Showing papers on "Economic interdependence published in 1992"

Monetary and Portfolio-Balance Models of Exchange Rate Determination

Abstract: “Monetary and Portfolio-Balance Models of Exchange Rate Determination” was a survey of empirical models of the 1970s, published in Economic Interdependence and Flexible Exchange Rates , edited by J. Bhandari (M.I.T. Press: Cambridge), in 1983. It is here supplemented with a brief epilogue to update the literature to 1987, including some skeptical observations on recent claims that “random walk” results constitute evidence in favor of an “equilibrium” model of the exchange rate.

Fiscal Policies and the World Economy

Abstract: Part 1 Prologue: stylized facts on fiscal policies and international economic interdependence. Part 2 Traditional approaches to fiscal policies and international economic interdependence: the income-expendiuture model - fiscal policies and the determination of output fiscal policies and international capital mobility and the income-expenditure model. Part 3 Elements of intertemporal macroeconomics: the composite-commodity world the multiple-good world. Part 4 An intertemporal approach to fiscal policies in the world economy: government spending budget deficits with nondistortionary taxes - the pure wealth effect an exposition of the two-country overlapping-generations model. Part 5 Distortionary tax incentives - concepts and applications: equivalence relations in international taxation budget deficits with distortionary taxes fiscal policies and the real exchange rate capital income taxation in the open economy. Part 6 Stochastic fiscal policies: international stock markets and fiscal policy. Part 7 International spillovers of tax policies - a simulation analysis: spillover effects of international VAT harmonization spillover effects of budget deficits.

World Trade Rules and Environmental Policies: Congruence or Conflict?

Abstract: INTRODUCTION(1)Proposition 1: Protection of the environment has become exceedingly important, and promises to be more important for the benefit of future generations. Protecting the environment involves rules of international co-operation, sanction, or both, so that some government actions to enhance environmental protection will not be undermined by the actions of other governments. Sometimes such rules involve trade restricting measures.Proposition 2: Trade liberalization is important for enhancing world economic welfare and for providing a greater opportunity for billions of individuals to lead satisfying lives. Measures that restrict trade often will decrease the achievement of this goal.These two propositions state the opposing policy objectives that currently pose important and difficult dilemmas for governments. This type of "policy discord" is not unique; there are many similar policy discords, at both the national and the international levels, that governments must confront.(2) Indeed, there is some evidence that environmental policy and trade policy are complementary, at least in the sense that increasing world welfare can lead to citizen demands and governmental actions to improve protection for the environment. The poorest nations in the world cannot afford such protection, but as welfare increases protection becomes more affordable.(3)An unfortunate development in public and interest group attention to trade and the environment is the appearance of hostility between proponents of the two different propositions stated above. The hostility is misplaced because both groups will need the assistance and cooperation of the other group in order to accomplish their respective policy objectives. Of course, some of this tension is typical of political systems. Political participants often seek to achieve opposing objectives and goals. Each side may endorse legitimate goals, but when the goals clash, accommodation is necessary.To some extent, the conflicts between the trade liberalization proponents and the environmental protection proponents derive from a certain "difference in cultures" between the trade policy experts and the environmental policy experts. Oddly enough, even when operating within the framework of the same society, these different "policy cultures" have developed different attitudes and perceptions of the political and policy processes, and these different outlooks create misunderstandings and conflict between the groups.(4)These problems are part of a broader trend of international economic relations that is posing a number of perplexing and troublesome situations for statesmen and policy leaders. Part of the difficulty inevitably results from the growth of international economic interdependence.(5) Such interdependence increases trade in both products and services across national borders and brings many benefits to participating countries. International interdependence also results in efficiencies and economies of scale that can raise world welfare (but not necessarily everyone's welfare, because some groups will be required to adjust in the face of increased competition).(6) This trend towards increased international economic interdependence requires a different sort of attitude towards government regulation. Within a nation, government regulations in such areas as consumer protection, competition policy, prudential measures (of banking and financial institutions), health and welfare (for example, alcohol and abortion control), and human rights (for example, prohibiting discrimination), are all designed by governments to promote worthy policies that sometimes clash with market oriented economic policies. When economic interdependence moves a number of these issues to the international scene, they become (at least in today's defective international system) much more difficult to manage. The circumstances and the broader scope of the international system create in many contexts (not just those concerning environmental policies) a series of problems and questions including:--General questions of effectiveness of national "sovereignty" in the face of a need to cooperate with other countries to avoid some aspects of the "prisoners dilemma"(7) or "free rider"(8) problems. …

World Trade Rules and Environmental Policies: Congruence or Conflict?

