The Expansion of Global Governance into the Third World: Altruism, Realism, or Constructivism?

Author(s): Yakub Halabi Reviewed work(s): Source: International Studies Review, Vol. 6, No. 1 (Mar., 2004), pp. 21-48 Published by: Blackwell Publishing on behalf of The International Studies Association Stable URL: http://www.jstor.org/stable/3186538 . Accessed: 17/03/2012 12:55
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Studies Review(2004) 6, 21-48 International

The Expansion of Global Governance into the Third World: Altruism, Realism, or Constructivism?
YAKUB HALABI

Division of InternationalRelations, Universityof Haifa This essay examines the expansion of global governance into developing countries. Its centralthesis is that in the present era of globalization, competitivenesshas become a majorconcern for developed countries,in particular,those facing tough competition from the developing states that have improved their terms of trade through state-leddevelopment strategiesand have become majorexporters of manufacturedproducts. Developed countries seek the expansion of global governance in order to regulate the behavior of these developing states, thereby opening their economies to foreign investment and augmenting their wealth. Yet,a successfulexpansion of globalgovernancerequiresthe creationof internal institutions in the developing countries that may alter their politicalcultures. Given the unique problems of the developing states, this taskcannot be achievedsimplyby internationalizing countriesin the the GlobalSouth. This essay relies on the theory of socialconstructivism and contends that the creation of internal institutionscompatiblewith global governance has been achieved only when developing countries have become convinced that global regulations will benefit them, not just the more developed states.

The literature on global governance has focused on examining the evolving mechanisms of political coordination among states and private agencies that seek to resolve collective problems or realize common or complementary interests in an era of globalization (Held and McGrew 2002a). Advocates of global governance contend that its domain includes states, international governmental organizations (IGOs), multinational corporations (MNCs), and international nongovernmental organizations (INGOs)-all of which seek to advance common international activities through regulation (Cutler 1999; Held and McGrew 2002b). Global governance marks the acceptance of regulations at the global level out of a conviction that such regulations will enable actors to seek wealth in an orderly fashion and in accordance with the norms of the international system. Across the past several decades, a number of developing countries, especially those in East Asia, have adopted a state-led development model in order to boost their economic competitiveness (Woo-Cumings 1999). Competitiveness is defined here as the ability of a nation to produce goods that meet international standards, outsell those from rival nations, and keep labor income rising (Tyson 1992). In the current era of globalization, every state is concerned about the competitiveness of its firms and the livelihoods of its citizens. Competitiveness, in the words of two economists (Krugman and Obstfeld 2000:276), has "often suggested that nations were engaged in the economic equivalent of warfare." In this sense, the
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comparative advantage of a state is not exogenously given; each state is concerned about what others are doing in the process of constructing its own comparative advantage. Therefore, governments are not concerned only about the way others behave in the foreign policy arena, they are also concerned about the nature of the domestic institutions that give rise to these policies. Global governance involves an attempt by the developed countries to regulate relations among states and to bind developing states to global rules. But, perhaps more important, global governance helps shape domestic institutions within the latter countries so that they become more compatible with global regulations, ensuring that developing states will not engage in economic nationalism at the expense of the developed countries. Establishing market-supporting domestic institutions in developing states, it is assumed, will lead to a certain mutual understanding regarding global regulations between North and South. From the point of view of the developed countries, this process guarantees at least fair competition. By the same token, incongruent institutions may impede such understanding. However, building the necessary domestic institutions requires conviction and consent on the part of the developing states that are going to operate them. As a result, developed countries endeavor to expand global governance into the Third World in the domain of international trade in order (1) to dissuade developing states from boosting their competitiveness in high-valueadded products, and (2) to restore developing countries' traditional comparative advantage in primary products and labor intensive goods. In this sense, global governance is portrayed by the developed countries as an attempt to create a "level playing field" in world trade, whereby states are not allowed to use their economic power to shape their comparative advantage. The Third World, however, is not a homogenous group of states (Cammak, Pool, and Tordoff 1993). For present purposes, it will be divided into three groups. First is the group of underdeveloped states that receive very small amounts of foreign investment, if any. These states lack modern capitalist institutions, and they have small markets, high rates of illiteracy, and low per capita income. The Western world doubts the rationality of these nations and seeks to modernize them out of altruistic motives. Second are developing states that receive little foreign investment yet are important strategically (Egypt, Turkey) or economically (oil exporting countries) for the world economy, along with states that engage in producing laborintensive goods that do not compete with the exports of the developed world. These states have come under pressure from the West through the International Monetary Fund (IMF) and the World Bank (henceforth referred to collectively as international financial institutions or IFIs) to adopt free market economies. Third is the group of states that have become attractive to foreign investment during the last two decades, such as the newly industrialized countries (NICs). These states have challenged the developed countries in their own markets and are the ones that have been consistently pushed to adopt Western models of economic order and to help create, among other things, a level playing field in international trade. This essay deals with the last two groups of states, examining under what conditions these developing countries decide to establish domestic institutions that are congruent with the rules and regulations that comprise the global governance system. For this purpose, the argument relies on the theory of social constructivism to explain change in the Third World leading to such convergence. Certainly, it must be admitted from the start that the existence of backward or, at least, different political and economic systems and institutions in the Third World along with the diffused system of authority that currently comprises global governance make it difficult to impose and monitor global regulations in these states. Moreover, the differences in political culture among the developing countries impede the ability of IGOs to play a leadership role in facilitating institutional convergence around Western models of organization. At present,

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global governance remains the property of the powerful states that seek convergence and the economically important states, such as the NICs, that are being pushed toward convergence, with globalization punishing, or at least not benefiting, states not subject to its rules and norms. In short, "[t]he industries of the future have to be invented. They don't just exist. In the era ahead countries have to make investments in knowledge and skills that will create a set of man-made brainpower industries that will allow their citizens to have high wages and a high standard of living" (Thurow 1996:71). The announcement by Michael Boskin, a neoliberal economist and a chairman of President George Bush's Council of Economic Advisors (quoted in Thurow 1996:70), that "[i]t doesn't make any difference whether a country makes potato chips or computer chips" was designed to convince politicians in the Third World to accept their natural comparative advantage. The role of global governance is to ensure that domestic institutions in the developing world support this neoliberal model. This essay is organized as follows. The first section reviews literature that deals with globalization and global governance. Section two introduces the challenges that originate from the South in an era of globalization, and section three overviews the problems surrounding the expansion of global governance into the Third World. Section four provides a brief review of the social constructivist approach, and section five analyzes the construction of internal institutions in several East Asian states after their 1997-1998 currency crisis as well as the institutionalization of structural adjustment programs in developing states. This final section also introduces the mechanisms that have been developed as part of the global governance process to monitor the behavior of developing states. Globalization and Global Governance Global governance is an attempt to manipulate the forces of globalization, mitigate globalization's negative effects, and privilege states that follow global rules. Globalization, in turn, is a system-level variable. It refers to a state of affairs in which events that occur in one place may have instantaneous effects as well as longterm consequences in other places and are often beyond the control of states that can merely react to them (Waters 1995). Examples of such phenomena are global environmental changes and the communication and transportation revolutions. Indeed, globalization is an exogenously given factor that does not automatically lead to global governance in the same way that anarchy in the international system does not necessarily lead to cooperation among states. In short, globalization is external to states; global governance is internal to them. To cope with the challenges and constraints of globalization, states and other public and private international institutions have created mechanisms to govern it. Global governance involves coordination among various local and global actors (states, MNCs, INGOs, and so on), each seeking to augment their utilities. Such governance requires states and other agencies to self-consciously recognize their interests, their existing problems, and the value of creating global rules and local institutions to tackle those problems and serve those interests. The distinction between global governance and globalization helps us define both phenomena. of According to Bertrand Badie (2000:2-3), '"globalization' is the establishment an international system tending toward unification of its rules, values, and objectives, while claiming to integrate within its center the whole of humanity" [italics added]. In contrast to global governance, globalization is not a constructed system; it has not been intentionally established. Indeed, Ngaire Woods (2002:25) has confused the two terms when he describes globalization as "a combination of internationalization, political and economic liberalization, and a technological revolution." Woods combines political internationalization-the participation of the state in IGOs to

