Economic Policy

Internationalization of Economic Policy

At the domestic level, governments now share their economic decision-making authority with central banks and a range of bodies that seek to regulate the financial sector in particular. However, economic policy has become much more internationalized with a complex system of multilevel decision making. Bodies such as the World Trade Organization (WTO) set the rules within which economic activity takes place, while the G-8 and, more recently, the G-20 seek to coordinate the economic policies of major governments. The 27 member states of the European Union (EU), particularly those using the euro, face another regional level of decision making that shapes that economic policy.

This more internationalized system of decision making reflects the increasing internationalization of economic activity. In the period between World War I and World War II, nation-states pursued policies of autarchy in which they aimed for self-sufficiency either within their own national borders or in economic systems that embraced their colonies. These policies of protectionism, combined in some countries with the denomination of their currency in gold—the gold standard—which produced overvalued currencies, undermined international trade and the efficiency gains it could provide through comparative advantage.

After World War II, the world, under the leadership of the United States, sought to move toward a more liberal international economic system, at least within the Western bloc. The so-called Bretton Woods institutions and agreements—the Inter national Monetary Fund (IMF) and the World Bank, along with the General Agreement on Tariffs and Trade (GATT)—sought to create the economic and political space within which this system could operate. In the period between the end of World War II and the 1970s, this system was built around fixed exchange rates, pegged against the dollar backed by gold and by relative capital immobility. These arrangements were not without costs for the United States, but it was often prepared to bear them in the pursuit of broader policy objectives such as underpinning Western economies in the context of the Cold War. Through this period, international trade was stimulated by the reduction of tariffs through the GATT negotiating rounds, although one unintended consequence was that nontariff barriers to trade started to assume a greater importance.

...