Abstract: INTRODUCTION(1)Proposition 1: Protection of the environment has become exceedingly important, and promises to be more important for the benefit of future generations. Protecting the environment involves rules of international co-operation, sanction, or both, so that some government actions to enhance environmental protection will not be undermined by the actions of other governments. Sometimes such rules involve trade restricting measures.Proposition 2: Trade liberalization is important for enhancing world economic welfare and for providing a greater opportunity for billions of individuals to lead satisfying lives. Measures that restrict trade often will decrease the achievement of this goal.These two propositions state the opposing policy objectives that currently pose important and difficult dilemmas for governments. This type of "policy discord" is not unique; there are many similar policy discords, at both the national and the international levels, that governments must confront.(2) Indeed, there is some evidence that environmental policy and trade policy are complementary, at least in the sense that increasing world welfare can lead to citizen demands and governmental actions to improve protection for the environment. The poorest nations in the world cannot afford such protection, but as welfare increases protection becomes more affordable.(3)An unfortunate development in public and interest group attention to trade and the environment is the appearance of hostility between proponents of the two different propositions stated above. The hostility is misplaced because both groups will need the assistance and cooperation of the other group in order to accomplish their respective policy objectives. Of course, some of this tension is typical of political systems. Political participants often seek to achieve opposing objectives and goals. Each side may endorse legitimate goals, but when the goals clash, accommodation is necessary.To some extent, the conflicts between the trade liberalization proponents and the environmental protection proponents derive from a certain "difference in cultures" between the trade policy experts and the environmental policy experts. Oddly enough, even when operating within the framework of the same society, these different "policy cultures" have developed different attitudes and perceptions of the political and policy processes, and these different outlooks create misunderstandings and conflict between the groups.(4)These problems are part of a broader trend of international economic relations that is posing a number of perplexing and troublesome situations for statesmen and policy leaders. Part of the difficulty inevitably results from the growth of international economic interdependence.(5) Such interdependence increases trade in both products and services across national borders and brings many benefits to participating countries. International interdependence also results in efficiencies and economies of scale that can raise world welfare (but not necessarily everyone's welfare, because some groups will be required to adjust in the face of increased competition).(6) This trend towards increased international economic interdependence requires a different sort of attitude towards government regulation. Within a nation, government regulations in such areas as consumer protection, competition policy, prudential measures (of banking and financial institutions), health and welfare (for example, alcohol and abortion control), and human rights (for example, prohibiting discrimination), are all designed by governments to promote worthy policies that sometimes clash with market oriented economic policies. When economic interdependence moves a number of these issues to the international scene, they become (at least in today's defective international system) much more difficult to manage. The circumstances and the broader scope of the international system create in many contexts (not just those concerning environmental policies) a series of problems and questions including:--General questions of effectiveness of national "sovereignty" in the face of a need to cooperate with other countries to avoid some aspects of the "prisoners dilemma"(7) or "free rider"(8) problems. …

Market-oriented Systemic Transformations in Eastern Europe: Problems, Theoretical Issues, and Policy Options