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regulate globalization--and the internationalization of production-the scattering of production by MNCs (Cox 1996b)-with the forces that underlie globalization, such as the technological revolution, that are outside the domain over which states have influence. The communication revolution is a direct result of a technological innovation that allows the free movement of information across borders, outside the control of heads of state. Environmental changes such as global warming have occurred as a result of the excessive utilization of resources and pollution. Both cases demonstrate that under globalization states as well as other types of international actors are almost powerless and mainly reactive to these challenges. Environmental changes compel states to treat the planet as an integrated unit and to constrain their behavior in order to protect the environment; the communication revolution has rendered state borders porous. The communication revolution, for instance, facilitates a daily turnover in foreign exchange markets that could reach $1.3 trillion, while the free movement of information has a major effect on world public opinion. Under these circumstances, governments have conceded control over their currency rates and public opinion. We are still living, nonetheless, in a world in which the nation-state has remained the most important actor in world affairs. In addition to the state, MNCs and international organizations play a significant role. Yet, whereas an MNC perceives competitiveness and market share as a zero-sum game and an international organization usually deals with one issue area, states see trade as a non-zero-sum game and deal with multiple issue areas. Thus, states must have a much wider perspective than nonstate actors. Moreover, states have the authority to enforce rules within their jurisdictions and to expect reciprocity from other states. Indeed, states are rational egoists that seek wealth and power. But this assumption tells us nothing about states' intentions, their mutual interaction, or the impact of new ideas and institutions on their behavior. For some issues, defining national interests in terms of wealth and power can create a conflict between these two goals. A state that is concerned about its wealth focuses on absolute gains, even though it may seek to boost its competitiveness to achieve this goal at the expense of other states. The pursuit of power, however, indicates that a state is willing to limit its overall trade relations if the relative gains of the rival state are higher than its own. Power relations, in short, limit interstate cooperation. Governments and Global Governance Global governance prescribes what is perceived as normal behavior in world affairs. States seek wealth under a transparent system of rule-based behavior. In fact, global governance is an attempt to administer globalization and resolve disputes between states so that developing as well as developed countries can pursue wealth under a constructed structure of their own choice. Certainly, the complexity of world affairs manifested in the multiplicity of issue areas and the problem of market failure have eroded the ability of states to solve their common problems via interstate negotiations or through free markets respectively. This complexity has led to a polycentric system of order as well as a multiplicity of organizations (states, IGOs, NGOs, MNCs, and so on) within each issue area, with no clear sense of hierarchy among the actors. Even though power relations affect the types of rules that prescribe behavior in each issue area (Keohane and Nye 1977), nothing guarantees that states will follow these rules if their internal institutions are incompatible with them. The increasing intricacies in world affairs together with growing technical uncertainty has eroded the ability of states to control what is happening. This complexity has made policy coordination among states an important but difficult task. Decision makers and even bureaucrats are in many ways unqualified to cope

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with the range of problems. Moreover, some global concerns such as those of global warming, HIV/AIDS, and contagious financial crises are affecting domestic politics. Much of this political void has been filled by INGOs, each specializing in one issue area and consulting with states on strategies for coping with that set of concerns. The elevation of INGOs to this prominent role in world affairs has often been referred to as the creation of a global civil society (Lipschutz 1996). States, however, have become very jealous of losing their position of prominence in world affairs, despite the complexities posed by globalization. Governments have responded to the challenges of globalization through the establishment or restructuring of IGOs. Moreover, states have sought global integration and efficiency while also yearning to return to the time when they were omnipresent and omnipotent. Thus, governments seek to reconcile sovereignty, integration, and efficiency by strengthening existing IGOs and replacing obsolete ones that cannot deal with the new challenges. Consider, for example, the substitution of the World Trade Organization (WTO) for the General Agreement on Tariffs and Trade (GATT). The scope of the WTO is much broader than that of GATT because it oversees multilateral agreements that relate to trade in goods and services, foreign investments, and intellectual property rights. Furthermore, the WTO was created with a mechanism to settle disputes between states, even though it has no power to force states to obey agreements or comply with its rulings (Irwin 2002). Additional examples are the United Nations, NATO (North Atlantic Treaty Organization), the IMF, the World Bank, the European Union, and the International Labor Organization (ILO)-all of which deal with the challenges of globalization on a daily basis. Some advocates of global governance contend that a structural shift in such governance is occurring not only against the will of the state, but in its absence. In this regard, David Held and Anthony McGrew (2002b:8) ask "whether the thickening of institutional density, expanding jurisdiction, intensifying transnational politics, and deepening impact of suprastate regulation denotes a in how global affairs and transboundary problems qualitative-structural-shift are governed." The vast number of INGOs (38,243 in 1996) and the increasing number of global problems have led these two authors to conclude that the "national government is increasingly locked in an array of global, regional, and multilayered systems of governance-and can barely monitor it all, let alone stay in command." In this view, globalization is taking place in a political void with governments unprepared institutionally to deal with what is occurring. Thus, the expanding networks, Held and McGrew (2002b) claim, become by themselves a type of global institution that regulates relations in a particular issue area under the nose of the state. These authors assert that globalization increases the demand for a new infrastructure of regulation that allows global governance to evolve and to penetrate deeply into domestic affairs without the need for government permission. In this sense, global governance evolves at an early stage to solve market failures as the demand for regulation creates its own supply; INGOs penetrate into states from outside in order to meet this demand. Hence, global governance, according to this postnationalist view, bypasses the state in issue areas that the state is unwilling or unable to address (Rosenau 2000). For realist scholars, however, it seems odd to speak about the formation of global governance in a world of sovereign states controlled by national governments. These scholars still doubt the possibility of establishing IGOs, let alone INGOs, that can prescribe behavior to states and constrain their maneuverability under conditions of state sovereignty and international anarchy (Gilpin 2002). Realists argue that states are concerned mainly about their interests, defined in terms of military security. Power relations and relative gains control their agendas. Although these scholars (see, for example, Gilpin 2002:239-240) concede that states may be able to cooperate in economic affairs, such as trade and foreign investment, that

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require binding obligations, they cannot escape the impact of the anarchic nature of the international system. Thus, realists assert that economic forces will always be subordinated to the military power of the state. Moreover, they maintain that an ontological, objective knowable world exists separate from the knowing observer (Mearsheimer 1995). Therefore, the claim by social constructivists that ideas have power in constructing the world seems indefensible (Onuf 1989). The narrow focus of realists on power relations and anarchy has distracted them from the other functions that states perform, such as the pursuit of wealth. In point of fact, realists have failed to conceptualize the influence that capitalism can have as a mechanism for the pursuit of wealth, forcing states to specialize in the production of those goods in which they have a comparative advantage and to trade these goods for others that they produce less effectively. Capitalism has reshaped the identity of the state and its social structure (class formation and civil society), thereby affecting the way in which it defines its interests and policies. The pursuit of wealth has compelled states to create a division of labor among themselves, with capitalism facilitating the realization of the maximum amount of wealth for the greatest number of people. This preoccupation with wealth does not mean that states are less concerned about their relative gains. This concern, though, is not necessarily focused on augmenting power but rather on considerations of welfare. Some products, such as pharmaceuticals, yield a higher rate of return on capital than other products, such as apparel. Obviously, states want to establish their comparative advantage in the former industries, maximizing their market share at the expense of others, while forcing other states to specialize in low-value-added products. Thus, states are, indeed, concerned about their relative gains. Such considerations, however, do not force states to cease cooperating economically because they are dependent on each other in meeting their needs. In effect, specialization in low-value-added products under free trade accrues more wealth to the state than the production of highvalue-added products under autarchy. Neoliberal institutionalists agree with realists about the centrality of the state in world affairs, yet they (see, for example, Keohane 1984) argue that states are rational actors who are concerned with the management of the international economy. As such, states will establish IGOs and regimes that will bring them to a point of Pareto optimality, that is, a point at which no one actor is made better off without making someone else worse off. In this sense, states are mainly concerned about their own absolute gains. Neoliberals contend that "institutions matter because they enable states to do things they otherwise could not do, that is achieve mutual gains from cooperation. Neoliberals see [institutions] as enabling states to reach mutually beneficial, cooperative outcomes" [italics in original] (Schweller and Priess 1997:3). Neoliberal institutionalists examine cooperation between states regardless of their domestic attributes such as their institutions and policies. These scholars (Keohane 1984:12-13) approach cooperation from an Anglo-American perspective of market-based economics and assume that the quest for wealth will induce rational states to adopt this model. Rationality in this sense is universal and independent of cultural constraints. Cooperation takes place between rational egoist actors who expect cooperation to improve their utilities. International regimes coordinate cooperation by prescribing rules, norms, and principles around which actors' expectations converge in a particular issue area. Of course, the creation of a regime or any other type of IGO does not tell us anything about the internal institutions of the states that comprise it. Having said that, neoliberal institutionalism is an individualistic approach in which each state actively adjusts its foreign trade policies to meet the demands of others and requires other states to follow suit. In this view, mutual adjustments allow successful cooperation to take place as technological innovations and competition create pressure fir the

