliminating some of its protections has made markets more volatile and uncertain, increasing the likelihood of economic crises. There are also environmental concerns, as deregulation is often associated with negative ecological impacts, as TNCs can find places with lax environmental regulations to conduct activities that can be detrimental to the environment. Increased levels of economic inequality are also associated with neoliberal regimes, as is a decline in the overall standard of living for the working class and poor, brought on by cuts to government spending, which make opportunities for social mobility less available. 

Globalization as a Mentifact in Contemporary Society 

Although the examples provided in this chapter provide just a few selected moments in history, they have all been important for advancing time-space compression and promoting economic, political, and cultural interconnectivity. It is also important to note that there are also periods in time that worked to lessen these trends. Therefore, it is important to see globalization not as a liner concept that only progresses through time and space. Rather, globalization should be viewed as a dynamic, on-going, process. 

Challenges to the U.S.-based Liberal International Order are evident today. Russia defied the Liberal International Order with its 2022 special military operation in Ukraine, based partly on Russia’s fear of NATO expansion. Efforts led by Saudi Arabia and other petrol states to eliminate the use of the U.S. dollar as the exclusive currency for oil suggests their discontent with the global monetary system. Disagreements between the U.S. and China over the status of intellectual property rights and trade policy, along with the status of Taiwan, pose a treat to global supply chains and trade between Asia and North America. Criticism of the effectiveness of the United Nation when it comes to its ability to prevent and or resolve international conflicts have also been expressed. 

Despite these challenges, people all over the world are more connected than ever before, and technology plays an ever-increasing role in their day-to-day lives. While it is important to acknowledge that the direct impact of globalization benefits some at the expense of others, its overall impacts on quality of life and opportunities for economic development are undeniable. As long as TNCs continue to dominate international trade, global institutions continue to maintain order and provide security, and consumers benefit from less expensive and often higher quality goods and services, it is unlikely that efforts promoting globalization will totally cease to exit. Going forward, workers, investors, and consumers can expect to engage with the global economy and have access to people and places far from where they reside. Just as people have experienced major changes in terms of access in the past, the political, social, and economic norms that we observe today are also in flux. Time-space compression will continue to impact our lives into the future as well. This means globalization itself is a mentifact in contemporary society.