Abstract: A: Characteristics of the Centrally Planned Economy and Systemic Collapse.- 1. The Rise and Fall of Marxist Theory and Socialism.- 1.1 The Crisis of the Socialist Systems in Eastern Europe.- 1.2 Some Stylized Facts.- 2. Distortions of Socialist Economics.- 2.1 The Monopoly Problem.- 2.2 Innovation Gap, Inefficient Investment and Stagnation.- 2.3 State-administered Allocation of Goods and the Pricing Rules.- 2.4 Tendency to Build up Reserve Capacities.- 2.5 Quasi-inflation in the Socialist Economy.- 2.5.1 Administered Prices and Preferential Supply in the Official Economy.- 2.5.2 The Dynamics of the Socialist Shadow Economy.- 2.5.3 Differentiated Product Supply in a Command Economy.- 3. Stagnation and Collapse.- 4. Dramatic Changes in Eastern Europe.- Appendix Al: Quality Gaps in Socialism Modelled in a SALOP-SALANT Approach.- B: Inefficiency, Instability, and Restricted Options.- 1. Introduction.- 2. The Scope of Transformation and the Sequencing Issue.- 2.1 Dimensions of the Transformation Problem.- 2.2 Distortions and the Need for Efficiency and Stabilization.- 2.3 The Inefficiency Problem.- 2.3.1 The Starting Point - Inefficiency and Adjustment Costs.- 2.3.2 Neutralizing Distortions as a Second-Best Strategy.- 2.4 Monetary Stabilization: Need, Process and Effects.- 3. Restricted Options in Transforming Socialist Economics.- 3.1 Fiscal Policy and Monetary Stabilization.- 3.2 Side-Constraints: The Income Distribution Issue.- 3.3 Joint Systemic Transformation and Regional Cooperation?.- 3.4 Some Lessons from the Asian NICs and Latin America.- C: Privatization and Foreign Investment in Eastern Europe.- 1. In Search of Private Owners and Entrepreneurship.- 1.1 The Economic Challenge of Privatization.- 1.2 Early Developments in Privatization and Foreign Investment in Eastern Europe.- 2. Privatization and Resistance to Systemic Change.- 2.1 Basic Issues of Privatization.- 2.2 Macroeconomic, Organizational and Strategic Problems.- 2.2.1 Political Rationale versus Economic Rationale.- 2.2.2 Devaluation, Wealth and Welfare.- 2.2.3 Restitution without Privatizing Foreign Debt?.- 2.2.4 Compensation vs. Restitution.- 2.2.5 Ownership Structure Problems.- 2.2.6 Strategics for Privatization.- 2.3 Rent-Seeking and Wage Bargaining: The Role of Privatization.- 2.4 Asset Prices and Sequencing.- 3. Economic Challenges of Foreign Direct Investment in Eastern Europe.- 3.1 Some Links between Privatization and FDI.- 3.2 Role of FDI in Economic Development: Some New Aspects.- 3.3 Information Costs and Common Investment Policies.- 3.4 How Significant Can Foreign Direct Investment Be?.- 3.5 Regional Diversification.- 3.6 "C1ub Goods" in Host Countries.- 4. Normative Conclusions for Policy Concepts.- Appendix C1: Competition and Prices in Systemic Transition.- D: Foreign Economic Liberalization in Eastern Europe.- 1. The Challenge of Foreign Economic Liberalization.- 1.1 Convertibility.- 1.2 Expected Macroeconomic Effects of Foreign Economic Liberalization.- 2. Strategic Role of Foreign Economic Liberalization.- 2.1 Import Competition.- 2.2 Export Liberalization.- 2.3 Sequencing and Foreign Direct Investment.- 2.3.1 Demonopolization.- 2.3.2 Strategic Role of FDI.- 2.4 Links between Trade Liberalization and Foreign Direct Investment.- 3. Liberalization and Economic Integration.- 3.1 The Role of the EC.- 3.2 West European Integration and Eastern Europe.- 4. Role of a New Marshall Plan.- Appendix D1: Ratio of Consumer Surplus to Producer Surplus.- Appendix D2: A New Supply-augmented IS-LM Model.- Appendix D3: Exports to European A Partners as a Percentage of Total Exports.- E: East-West Problems in Europe and North-South Conflicts.- 1. The New Europe.- 2. Economic Aspects of Instability and Conflict in Europe.- 2.1 Is Europe Returning to the Interwar Period?.- 2.2 Replacing Coercion with Positive Economic Interdependence.- 2.3 Politico-economic Aspects of the East European Transformation.- 2.4 The Role of the New Germany.- 3. North-South Conflicts and Global Aspects.- 3.1 "De-socialization" of Developing Countries: Changing North-South Conflicts.- 3.2 New Global Security Structures.- 3.3 Proliferation Problems and the Need for a New Schuman Plan.

Rules and Discretion in International Economic Policy

Abstract: Economic interdependence offers the potential for raising global welfare, but there is a fuzzy boundary between national interests and global objectives in the economic policy area. This paper examines the boundary area. It concludes that all international economic regimes must entail a mix of rules and discretion, and it considers the most appropriate weights to be given to rules and discretion.