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elimination of outdated internal institutions and the movement toward convergence, bypassing the laborious process of dealing directly with change in domestic institutions. Mutual adjustment is a goal-oriented strategy in which successful cooperation is based on the existence of both common interests and rules. Classical liberalism, in the same vein, exempts states from examining the internal development strategies of other states. If an exporting country provides subsidies for its goods, it sells its products below their real price and increases the consumer surplus in importing countries. This approach, like that of neoliberal institutionalism, however, pays little attention to domestic institutional reforms or convergence with universal regulations. Each state exports goods in which it has a comparative advantage that is externally given. What these approaches fail to grasp is that nations with different political cultures may believe that a state-coordinated economy is a coherent and viable alternative to Anglo-American capitalism (Berger and Dore 1996). Moreover, neoliberal institutionalists treat institutions as though they were passive actors, connected only to states and acting essentially on their behalf. The theory treats IGOs as isolated and under the control of the states that comprise them. In this sense, neoliberals see the trees but not the forest. They have failed to perceive the emergence of an array of actors (states, IGOs, INGOs, and so on) that are interconnected and constitute a global network that shares knowledge about how to deal with particular problems and how to realize common interests. The challenge has been to expand this shared knowledge into the developing states despite their different institutions and dissimilar ideas. In short, neoliberals see IGOs as a pawn under the control of states, merely facilitating interstate cooperation; they have not been able to grasp the extent to which such entities are also involved in global governance. Consider, for example, the following statement by Robert Keohane and Joseph Nye (2000:37): "Any emerging pattern of governance will have to be networked rather than hierarchical and must have minimal rather than highly ambitious objectives." This statement does not take into account the potential for discrediting existing models in the developing countries through discursive practices and for creating new institutions within these states that are compatible with the model espoused in the current global governance system. One of the features of globalization is that it has brought the North and the South closer together and made the latter attractive to foreign investments originating in the former. Given the cultural differences between the two regions, however, establishing cooperation between them is a complex task. Expectations do not necessarily converge once a regime or IGO is created. Indeed, the creation of a new international institution is just the beginning of a laborious process leading toward convergence and the building of similar economic and political mechanisms. Furthermore, the creation of IGOs intended to bring together developed and developing states does not automatically result in cooperation. An important first step involves the socialization and acculturation of developing states such that their domestic institutions can be synchronized with global institutions. Thus, the socalled internationalization of the (developing) state needs to be explained (Sakamoto 1994). The main task of the IGOs is to transform the economic and political systems inside the Third World that set the stage for deepening integration once they are in place. Thus, it is the role of the IGO to facilitate cooperation and convergence rather than that of the state by itself. Critical theory scholars accuse IFIs such as the World Bank, IMF, and WTO of deepening economic integration and promoting trade openness in order to serve the interests of the transnational business elite (Cox 1996a; Gill 1997). In the words of Robert Cox (1996b:1 11): "Atthe apex of an emerging global class structure is the transnational managerial class. Having its own ideology, strategy, and insinuations of collective action, it is a class both in itself and for itself. Its focal points of

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organization, the Trilateral Commission, World Bank, IMF, and OECD, develop both a framework of thought and guidelines for policies." Cox takes a top-down approach in which the state plays the role of translator between the local and the global to meet the needs of the civil society as well as to reconcile states' interests at the global level. In his view, through the process of internationalizing the state via participation in international organizations, an international consensus begins to form as "the internal structures of states are adjusted so that each can best transform the global consensus into national policy and practice" (Cox 1987:254). In effect, international consciousness is translated into national consensus, in turn stimulating the reflection of global institutions at the state level. The rise of these institutions gives legitimacy in Gramscian terms to the existing global and national capitalist modes of production respectively. "The center of gravity [has] shifted from national economies to the world economy, but states [are] recognized as having a responsibility for both" (Cox 1987:255). At the same time, scholars from this school of thought concede that policymakers seem to be relinquishing control over their own economies. The increasing inappropriateness of using Keynesian tools in the development of fiscal and monetary policies to deal with problems of unemployment and recession is forcing governments to succumb to the demands of the IFIs and to follow their prescriptions. The dilemma facing critical theorists is that the internationalization of both production and the state are not two sides of the same coin in which the demand for institutionalization by the former creates the latter. The scattering of production by the business elite does not automatically result in the internationalization of the state in the developing world because developed and developing countries have different political agendas, interests, and cultures. The creation of a hegemonic order that is based on power, ideas, and institutions cannot be achieved without reforming the internal institutions within developing states (Cox 1996b). In effect, hegemonic ideas must become embedded in the internal institutions of the developing countries because of the different political models and institutions already in place in these states; the hegemon cannot drive institutional changes inside other states. Global governance, indeed, involves the internationalization of the state as it participates in international institutions and pledges to accept the rules and norms of these organizations as well as to implement their decisions within its jurisdiction (Woods 2002:25). This process simultaneously facilitates integration, free trade, and the free movement of capital while, at the same time, maintaining the status quo through national compartmentalization. Internationalization requires developing states to become attuned to the rules of IGOs and to actively initiate reforms compatible with these rules. A developing state can be considered internationalized only if the state and global actors have reached such a consensus, and institutions reflecting that consensus are established within the state. The Challenges of Globalization The shrinkage of the world poses new opportunities and risks for the developed countries as the Third World becomes increasingly integrated into the world economy and emerges as an attractive destination for foreign direct investment (FDI) by MNCs (Fishman 2000; Greider 2000). The challenges that the South poses include: economic crises that may carry contagious effects such as the Asian currency crisis of 1997-1998 (Dash 2003), lower wage rates for unskilled workers in the North (Kapstein 1996; Rodrik 1997), loss of competitiveness in key traditional industries in the North (Krugman 1994a; Thurow 1996), lack of transparency and accountability in developing countries (Henry and Springborg 2001), and the flow of refugees and illegal immigrants from South to North (United Nations Development Programme, 1995; Castells 2000).

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For many years, the Third World has constituted a major source of raw materials and other primary products. During the past two decades, many MNCs have also sought to exploit its abundant unskilled and semiskilled labor force through foreign direct investment. During the late 1970s, capital flows into developing economies totaled $7.5 billion or 23.4 percent of the world total, while during the early 1990s such flows reached $75 billion or 32 percent of the world total (Dunning 2000:24; Li and Resnick 2003). In the same period, investments in North America and Western Europe declined from 70.3 percent of the world total to 61 percent. Further, since launching market reforms in 1978, China has received over $400 billion in foreign direct investment. Inflows have recently averaged more than $40 billion a year and accounted for a fifth of all such flows to developing countries. In 2002, China attracted more foreign direct investment than the United States, making it the largest FDI recipient in the world (Huang 2003). Foreign direct investment can be construed as a zero-sum game. Capital that moves into the South is capital that is not invested in the North, which means that the productivity of workers in the North must fall relative to their counterparts in the South. According to David Dollar (1986:178), "the improved terms of trade of the North... lead to a more rapid rate of diffusion of technology to the South. ... [T]he expanded labor force in the South affects the supply conditions in the North by attracting capital and technology." Foreign production capital has reached almost all developing states. Moreover, the number of foreign affiliates located in these states has reached 129,771 (Li and Resnick 2003:175). Anne Krueger (1995:43) shows that in 1970, 3 percent of total exported manufactured goods originated in developing countries. By 1990 that rate had risen to 18 percent. In some developing states (for example, Bangladesh, Brazil, India, Mexico, Pakistan, Thailand, and Turkey) in 1997 manufactures constituted more than 50 percent of total exports. These processes create powerful reasons for Western policymakers to become apprehensive about any type of spontaneous integration that is taking place without institutionalization or long-term planning. Yet, ninety of the one hundred biggest MNCs in 2001 were American, European, or Japanese, whereas only three were based in developing countries. Further, the biggest thirty investing countries controlled 99 percent of foreign direct investment in 2001. With this concentration of wealth, inequality has also increased. The income gap between the fourth of the world's population living in the richest countries and the fourth living in the poorest countries rose from 50 to 1 in 1978 to 88 to 1 in 1993, or from 1:15 to 1:23 if adjusted by purchasing power parities (World Bank 1995). The developed countries want this trend to continue and seek to protect the interests of their MNCs through global governance. This desire is not designed to limit the integration of developing states into the global market, but rather to manipulate the spread of globalization for the benefit of the developed countries. During the last two decades, Western states have also grown concerned about their competitiveness in labor-intensive industries and the flow of investments into the Third World. Their major consideration is labor productivity in the South in medium-tech industries. Based on the writing of Sir Arthur Lewis, Paul Krugman
(1994b) claims that three main types of goods should be differentiated: high-tech,

medium-tech, and low-tech. The North has a relative advantage in producing hightech; the South had a relative advantage in low-tech industries. But both regions produce medium-tech products; it is with these industries that relative productivity correlates with relative wages in both regions. If investments in the South raise labor productivity in medium-tech industries relative to the North, then the relative wage rate in the North must fall. According to product cycle theory, the North is engaged in producing new products, whereas the South produces old products once produced in the North. The transfer of technology into the South allows it to produce these old goods more cheaply than in the North. Yet, the transfer of

