Page 49 - Global Political Economy_Understanding The International Economic Order

CHA PTER T WO
interaction of the economic and political forces that provide the dy-
namics of the international economy.
Since the mid-1970s, the size of international financial flows has
grown to hundreds of billions of dollars a day. These immense capital
flows can easily overwhelm national economies, as they did the Italian
and British economies in 1992 and many other economies in the late
1990s. Increasing integration of global financial markets has caused
national governments to surrender a portion of their economic auton-
omy to global market forces. Although a government may pursue
inappropriately expansionary economic policies for a time, powerful
market forces will eventually overturn these policies. The huge out-
flow of capital from Italy and Great Britain in 1992 and subsequent
devaluations of their currencies forced both nations to withdraw from
the Exchange Rate Mechanism (ERM), although Italy eventually re-
turned.
Many observers believe that the September 1992 financial crisis
demonstrated the triumph of transnational economic forces and eco-
nomic globalization over the nation-state. In this popular and influ-
ential interpretation, the integration of global financial markets and
the resulting huge flows of capital across national boundaries have
led, in the words of one enthusiastic writer, to “the end of geogra-
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phy.” Some commentators allege that national governments are rap-
idly losing their economic autonomy and have even become hostage
to global market forces and the whims of international speculators.
Some argue that if a national government fails to heed the interests
of the controllers of international capital, the errant government will
not be able to obtain the capital required to carry out its economic
and political plans. International capital markets are alleged to have
created a web of economic interdependence that has transformed the
nature of international affairs and destroyed the economic and politi-
cal independence of nation-states. Hence, many have concluded that
markets are firmly in control of the world economy. Some believe
that the 1997 East Asian financial crisis supports this conclusion.
An alternative interpretation of the earlier 1992 crisis emphasizes
the role of government decisions and political developments in con-
vincing international investors that the currency situation in Western
Europe was highly unstable. The July 1990 decision to eliminate in-
tra-European barriers to capital flows had increased the risk of cur-
rency speculation that could cause exchange rate disequilibria. This

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Richard O’Brien, Global Financial Integration: The End of Geography (London:
Pinter Publishers, 1992). Published for the Royal Institute of International Affairs.
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