China and Japan: Politics Versus Economics

Abstract: Sino-Japanese relations suffer from the heritage of Chinese bitterness over Japanese expansionism and aggression. This has put a political burden on economic complementarity that places Japan foremost in China's economic modernization in terms of trade, loans, and aid, and second in investment. In addition to the political burden, the economic interdependence is highly asymmetrical, being far more valuable for China than for Japan. Since the Tiananmen massacre, however, economic pragmatism has prevailed in Beijing as a result of Tokyo's muting its criticism of the event and moving to lift sanctions imposed by the Western industrial capitals. Yet Chinese memory and suspicion, heightened by a dispute over islands in the East China Sea, remain.

Integration Without Institutions: The NAFTA Mutation of the EC Model and the Future of the GATT Regime

Abstract: Integration may be viewed as an evolutionary outgrowth of heightened social and economic interdependence brought about by advances in technology. As persons, goods, capital, services and ideas cross artificial national frontiers at increased rates of speed, the wisdom of imposing disparate governmental regulatory measures is not only called into question because of a variety of factors relating to efficiencies and economies of scale, but the authority of competing national power structures to regulate these flows is called upon for examination.The NAFTA itself is, like the EC, an experiment. It will provide a model for other nations which are interested in reducing trade barriers, but not in creating significant central institutions or in harmonizing laws and regulations. The EC model is a comparative success. In addressing problems confronted by the new NAFTA,solutions may be found by examining the EC experience. Of course, the EC model itself is imperfect and is continually being refined. Perhaps the NAFTA will benefit by observation of the EC as it works its way through the obstacles on the path to completed integration.Though the ambition of the NAFTA regarding the creation of regional institutions is rather modest, and the arrangement is lacking in mechanisms for the harmonization of law, the planting of the acorn of regional institutions in the NAFTA may prove to be a worthwhile task, in the hope of its long term growth into a solid oak of institutions capable of creating a complete and effective NAFTA regional arrangement.

Integration without institutions: the NAFTA mutation of the EC model and the future of the GATT regime

Abstract: Integration may be viewed as an evolutionary outgrowth of heightened social and economic interdependence brought about by advances in technology. As persons, goods, capital, services and ideas cross artificial national frontiers at increased rates of speed, the wisdom of imposing disparate governmental regulatory measures is not only called into question because of a variety of factors relating to efficiencies and economies of scale, but the authority of competing national power structures to regulate these flows is called upon for examination.The NAFTA itself is, like the EC, an experiment. It will provide a model for other nations which are interested in reducing trade barriers, but not in creating significant central institutions or in harmonizing laws and regulations. The EC model is a comparative success. In addressing problems confronted by the new NAFTA,solutions may be found by examining the EC experience. Of course, the EC model itself is imperfect and is continually being refined. Perhaps the NAFTA will benefit by observation of the EC as it works its way through the obstacles on the path to completed integration.Though the ambition of the NAFTA regarding the creation of regional institutions is rather modest, and the arrangement is lacking in mechanisms for the harmonization of law, the planting of the acorn of regional institutions in the NAFTA may prove to be a worthwhile task, in the hope of its long term growth into a solid oak of institutions capable of creating a complete and effective NAFTA regional arrangement.

The Political Economy of Global Conflict

Abstract: The global conflict process and the global economy are viewed as being interconnected at the global level through a process that has distinctive characteristics and a momentum of its own. This political economy of global conflict is examined from a broad-gauged, historical, and dynamic perspective. Evidence is presented from the 1954-1980 time period that supports the viewpoint that changes in civil war, international war, size of the global economy, economic interdependence, and economic hegemony are interrelated in a complex behavioral pattern with higher order lag structures, autoregressive components, and multivariate relationships involving some feedback mechanisms.

Canada-China government relations : political differences versus economic relations in comparison with Japan-China relations

Abstract: ACKNOWLEDGEMENTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . v TABLE OF CO- v i LIST OF TABLBS viii A. The China Issue The Middle Powers' Dilemma.... B. The Trudeau Era and The Canadian Formula........ C. The Sino-Japanese Relationship: Trade First, Politics Second SINO-CANADIAN AND SINO-JAPANESE TRADE BELATIONS.... A. Canada China Trade Relations: A Four Phased Development B. China's Economic Refoms and Its Impact on Bilateral Relations C. Japan China Trade Relations: Vulnerability Versus Sensitivity D. Comparison of Trade Policies between Canada and Japan with China Canada's Governaent Economic Policies Versus Japan's Private Sectors' Zeal........ Canada's Short Range Strategy Versus Japan's Long Term Business Planning......... Canada's Natural Resources Versus Japan's Manufactured Products IV TRANSFORMATION OF ECONOMIC POWEB 117 A . International Economic Interdependence ......... 123 B . Linkage and Economic Power 126 V CONCLUSIONS 132 APPENDICES 1 Minutes on Talks Between Dietman Matsurura Keneo and Premier Zhou En-lai 139 2 Joint Statement of the Government of Japan and the Government of the People's Republic of China 140 3 Canada Establishes Diplomatic Relations with the Chinese People's Republic.. 143 BIBLIOGRAPHY Methodolog.~r 145 Sino-Canadian and Sino-Japanese Belations 148

Rules and Discretion in International Economic Policy

Abstract: Economic interdependence offers the potential for raising global welfare, but there is a fuzzy boundary between national interests and global objectives in the economic policy area. This paper examines the boundary area. It concludes that all international economic regimes must entail a mix of rules and discretion, and it considers the most appropriate weights to be given to rules and discretion.

International Economic Interdependence, Patterns of Trade Balances and Economic Policy Coordination

Abstract: Preface - Introduction and Major Conclusions E.S.Phelps - Trade Balance Patterns as Global General Equilibrium: The Seventeenth Approach to the Balance of Payments R.Mundell - PART 1: DOMESTIC ECONOMIC POLICY AND TRADE BALANCE - The Real Exchange Rate Under Alternative Nominal Exchange Rate Regimes E-M.Claassen - The Economic Effects of Expected Fiscal Policy in Small Open Economies J.Schr der - The 'Pass-Through Puzzle': The Missing Prince from Hamlet J.N.Bhagwati - PART 2: INTERDEPENDENCE BETWEEN AREAS AND BALANCES OF PAYMENTS - International Economic Interdependence and Trade Balances L.Paganetto - A Framework to Develop Measures of Interdependence and Protectionism P.L.Scandizzo - North-North and North-South Debt Crises and the Role of Trade Adjustments P.C.Padoan - Latin-American Debt, US Role in the Transmission of North-South Linkages and World Trade C.W.Reynolds - The Unified European Market and Trade with Latin America: Emargination or Development? M.Bagella - PART 3: MARKETS, MONETARY AND FISCAL POLICY, INTERDEPENDENCE AND INTERNATIONAL COORDINATION OF ECONOMIC POLICIES - Exchange-Rate Regimes and the Desirability of International Cooperation C.Carraro & F.Giavazzi - Prices and Exchange Rates: What Theory Needs to Explain A.Giovannini - International Economic Coordination from Bretton Woods to the G5/G7 Meetings of the 80s A.Colombo - International Economic Interdependence and World Income Distribution G.Palmerio - Evaluation or Actual Mechanisms Worked for External Adjustments, 1985-1988 M.Yoshitomi - Cooperation in Managing the Dollar, 1985-1987: Interventions in Foreign Exchange Markets and Interest Rates E.Gaiotti, P.Giucca & S.Micossi - EMS Membership under Real Exchange Rate Appreciation: Recent Trends in Italian Trade R.de Luzenberger & C.Imbriani - Deficit and Surplus Forever? S.Marris - Index

A Wasted Opportunity: Shortcomings of the Caribbean Basin Initiative Approach to Development in the West Indies and Central America