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technology into the South also increases the range of goods it produces, thus reducing the number of goods produced in the North. Extending the range of goods produced in a region, according to David Dollar (1986), improves the terms of trade for that region. If this process is inevitable, then the challenge for the North is to control firms located in the South that use any transferred technology by regulating foreign direct investment and the free movement of capital. Thus, over the last two decades, the developed countries have experienced a transformation in the relationship between governments and markets. These states have became worried about their competitiveness, believing as they do that a nation's prosperity depends "on its ability to outsell rival nations on the world markets. ... [N]ations around the world eagerly awaited the annual report of the World Economic Forum, which ranked nations by their competitiveness" (Krugman and Obstfeld 2000:276). Experts advise heads of states on competitiveness. The problem is that it is not only the developed countries that are engaged in promoting their competitiveness, but the developing states as well. High technology sectors, for example, are perceived to be high-value-added and high-wage sectors. Therefore, subsidizing these sectors increases the country's wealth at the expense of other countries and is compatible with the national interest. In this sense, foreign trade is seen by some as a zero-sum game: increasing one state's gains from trade as a result of expanding market share necessarily results in losses for others (Prestowitz 1994). According to this view, foreign trade takes us back to the dark policy, in which devaluation days of the 1930s and the beggar-thy-neighbor reduced the prices of an exporting country's goods and raised the prices of its imported products thereby augmenting its terms of trade. But numerous, less dramatic ways to boost exports and cut imports of certain goods can be found; indeed, expanding global governance into the South is one possibility. Developed countries seek to expand global governance in order to deprive developing states of the opportunity to use their power to boost competitiveness in desirable goods at the expense of the developed countries. By the same token, developed countries also seek to expand global governance in order to create a "level playing field" or "fair trade," so that goods and capital move freely. Thus, global governance is intended to constrain states' interventions in the economy, and reinstall free and "fair" preempt a situation of beggar-thy-neighbor, As a result, the expansion of global governance cannot be achieved competition. without the acquiescence of the state. Given that civil society in the developing states is weak or primordial (Norton 1995), global governance cannot simply bypass the state; it must also strengthen local institutions. With regard to the developed countries, Steven Vogel (1996) has observed that their governments have, indeed, initiated the reform processes of deregulation and liberalization by themselves. Governments are tempting firms engaged in regulatory arbitrage (moving their business to the country that offers the most favorable regulations) to invest at home. From Vogel's (1996:4) point of view, the developed states have combined liberalization with reregulation, that is, pushed for freer markets but with more rules. In his words, the advanced industrialized countries have "achieved different degrees of liberalization, adopted particular types of reregulation, and developed distinctive new styles of regulation." What is interesting about Vogel's (1996:5) argument is that "a movement propelled by global forces has reinforced national differences; and a movement purported to push back the state has been led by the state itself." This argument refers to the developed countries, which is beyond the scope of the present essay. Yet, if we assume that what Vogel proposes is correct, why do developed countries push states to become involved in global governance and blur their developing differences while at the same time initiating liberalization and reregulations that reinfoirce the differences? In tact, developing countries, especially the NICs, also pursue liberalization combined with reregulations that simultaneously promote

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free markets and preserve the state's uniqueness. The explanation for this phenomenon is that states show their commitment to free markets through rules but seek to maintain their relative advantage in free competition by adopting unique (favorable) regulations. Moreover, unskilled workers in countries such as Indonesia, Egypt, and Bangladesh earn around $40 a month and work about sixty hours a week. The labor cost per item, such as for a shirt or shoe, is less than 10 cents. Yet these same items are sold in the North at relatively high local prices, and the profits (rents) are captured by the corporation. Take, for example, the fact that the average cost of a mid-priced Nike shoe made in South Korea is $20; the average price for this same shoe in the United States is about twice its cost, while the cost is much cheaper in China (Korzeniewicz 2000). In response to this situation, a developed country can protect either the interests of its laborers via protectionism or the interests of its MNCs via the free movement of capital (Burgoon 2001). In this regard, Lawrence Summers (1999) asserted at a meeting of the Association of Government Economists that "United States laws prevent workers from being driven out of their jobs by other American workers willing to work 12 hours a day, accept sub-minimum wages, or forego basic rights to organize. How should they react to not being protected from foreign workers willing to do the same things?" In fact, the United States is willing to take long-term measures to protect the rights of industries that are engaged in producing high-value-added products but not to protect the rights of unskilled workers who are engaged in making low-value-added products. At any rate, developed countries cannot maintain their relative advantage in both capital as well as labor-intensive goods. Yet, the developed countries seek to prevent the situation in which they lose both jobs and rents and these go to laborers and exporting producers from the South. Furthermore, even in industries that do not face tough competition, such as the US auto industry in which imports constitute only 15 percent of the US auto market, "the prices and quality of those imports help determine the retail prices US automakers can charge, the wages of US auto workers, and the incomes of those who service the US auto industry" (Prestowitz 1994:188). The developed countries are concerned, therefore, about the type of development strategy employed by some East Asian emerging markets, which in many ways discriminates against foreign producers and investors. The particular strategy is based on a model of development proposed by Alexander Gerschenkron (1962) in which the state starts many basic industries, controls commercial banks, and channels investments to favored industries in the private sector. Moreover, the government limits competition by foreign producers and controls capital to limit access by MNCs. It uses capital earned by the agriculture sector to fund industrialization, thus decreasing reliance on foreign finance. Finally, it absorbs some of the risks associated with export-oriented ventures. In short, based on New Trade Theory (see Tyson 1992; Krugman and Obstfeld 2000), the state shapes its comparative advantage by subsidizing certain desirable industries and discriminating against foreign producers. Western states perceive this model as inimical to their business interests and have endeavored to prevent developing states in general from adopting this state-led strategy to boost their competitiveness in areas that contain high-value-added returns. Three factors make an industry desirable: (1) if it has high value-added per worker, (2) if it pays high wages, and (3) if it uses high technology (Tyson 1992; Thurow 1996; Krugman and Obstfeld 2000). In the words of Laura D'Andrea Tyson (1992:2), "success in high-technology industries bestows national benefits on productivity, technology development, and high-wage job creation .... [S]uch industries are major building blocks of national competitiveness.... [T]rade in high-technology products is not generally 'free' in the traditional sense;... trade outcomes are influenced..,. by both promotional and protectionist government

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policies." Further, according to Lester Thurow (1996:70), "average rates of return on common equity ranged from 27 percent in pharmaceuticals to minus 26 percent in building materials in 1992. Pharmaceuticals have become a hot political issue .... precisely because they have yielded the highest rate of return on capital for essentially the entire post-World War II period." The East Asian NICs not only limited the access of Western producers and investors to their markets, they also pursued an export-oriented strategy in which they exported their products to Western markets, thus competing against companies in the developed countries in their home markets (Schwartz 2000; for a critique of the Asian model, see Krugman 1994c). South Korea, for instance, established a shipbuilding industry, which has since grown from scratch to the world's second largest within a decade (Chang 1993). Policymakers in South Korea believed "that 'the market mechanism cannot be entirely trusted to increase the competitive advantage of industries,' and therefore sectors with high productivity growth potential had to be identified by the state and designated as 'promising financial, strategic industries,' or 'priority' sectors, and given custom-designed technical, and administrative support" (Chang 1993:139). Western countries saw this policy of government intervention and massive support for specific industries, however, not only as detrimental to their interests (competitiveness), but as harmful to the interests of their local economies. Western goods and capital could not move freely into these markets and political and business elites "wrestled with each other over who would reap the rents to be had" (Kang 2002:178). This type of state intervention together with "crony capitalism" became a recipe for corruption and for strangling fair competition among local producers. Furthermore, "because 'governments [in the Far East] targeted particular industries, promoted selected exports, and protected domestic industry' these practices were inimical to Western business interests. Eradicating these practices had long been central to the US bilateral trade agenda with these nations" (Hall 2003:79). According to one other writer, the United States had an "agenda to open up the Korean economy to foreign investment. . contained in the 'restructuring and reforms measures clauses of the IMF agreement" (Mathews 1999, quoted in Hall 2003:79). The North is not interested in impeding the process of integrating the South into the world market. In fact, the North is dependent more and more on the South for its supply of labor-intensive goods. The annual population growth rate in the North of 1 percent is below the replacement rate, which means that young laborers are in short supply, whereas this rate stands at 1.6 percent in Asia and 2 percent in Latin America. The demographic trends in the North that include low birth rates, low death rates, and increased longevity put tremendous pressure on these states' welfare systems and will increase the dependence of developed countries on the South's labor force. Facing such constraints, among others, suggests why the North is interested in promoting development in the Third World, regulating global competitiveness, and creating a level playing field in world markets, while at the same time keeping the increasing population of the South out of the North. This is being attempted through global organizations process of integration-segregation that seek to socialize the developing countries to function according to global rules and regulations.

Global Governance and the Third World

The differences, even incompatibilities, between the economic and political systems of the North and South make convergence around a similar system of governance almost impossible. The developed countries are characterized by technological innovations, democratic regimes, capitalist economic systems, high per-capita income, rational decision making, and transparency. The South is a collection of developing and less-developed countries that possess some of these characteristics,

YAKUB HALABI

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but certainly not all of them (see Kegley and Wittkopf 1999:101). In fact, many Third World states are characterized by obsolete institutions that include the commercial banks and the central bank (both controlled by the state), inadequate stock markets, and a lack of transparency (a controlled media or a dependent judiciary system) making the economies of these states incompatible with the global vision of free markets. In addition, the lack of technological innovation in the South prevents synchronization of technological regulations between the two regions. In short, the North and South represent different political, social, and economic cultures, which often creates a source of conflict between them. Given the interests at stake, Northern states cannot surrender to these differences and leave North-South economic relations to be determined arbitrarily as a sum-total of each state's policies. The developed countries have begun to recognize the need to establish the international system as a rule-based order, in which global governance allows states to seek wealth in an orderly fashion and according to the normative features of that international system. To accomplish this goal, the developed countries have to convince developing states to internationalize and to institutionalize global regulations. The IGOs have to exploit the dependence of the developing state on international resources-such as loans, foreign direct induce them to buy into capitalism and to investment, and technology-to internationalize. This analysis explicitly suggests that the developed countries must strengthen the states in the developing world, thus facilitating the expansion of global governance into each state's jurisdiction. Our examination thus far concerning the expansion of global governance has implicitly assumed that the state is the main anchor of institutional reform and deregulation. The argument has been that the developed countries have an interest in expanding global governance into the Third World and seek adherence to global regulations through the state. This assumption raises several problems if applied to the developing states. First, the weakness of the Third World state vis-a-vis its society has prevented it from being flexible enough in general to deal with new challenges. According to Joel Migdal (1988:137), the developing state is weak because "diffused fragments of society have stayed strong," undermining the ability of the state to impose its will on powerful, traditional segments of society. This weakness has blocked the state from initiating new reforms or projects that harm the narrow interests of certain social segments. Second, civil society in the Third World is weak, which means that very few civil organizations operate there; indeed, such organizations may even be nonexistent (Norton 1995). This weakness may, however, make it easier for IGOs or a local government to impose and implement reforms. Third, because the developing state is autonomous from civil society, it possesses the power and capacity to hasten the process of convergence into global models of governance. In the same way that the state is autonomous and can implement a state-led development model, it can also seek convergence. Put simply, developing states are in many ways too weak to initiate and implement reforms against the will of the society by themselves, strong enough to block reforms initiated by local bourgeoisie, face little resistance from civil society, and yet are often too weak to block reforms initiated by IGOs backed by Western states. Based on the above factors, the expansion of global governance into the Third World faces two major hurdles. First, global governance cannot overrule state sovereignty and impose its regulations on the unwilling state (Jackson 1990; Murphy 2000). Thus, binding the developing world to global regulations needs to occur as a result of conviction and mutual cooperation. Second, global governance is not a traditional type of development. The developed countries are not acting in a value-free manner, merely seeking to help the developing world improve its living standards. The West faces tough competition from these states in manufactured products, affecting its terms of trade and the livelihood of its unskilled and semiskilled laborers. The West wants to fix these problems by establishing "fair

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competition." This desire does not contradict the idea that states with different political cultures can believe that state-coordinated economies are a coherent and viable alternative to the Anglo-American form of capitalism (Berger and Dore 1996). Global governance requires that global institutions be reflected inside states so that institutions at both levels can operate in tandem. In effect, global governance tackles policies involving double standards in which, for example, the state adheres, on the one hand, to a free trade regime while, on the othei; it adopts a Gerschenkronian model of development and limits foreign access to its market. Moreover, global governance reconciles the desires of states to accumulate wealth with the need for universal regulations and a level playing field. In short, the West needs to convince the developing states to adopt an economic model that fits the latter's interests too. Some developing states may resist pressure from IGOs to converge, whereas others may be convinced by the models offered by these same IGOs. Some may agree with convergence as an end but not with the means. One thing is for certain: Western states and prominent IGOs are currently involved in telling developing states that if they wish to attract foreign investment and become rich they will have to implement structural economic reforms and create institutions that are compatible with global governance and, in turn, increase their efficiency and transparency respectively (Li and Resnick 2003). International actors seek to convince developing states that institutional reforms will enhance their economic performance and deliver economic benefits by attracting foreign capital. Clearly, states that institutionalize global standards gain from the decisions of the international rating agencies, which constitute a main source of infi)rmation for investors and creditors. Gathering investment infi)rmation individually is a very expensive process, so investors usually rely on these agencies for reliable data. Third World states are induced in this way to meet international standards of governance as the only guarantee for receiving investments and loans at a low interest rate. Global governance has, as a result, become a channel to tame Third World states by pushing them to abide by universal regulations through the establishment of domestic institutions that are compatible with Western rules of order. Institutionalization of global standards in the Third World is an incremental learning process that is taking place through interaction between an IGO and a developing state, the interaction affecting the latter's identity. The interaction of IGOs with numerous developing countries gives them tremendous experience concerning how to manipulate these states. Global governance is used to induce developing countries to converge into capitalism, adopt trade openness, float their currencies, privatize their commercial banks and state-owned enterprises (SOEs), bestow independence on their central bank, eliminate subsidies on production and goods, and establish more transparent institutions such as the stock market. Yet, each developing state has its own unique economic problems and political culture, hence each state has its own ideas regarding how to proceed with the economic reforms that will lead to participation in the global governance system. the processes behind Given that global governance involves deciphering it cannot coexist with diverse or contradictory political and competitiveness, economic institutions. Common understanding is achieved mainly through the creation of local institutions that abide by universal rules and operate in tandem with international institutions. Thus, the ability of states to cooperate does not merely depend on the goodwill of governments, the volition of rulers, or the participation of states in international institutions (internationalization of the state). It is even more desirable, from a Western capitalist point of view, that interstate relations be regulated by institutions and market relations with minimum ad hoc state intervention or leeway fi)r discretion. Such institultio)nalization permits a high rate of predictability and creldibility.

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Moreover, world order cannot be based on the fiats of authoritarian regimes. Internationalization of the state marks its preliminary acceptance of international rules, but gradual and incremental convergence toward common understanding requires domestic institutionalization inside the states. Thus, institutionalization of Western models in the South marks the latter's acculturation and the convergence of expectations around universal rules. Indeed, privatization and deregulation imply that governments are relinquishing their economic and regulatory power respectively. Selling off state assets means shifting power to the private sector; deregulation indicates that governments have less power to control the economy. These trends, according to some scholars (see Ohmae 1999), have left the government debilitated. Strengthening markets, they claim, through deregulation and privatization necessarily means weakening states and promoting convergence. In this view, markets and governments are engaged in a zero-sum game; global governance strengthens the former at the expense of the latter. At first glance, the weakness of the Third World state and its shallow institutional differentiation reinforces arguments about the eroding power, if not the demise, of the state. As mentioned before, however, civil society in the Third World is weak, and IGOs have no reliable partner in these societies but the state. In addition, from the point of view of the developed countries, nongovernmental organizations should be subordinated to states and should not be allowed to operate freely. Indeed, the developed countries seek to cooperate with the developing countries in areas such as the environment, production, trade, labor standards, finance, and human rights as the developing states appear to be the most reliable partner to deal with on these issues. In the complex that is global governance, the state sits at the intersection of a wide range of global networks and is part of them all. Unlike IGOs and NGOs that deal with one issue area, the state has multiple functions; as such it can and should be found in numerous networks. Therefore, the state must be involved within and with these organizations in the governance of these types of problems. Social Constructivism and Change In this section we will posit a theory to explain the expansion of global governance into the Third World. In the previous section the West was shown to have a major interest in binding developing states to global regulations. The motives that drive the developed countries are not altruistic ones intended to help traditional agrarian societies develop. In fact, the increasing economic power and policies of developing countries have begun to affect the vital interests of the developed states, such as their growth, unemployment, distribution of wealth, and to a certain extent even their income per capita. Given that the South uses strategies to improve its terms of trade at the expense of the North, a new approach is needed to explain the desire of the North to push for the expansion of global governance into the South as well as for the readiness of the South to establish universally compatible internal institutions. Therefore, the main task now is to provide a theoretical explanation for how the developed countries are managing to expand global governance into the developing states and to install in them domestic institutions that mirror those at the international level. The following relies on the theory of social constructivism for the development of such an explanation. Social constructivism focuses on the constitutive effects of discursive sources. According to this point of view, ideas influence state leaders, global businessmen, and other political activists. And discursive practices generate discursive structures that constitute the identities of the actors and their interests. In effect, ideas and identity are considered to play a stronger role in defining interests than structural material forces (Wendt 1999). In the words of one writer (Hall 2003:71), "discursive practices generate narrative structures that have a constitutive effect on the

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The Expansionof GlobalGovernance the Third World into

. .

subsequent discursive .

gives rise to the construction of new institutions, changes the agenda of the state, and can even be reflected in the curricula of its educational system. In short, interests of states are not exogenously given but are defined by the actors themselves. Given that national interests are always defined in relation to other states and that global governance and hegemonic discourse have a holistic character, we need a top-down approach to account for the construction of domestic institutions that reflect the rules and regulations represented in the global governance system. Holism is such a top-down approach, which in the case of economic globalization examines how global institutions regulate the behavior of states and the institutionalization of the ideas they propagate within states. Especially in global economic affairs based on interdependence, cooperation, mutual adjustment, and the convergence of expectations around global rules, states cannot define their interests, shape their comparative advantage, or pursue a development model individually without regard to the reactions of other states. In fact, holism and globalization are two sides of the same coin. The rise of a global market requires holistic solutions and harmonization between institutions at various levels. Given the contagion effects that can occur in world economic relations and the internationalization of production, economic crises cannot be addressed by one state alone but require collective action. Major economic crises present IGOs with the opportunity to construct institutions that are compatible with their visions. These organizations can mitigate the negative effects of the crisis in the short run while at the same time facilitating the evolution of domestic institutions in their own image. At the behavioral level, social constructivism contends that human actors follow rules that not only regulate behavior (that is, constitute a causal effect) but also define social identities and national interests (Zehfuss 2002:8). A system that contains these rules is bigger than the sum total of its existing parts, mainly because such a system allows for self-supervision and self-correction; it becomes a dynamic system that is ever changing in response to powerful ideas. Although constructivists avoid judging or advocating a certain set of ideas, they do argue that ideas backed by power distinguish the normal from the abnormal. Each system is constructed by human collectivities and affects the behavior of these collectivities. Reason within the system is defined through the development of common understandings. The rules are not absolute, eternal, immutable, or externally given; rather, they are commensurate with changing ideas and consciousness. Thus, new regulations arise not merely as a reflection of material interests, but also in the context of new ideas or consciousness. Furthermore, universal norms and international law help to constitute the social identities of actors in the international system and guide their behavior when they interact. At the domestic level, the foreign policy of a state is influenced by its social environment and local culture. Local governments are actively involved in the process of shaping and being shaped by their internal and external environments. The ability of one state to construct internal institutions in other states is contingent upon its influence on the IGOs that are carrying out the change. Indeed, IGOs transmit global ideas to governments that, in turn, implement what is proposed in their own way, though under the supervision of the IGO. In effect, the IGOs use governments to mediate between their global vision and domestic reality (Weldes and Saco 1996:371-374). For instance, powerful ideas, such as those involved in deregulation and firee market reform, are backed by the developed countries with the aim of replacing what up to now has been a state-coordinated model with the Anglo-American neoliberal model. This latter model appeals to international actors, such as the IMF, the World Bank, and the WTO, that are convinced of its effectiveness and the

practices of actors." The generation of a new set of ideas

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inferiority of other competing models (Wade 2002:216; Hall 2003:7 1). These actors use the neoliberal model in their discourse in the hopes of creating a new reality that serves the collective interests of the developed states, who exert more influence in these IGOs than the developing countries. The IFIs, in turn, have used neoliberalism to discredit the state-led development model by representing it as responsible for the Asian currency crisis in 1997-1998 as a result of crony capitalism, lack of transparency, and corruption. Once this attack is developed into a narrative structure, it affects how policymakers perceive their interests and the construction of new domestic institutions. Similarly, these actors have also represented the debt crisis in the Third World in the 1980s as a direct result of the import-substitution policies adopted by the developing states; at that time, they introduced structural adjustment programs as the best recipe for healing these economies. Arturo Escobar (1995) has examined the discourse of development from a postmodern perspective. In his view, this discourse has turned the poor into people to be studied and managed. Moreover, it has framed the Third World according to Western categories, not only to make sense of it, but also to dominate it. This discourse, which focuses on power, facilitates certain modes of thinking while disqualifying others. In this regard, Edward Said (1978:3) has asserted that the discourse of "Orientalism can be discussed and analyzed as the corporate institution for dealing with the Orient-dealing with it by making statements about it, authorizing a view of it, describing it, by teaching it, settling it, ruling over it." This development discourse, Escobar contends, has led two-thirds of the world population to seek material prosperity and economic growth. This emphasis on prosperity is responsible not only for increasing wealth and improving living standards in the South, but for impoverishment, exploitation, and repression. In Escobar's (1995:13) view, the failure of neoliberal development is manifested in "[t]he debt crisis, Salhelian famine, increasing poverty, malnutrition, and violence." He does not claim that there has been a conspiracy in the West to use development to further impoverish the South. But he does claim that the people in the South have remained impotent in the face of the discourse of development that "has relied exclusively on one knowledge system, namely, the modern Western one" (Escobar 1995:13). This system has marginalized and disqualified non-Western knowledge systems while facilitating the consolidation of capitalism and causing systemic pauperization through dependency on, and exploitation by, the developed world. According to Escobar, the discourse of development is flawed because it does not constitute a recipe for development. This postdevelopment approach purports to explain why fifty years of development interventions have produced so little effect. But Escobar's (1995) thesis remains incomplete because he cannot explain why after fifty years the people in the Third World have remained passive, despite what he argues is the deterioration in their living standards. In point of fact, however, the income per capita in many developing societies has improved drastically. Moreover, in his writing Escobar makes reference to Foucault, although he limits himself to particular sections that support his thesis about the pauperization of the poor. Foucault also uses the term biopower to show that there is a different type of power that is a productive force. Biopower operates alongside the power of the sovereign, each performing a different function (see Rabinow 1984:258-259). Both types of power, in general, foster, organize, and optimize social relations. By drawing on the mutually supportive processes of power and knowledge, power can simultaneously redefine and administer life in a calculated way. The systems that result determine what can count as true or false. Thus, power can be repressive in its effect while at the same time exerting "a positive influence on life" (Rabinow 1984:259). In order for society to prosper, life should be subjected, according to Foucault (see Rabinow 1984:259), "to precise controls and comprehensive regulations." And this is, in fact,

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the way that the developed countries have introduced global regulations: as a means for maintaining order in the service of general prosperity. Biopower, to a certain extent, helps explain the expansion of global governance. Developing states have to be convinced that global governance promotes their interests rather than increases the grip of the North over the South for the purpose of exploitation. Otherwise, we would have to assume that the developing states are fooled when the developed countries impose regulations on them that do not serve their interests. Although the rules and regulations involved in global governance should be reflected in the internal institutions of the South with such institutions being operated by domestic forces, the whole process of expansion is contingent on the developing countries being convinced of the necessity of global governance and the benefits behind it. Usually, institutional changes in developing states come at times when the economies of these states are in crisis and their governments ask for foreign aid. During such periods, it is easier to criticize existing institutions and demand institutional change, such as the structural adjustment programs advocated by the IMF and the World Bank, trade liberalization proposed by the WTO, labor standards pursued by the ILO, and deregulation (or reregulation) pushed by MNCs and Western governments. These processes involve not only being convinced by powerful ideas but also learning by doing. Participants in the discourse are open to being persuaded by better arguments with the focus on power receding into the background. Hence, actors use arguments to persuade others of their views, beliefs, goals, or identities. For example, following free-market reforms, a developing state changes its goals from seeking a just distribution of wealth and supplying people's basic needs, to maximizing growth and wealth and the efficient allocation of resources. The state changes its identity from a socialist state into a capitalist one and replaces import substitution policies, isolation, saturation, and self-satisfaction with an exportoriented policy, integration, and interdependence.

Constructivism and Domestic Institutionalization

This section examines the construction of internal institutions in the developing that ultimately shape not countries by the IFIs and the United States--institutions the identities of these states but also their policies and the definitions of their only national interests. We will examine two issues: (1) how global governance was extended into the East Asian countries following the 1997-1998 currency crisis, when the developed countries had a strong interest in establishing institutions in these countries that would be compatible with free markets and operate in tandem with the IFIs, and (2) the problem of implementing structural adjustment programs in the developing states that are less likely to engage in producing high-value-added products. In this latter case, the tendency is to establish a freemarket economy and market-supporting institutions with loose global surveillance. After several years of working on structural adjustment programs and deregulation, the US government and the IFIs realized that when the mechanisms of a free-market economy were installed in a developing state they needed to be complemented by auxiliary institutions monitored by I(;Os. Indeed, the ()perations Evaluation Department of the World Bank reported that during the period 1980-1997 only one-third of the bank's civil service reform interventions had successful outcomes (World Bank 1999). The idea behind this report was to present policymakers with data showing that institutional environment, rules, and policy credibility drive economic perfiormance (World Bank 2000b). Given that a period of crisis appears to provide the opportunity to discredit existing models and institutions and to promote new ones, what types of discursive practices do the United States and IGOs use to establish market-friendly domestic institutions? Let the reader note at the outset that the establishment of such institutions is a

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protracted process given the diversity in political cultures among the developing states. Dani Rodrik (1999), presenting a paper to the IMF on the issue of institutionalization, has suggested that five types of market-supporting institutions can be identified: those focused on property rights, those focused on regulation, those focused on macroeconomic stabilization, those focused on social insurance, and those focused on conflict management. None of these has been addressed directly or efficiently by the structural adjustment programs, which have been mainly targeted at slashing government budget deficits, liberalizing exchange rates, and privatization. The US and the IFIs have wanted to convince late-blooming developing countries that market forces are a more effective means of delineating their comparative advantage than leaving it to the government and that they should focus on cultivating an institutional environment suitable for capitalism. On the one hand, a free-market economy and market-supporting institutions are designed to ensure that developing states have to spend less time enhancing their competitiveness. On the other hand, vigilant institutions are essential for the free market to operate smoothly. In the words of Rodrik (1999:7): "In fact, the freer the markets are, the greater is the burden on the regulatory institutions. It is not a coincidence that the United States has the world's freest markets as well its toughest anti-trust enforcement." The economic misdeeds of developing states have been aggressively dealt with by leading economists from the IFIs and the US Treasury. These economists have used a carrot and stick policy that has included discursive practices backed by material rewards and punishments. They have looked for allies within the developing countries who share similar ideas to their own and have mobilized them to help persuade others of the appropriateness of what they are doing. When a state embarks on reforms or institutionalization under the auspices of the IFIs, its leader is usually invited to Washington, praised by the American president and the economic elite for her or his efforts, and given an aid package as a reward for good behavior. The first successful campaign to discredit the state-led development model in East Asia was initiated after the currency crisis in 1997. According to Rodrik (1999), in South Korea, Indonesia, and Thailand financial liberalization and the opening of capital accounts led to a financial crisis precisely because of inadequate regulation and supervision. The crisis caused a sharp devaluation of the currencies, rendered several key industries bankrupt, and resulted in massive layoffs of workers (Goldstein 1998:8-11). During the course of this Asian financial crisis, the IMF approved $21 billion in credit for South Korea, $23 billion for Indonesia, and $3.9 billion for Thailand (Dash 2003:275-279). In return, the IMF demanded, among other things, the restructuring of the financial sectors of these countries, the nerve center of the developing state that binds it to industries (Woo-Cumings 1999:10). Such restructuring involved closing insolvent financial companies, tightening bank license rules, establishing a timetable for financial sector restructuring, privatizing state banks, enhancing transparency, and liberalizing foreign trade and investment. South Korea was the most prominent country to be affected by the crisis. Their currency crisis caused the won to depreciate by an average of 26 percent in late 1997, unemployment to rise from 2.5 percent in 1996 to 8.7 percent in February 1999, the wage rate to fall by 9 percent in real terms, and the interest rate to increase from 15 to 25 percent, while real growth and total imports fell by 5.8 and 21 percent respectively in 1998 (International Monetary Fund 2000:12). In early 1998, the average daily corporate insolvencies had doubled to over thirty, leading real industrial production to fall by 12 percent. Six of the top thirty chaebols (Korean conglomerates) declared bankruptcy, which severely weakened the financial system. The bankruptcy of Hanbo and Kia in 1997 resulted in a downgrading of

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the ratings of the Korean financial institutions by Standard and Poor's (International Monetary Fund 2000:8). Under these circumstances, the United States and the IFIs led a discursive attack on the current manner in which the economy was being managed in South Korea and made loans and aid contingent on reforms. The IMF accused Korean investors of not carefully assessing the risk involved in their investments. The claim was that investors had created overcapacity in a narrow range of goods and this oversupply had driven prices down, causing the terms of trade to go down as well. Moreover, the IMF asserted that the long history of government control of the financial markets had left this market in a weak position; it lacked discipline, having neither transparency in its financial operations nor adequate expertise in credit and risk analysis (International Monetary Fund 2000:37). Furthermore, Lawrence Summers from the US Treasury Department "represented the . . . causes of the crisis as inadequacies in the domestic institutional structures of the affected East Asian nations. In the public realm Summers referred to an 'absence of strong and credible domestic institutions' and 'weak' financial sector 'supervisory regimes' while the private sector was plagued by 'lax lending standards"' (Hall 2003:76). Indeed, the US Treasury "led the neoliberal narrative on the sins of 'crony capitalism"' as an alibi for discrediting the state-led model (Hall 2003:76). "In Korea . . . the close and preferential development between the chaebols, the banks, and the government ... has been a relationship mounting source of friction with the United States" (Summers 1998b). The United States has worked with the IFIs to convince South Korea to establish adequate domestic institutions compatible with Western regulations. Convincing the South Korean government, though, without institutionalization and supervision by the IGOs does not guarantee continuity. The truth is that eradicating state control over the economy in East Asia permitted the United States to kill two birds with one stone. The elimination of crony capitalism or public-private cooperation in these countries would facilitate creating a level playing field in international competition and allow free movement of capital across borders. Furthermore, it would prevent overheated economies and, consequently, overcapacity in certain industries that could cause a financial crisis in the developed countries. In the end, the IMF recommended that South Korea take four major steps: (1) open up their capital accounts, allowing Korean companies direct access to foreign capital markets and shifting corporate financing away from excessive reliance on debt, (2) permit greater foreign investment and ownership of Korean companies, (3) create simple and transparent rules that prescribe the use of foreign exchange, and (4) remove distortions in trade policy to stimulate more competition. The IMF team asserted that "opening the market to foreigners would strengthen market discipline on managers and owners of domestic companies" (International Monetary Fund 2000:37). And, indeed, building on these IMF recommendations, the South Korean government did the following. They opened the bond and equity markets to foreign investors, raising the ceiling on aggregate foreign ownership to 50 percent on listed shares and 55 percent on equities; liberalized the domestic money market, allowing unlimited foreign investment in money market instruments; permitted local corporations to directly seek loans overseas; removed control over corporate ownership, allowing foreign participation and takeover through mergers and acquisitions and direct foreign investment without government approval; and abolished trade-related subsidies such as those on the reserves fir export losses (International Monetary Fund 2000:39-40). According to Hall (2003:93), "the institutional fabric of the Korean economy was refiormed beyond what the IMF required, but consistent with what the US iTreasury wanted." The IMF and the South Korean government also agreed to restrict the government's lending to firms and that it would not intervene in the lending policies of

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commercial banks. In addition, the government amended its rules to encourage more transparency in companies listed on the stock exchange, such as the inclusion of outside persons on boards of directors. The currency crisis led to a shift in the role of the South Korean government and in its interests. Prior to the crisis, the government perceived its role as that of a facilitator of its corporations' interests, identifying the interests of these companies as the interests of the state. Moreover, the government had pursued a monetary policy that was aimed at keeping the value of the won stable and supporting a sound financial system. Following the crisis, the government defined its role as maintaining confidence in the financial market and stabilizing the exchange market. The new government of President Kim Dae-Jung that came to power in early 1998 perceived that the Asian development model was a source of corruption, linking as it did the government with the chaebols,and had resulted in crony capitalism. Kim, who shared similar ideas as those of the staffs of the IFIs, defined transparency and efficiency as two sides of the same coin and believed that both could be achieved by combining democracy with a free-market economy (Hall 2003:89). The new laws enacted by his government were aimed at liberalizing the financial market and restructuring corporate governance as well as institutionalizing this new role of the state. Similar things happened in Indonesia in response to the 1997 currency crisis. Indeed, following the crisis, the World Bank (2000a) described the situation in Indonesia in these words: "The 1997 economic crisis increased poverty significantly. Indonesia's far-reaching decentralization, while offering long-run prospects for public services more responsive to the needs and desires of the poor, has in the short run created uncertainties and disruptions.... Weak governance has, if not caused, then at least aggravated the economic crisis from which Indonesia is just emerging. Indonesia scores consistently low in surveys on rule of law, corruption, and business environment." Indonesia worked closely with the IFIs for several years following the crisis. The Indonesian State Policy Guidelines adopted in 1999 emphasized the supremacy of law and the protection of fundamental human rights. Furthermore, in its several letters of intent sent to the IMF, the Indonesian government indicated its intention to improve its framework for investment and trade policy, develop and rehabilitate its infrastructure, increase public service transparency, and further equitable growth (International Monetary Fund 2003a:34). President Megawati's speech on the 2002 budget underscored these concerns and the need to create good governance, public order, and security. Concentrating on financial liberalization and privatization, the IMF completed its ninth review of Indonesia's performance under the Extended Fund Facility Arrangement in June 2003 (International Monetary Fund 2003a), opening the way for further release of $486 million. The deputy managing director of the IMF commended the Indonesian authorities for their "continued strong policy performance under their arrangement with the Fund" (International Monetary Fund 2003b). During a few years, the World Bank had reduced the annual amount of its loans to Indonesia from $1 billion a year to $400 million because of government corruption. However, in 2003 it decided to increase its loans to a minimum of $580 million, despite corruption. "The bank says that in return, the Indonesian government will be required to establish an anticorruption commission and strengthen government procurement methods" (Perlez 2003). With regard to Thailand, Prime Minister Chuan was invited to Washington in 1998, praised for implementing a reform program, and received a package worth $1.7 billion to assist that country during the crisis. The American Export-Import Bank provided an additional $1 billion to allow Thailand to import food and raw materials. According to then Deputy Treasury Secretary Summers (1998a), "Thailand has worked closely with the IMF on the key measures of structural

42

The Expansion of Global Governance into the Third World

reform, cleaning up problems in the banking system, working through problems in the corporate sector and maintaining a monetary policy conducive to confidence." Above and beyond the 1997 currency crisis, a number of other international institutions and arrangements have been put into place to bolster global governance in the domain of global finance. As Summers (1999) has observed, "the Basle Committee and the International Organization of Securities Commissions have..
.

to improve financial supervision and regulation at the domestic level" in the developing countries. The Basle Committee was set up in 1974 by central bank heads from eleven developed countries in response to the banking crises at the time. The aim of the Committee was to achieve better coordination of the surveillance exercised by national authorities over the international banking system. Stressing the need to abide by global regulations to preempt another Asian financial crisis, Summers (1999) has asserted that "there is the greatest willingness to cede power to international institutions where there is the greatest technical agreement on what needs to be done and where issues of values are less paramount." In December 1997, 102 states made commitments to liberalize their financial services trade under the Financial Services Agreement of the WTO. Renato Ruggiero (1998) observes that this agreement provides:
It will do this the tools to build a strongerfinancialsystemfor all economies. by introducinggreater competition...; by enlarging the presence of foreign banks, insurance companies and securities firms; and by building this new, on stronger,and more open financialinfrastructure a firm foundationof agreed multilateral rules.... [I]t will enhance their [governments'] options and increase their flexibility.

developed

core principles that can serve as a blueprint for efforts

are also allowed to develop new corporate strategies through mergers and acquisitions that give them a comparative advantage over small banks in the

Yet,Ruggieroalso admitsthat under this agreementbanksin developed countries

developing world.

In this regard, John Taylor (2001), US Under Secretary of the Treasury for International Affairs, has succinctly presented the developed countries' strategy for preventing the developing states from subsidizing their exported goods as well as the global supervision measures that the developed countries support:
Exlm [the US Export-ImportBank] advances the Administration's pro-export agenda in two very specific ways. First,it ensures that the officialexport credit agencies (ECAs) that other governments have in place do oltprovide f/reign a exporters competitive advantagein internationalexport competitions. Second, because ExIin exists, the United States has a seat.at the internationaltable that sets rules for how officialexport financingoperates.These rules are made in the OECD by the countries that are the Participantsto the Arrangement on Guidelines for OfficiallySupported Export Credits (Arrangement).This is an arrangement among nationsthatprovidesthe vastbulkof officialexport financing foi capitalgoods to developingcountries.These rules,whichare embodied in the by provided ()ECD Arrangement,are criticalto lhal the export finanuing ensuri.ng andfair compelilion. [italicsadded] m(lrkel principles. govermlenls prmoesomoes

In addition, the Asia-Europe Meeting (ASEM) organizes biennial summits for ten Asian countries and sixteen European Union representatives. The meetings aim to promote economic, political, and cultural cooperation between the two regions. Yet, they appear more like an attempt by the European Union to take part in the construction of reality in East Asia based on Western models. For this purpose, ASEM has created several agencies such as those involved with the Trade Facilitation Action Plan (TFAP) and the Investment Promotion Action Plan (IPAP)

YAKUB HALABI

43

(World Bank 2000a). In September 1997, the Finance Ministers from the ASEM countries agreed to strengthen cooperation regarding financial supervision and regulation. The ASEM teams, in general, gather information on Asian states, provide analysis of economic crises, and recommend long-term solutions. The group has supported a banking restructuring program in Indonesia and helped establish an independent review committee of international and Indonesian experts to enhance bank privatization. The World Bank, in fact, is managing the ASEM Financial Crisis Response Fund, providing technical assistance on social welfare as well as financial and corporate restructuring. The ASEM is also involved in building national institutions, including those having to do with legal and judicial reforms, public financial management and procurement, and decentralization -all are based on Western models of governance. Finally, the ASEM has an in-country committee that develops strategy and monitors the implementation of activities. As a means of strengthening the grip of global governance on developing countries, the WTO monitors the implementation of its decisions and assesses whether violations of global regulations have occurred, conducting "a collective evaluation of trade policies and practices of each WTO member at regular intervals and monitoring significant trends and developments which may have an impact on the global trading system" (World Trade Organization 1999). The WTO Secretariat's report covers all aspects of trade policy, including domestic laws and regulations as well as the institutional frameworks surrounding such policies. Moreover, since the early 1980s, more than fifty developing states have implemented structural adjustment programs under the auspices of the World Bank and the IMF (Bird 1995) and since 1995, 146 states have joined the WTO. These two IGOs are part of the Washington Consensus that is based on the neoliberal economic model: successful economic performance requires macroeconomic stability and competition (Williamson 1990; Gore 2003). The IMF works to achieve these goals in two stages-through stabilization and restructuring. The first stage entails slashing budget deficits, devaluing exchange rates, and making the real interest rate positive. These measures make sense to prominent economists in developing states because positive real interest rates help prevent capital outflows and they lower inflation, while devaluation boosts exports. The second stage involves privatization of state-owned enterprises and manifestation of an openness to free trade. Completion of the two stages may take several years, during which a team from the IMF monitors the macroeconomic performance of the developing country while the elites learn by doing, in the process accumulating knowledge about the merits of a free market. For instance, the IMF (1998:3) stated in its report concerning Egypt that "[m]arket inefficiencies were fostered by administrative restrictions: administered prices, interest rate ceilings, multiple (and overvalued) exchange rates.... The private sector was 'crowded out' by a development strategy that relied on large scale public ownership combined with import substitution and limited focus on export promotion." Having analyzed the sources of the crisis, the IMF's team highlighted the advantages derived from institutionalizing neoliberalism. The report stated that in the Middle East, Egypt, Jordan, Israel, Tunisia, and Morocco (all having implemented structural adjustment programs) were moving in this direction. And, indeed, implementing neoliberal measures is a precondition for reaching an association agreement with the European Union (EU). It should be mentioned that the European Union has adopted a policy of imposing voluntary export restraints on developing states, compelling them to agree not to export certain goods that compete against local European producers. The IMF (1998:1) in its assessment of Egypt's performance stated that the reforms have "brought much reduced inflation, led to improved public finance, a stable currency, and a strengthened banking system, together with a sound balance of payments position." After implementing structural adjustment programs from

44

TheExpansionof GlobalGovernance the ThirdWorld into

1987 to 1996, the Egyptian elite had become convinced that the aim of these programs was to restore growth to the economy rather than to lead to massive layoffs, undermining the legitimacy of the regime. This shift in the elite's position came no less than four years after launching the program. The question is whether learning by doing is enough to create the long-term macroeconomic stability that can be converted into institutions. In other words, how can macroeconomic stability and liberalization be maintained after the departure of the IFIs? The IFIs work to convince the governments of the developing states that their financial systems must find a balance between an open free-market economy and regulation of the use of savings for investments. After all, the behavior of firms and commercial banks at the micro-level has a direct effect on the economy as a whole. If domestic commercial banks fail to lend money to the most efficient firms, lending instead to firms with low productivity, the economy is affected. In the IFIs' view, institutionalizing the financial system in a free-market economy helps reduce risk, monitor liquidity, provide information, and increase transparency. But, to put it simply, because the developing states do not compete against the high-value-added products made in the developed countries and because their behavior is only loosely monitored currently, the IFIs often choose to wait until the next crisis to push for further institutionalization of liberalization. Instead, a tendency exists to convince the developing states to return to their "traditional" comparative advantage. In agriculture, for example, the pattern has been to induce these states to plant cash crops and abandon food crops. Since the early 1960s, for instance, the Egyptian government had fixed the border price of cotton and determined the amount of land that farmers could devote to this crop.
export was an important source of foreign exchange revenues. The government exercised a monopoly over the export of cotton and set its local price below the international market price in order to appropriate revenues. This implicit tax discouraged farmers from planting cotton, causing production to fall. In addition, the government kept the exchange rate overvalued and used its earnings in foreign currency to finance imports for state-owned enterprises (Handoussa, Nishimizu, and Page 1986). In the mid-1980s, Egypt provided 45 percent of the world's trade in extra-long staple cotton (Sadowski 1991:283). Thus, Cotton Egyptian government's intervention into the cotton market. Moreover, a number of the developing states that have become market economies have experienced increases in the independence of their central banks, a landmark of financial liberalization (Fry, Goodhart, and Almeida 1996). An independent central bank is responsible for setting the interest rate, determining monetary expansion, and supervising local financial institutions such as commercial banks. It also is an ally to the IFIs as both share similar ideas about the role of the state in the economy. An independent central bank is jealous of its autonomy and seeks to curtail a government's intervention into its affairs. According to one recent study (Bernhard, Broz, and Clark 2002:699): "The average [rankings of legal central bank independence] foir Latin America and Western Europe . . . are 0.55 . and 0.46 respectively. Mexico and Chile . .both increased the tbformalindepenfinancial markets and their potential effects on the real economy. They the significant role played by the central bank as a lender of last resort, against self-fulfilling banking crises. For example, in 1983, commercial Israel provided loans to small investors through specific funds run by

for cotton importing countries, it was critical to correct the distortion caused by the

dence of their central banks." The IFIs also stress the inherent instability in
highlight guarding banks in the bank

itself. This procedure caused a sharp rise in the shares of certain firms that did not justify their performance; when the firms later defaulted, they left hundreds of
thousands of small household investors impoverished and frustrated. Following this crisis, the government gave the central bank more autonomy and set utipstandards

YAKUB HALABI

45

for the supervision of the state's financial system that were imported from the developed countries. One other way that global governance is affecting institutions in the developing countries is through the determination of the interest rates charged for loans. These ratings are based on decisions of international rating agencies. If an agency such as Standard and Poor's decides to withdraw a country's investment grade ranking, that country has to pay a higher interest rate on loans than the market rate. Through this activity and the others we have already discussed, it seems as if the developed countries have left the developing states with little choice but to adhere to global rules in order to minimize costs or maximize gains. Indeed, the free movement of capital has two rules. Capital will move to places in which the return on investment is the highest, creating competition among states that can attract these investments. And, if a major financial crisis occurs, states may suffer from contagion effects, in which the outflow of capital from one developing country causes a similar trend in other developing countries. Therefore, emerging markets can distinguish themselves from the others by working for a higher investment grade ranking by emphasizing good governance and institutionalizing the rules and regulations espoused by the developed countries and the IFIs. Conclusion Advocates of neoliberal economics assert that removing "trade barriers [will] boost the world economy by nearly $1.9 trillion: the equivalent of adding two more Chinas to the world economy. All countries would gain from further multilateral liberalization" (Moore 2001). Yet, trade liberalization will benefit the developed countries more given that they already possess a comparative advantage in producing high-value-added products and control foreign direct investment. This essay claims that in our era of globalization, competitiveness has become a major concern for states. On the one hand, states want to enhance the competitiveness of their own firms and MNCs at the expense of foreign firms for the sake of wealth. On the other hand, the essence of globalization with its time and space shrinkage means that states have to take into account events occurring in other states. The developed countries face tough competition from developing states due to the abundant cheap labor in the latter, the expanding range of goods they can produce, the rise in the ratio of capital to labor in the South, and so on. These factors improve the terms of trade for the South over the North. Therefore, the developed countries seek to expand global governance into the South in order to limit the strategies the South can use to improve competitiveness and to help MNCs from the North invest freely in the South. Expanding global governance involves installing domestic institutions in the South that will bind the developing states to global regulations. As this essay suggests, such a process cannot be achieved without the South's consent. References
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