Abstract: Since it was proposed by President Ronald Reagan in 1982,(1) the Caribbean Basin Initiative(2) (CBI) has been a highly visible component of the United States' Western Hemisphere policy which, despite promises to the contrary, has yielded neither sustained economic development for the nations of the Caribbean and Central America nor significant profit opportunities for companies interested in investing in the region It is also true, however, that the flaws of CBI are not of such a character as to have a negative impact on the economies of the region(3) In fact, the Initiative has had a positive effect on certain economies that were particularly well-equipped to take advantage of it[4] However, for the most part, the Caribbean Basin Initiative embodies a wasted opportunity for the United States to participate in the economic vitalization of its neighbors to the south US policy motives in the Caribbean and Central America are manifold, including political and national security concerns, economic interdependence, and outright humanitarianism(5) The Caribbean Basin region in particular forms the nation's "third border,"(6) and contains vital sea lanes, such as the Panama Canal, through which more than three quarters of the United States' oil imports must flow(7) The Caribbean Basin is also a significant market for US exports,(8) and it is our second largest source of illegal immigration after Mexico(9) Prosperity in the region would enable the United States to safeguard these interests and reduce the unwanted incentives produced by narcotics production and transportation from or through the region(10) Thus, it is of vital importance for the United States to assist in the economic revitalization of the Caribbean and Central America(11) CBI's reliance upon the invisible hand(12) of the marketplace is misplaced in a region possessing woefully inadequate institutions to support such a system First, free trade, without the structural supports that must necessarily accompany it, is unlikely to have a substantial impact on the underdeveloped economies of most Basin nations Second, although US policy was originally motivated by a perceived need to maintain the hegemony between the United States and the threat of Communism, the United States has not shifted in its approach to capitalize on the demise of the Cold War Third, although CBI was designed to stimulate business interests in the Caribbean region, the Reagan administration's confrontational foreign policy in Central America, where the bulk of CBI resources were concentrated, actually threatened the "restoration of investor confidence"(13) In sum, it appears that the emphasis on free trade manifested by CBI is not directed towards the objective of economic health of our underdeveloped neighbors to the south as was originally claimed Rather, free trade itself has become the ultimate objective This Note will examine CBI as first conceptualized in 1982 and as subsequently modified Next, the Note will identify the barriers that prevent Caribbean and Central American nations from achieving economic health and evaluate the effectiveness of the Initiative in dismantling these barriers Finally, the Note will propose certain modifications for US policy in the Caribbean region that will further the objective of sustained economic development Historical and Economic Background Although historically impoverished,(14) the countries of the Caribbean and Central America have been particularly affected by the vicissitudes of the world oil market and declining prices of their traditional major exports such as sugar, coffee, and bauxite This situation has exacerbated chronic structural deficiencies and has caused high unemployment, declining growth in gross domestic product, huge balance-of-payments deficits, and a growing liquidity crisis(15) "This economic crisis threatens political and social stability throughout the region, and creates conditions which Cuba and others seek to exploit through terrorism and subversion …

Economic Containment: The Strategic View on East-West Economic Relations

Abstract: In Part One of this study we have discussed Functionalist doctrines of East-West economic relations. Based upon the economic approach of laissez-faire, this perspective tends to underplay the direct link between economics and politics, that is to say, between the economic power and the political power of a nation. Economic relations between states are only indirectly linked with politics in a Functionalist manner: when every country pursues its own economic interests, an international division of labour will automatically come about, leading up to the Benthamite utopia, providing ‘the greatest happiness for the greatest number’.

Latin America and the internationalization of the world economy

Abstract: This article questions the generally accepted theory that the international economy is being polarized into three regional nuclei: the United States, the European Economic Community, and Japan. In the light of trade and financial trends In the 1980s, it is maintained that there is no evidence of the formation of three trade blocs. Economic Interdependence, as measured by the relation between Intra-regional trade and the gross domestic product, shows that the EEC is the only one of the three centres which could conceivably fulfil the conditions for assuming the creation of a bloc. In global terms, the growth in trade in goods in each one of these groups during the 1980s favoured trade with the rest of the world more than intra-regional trade.

International Economic Interdependence and Trade Balances: Introductory Notes

Abstract: Notwithstanding the progress made in 1988, the size and the persistence of the trade deficit of the USA and the greater part of the developing countries, together with the corresponding surpluses of Japan and Germany, represents a challenge to the interpretation of the international adjustment mechanisms at the theoretical level and, at the practical level, to the attempts that are being made to achieve international coordination of economic policy.

Economic Interdependence: The Functionalist View on East-West Economic Relations

Abstract: It is a law of physics that close contact between rapidly moving bodies results in friction; a scientific notion corroborated by the saying ‘familiarity breeds contempt’. In the social sciences and humanities, however, such ‘laws’ do not exist. People and societies tend to evade rigid regularities; they are not subject to one, relatively simple all-embracing law which guides their behavior. Consequently, apart from ‘familiarity breeds contempt’, one could suggest a plethora of other hypotheses, such as intensive communication leads to mutual understanding, or trade fosters peace. Both postulates are based on pre-theory, rather commonsensical observations on the relationship between the level of contact and the amount of conflict among people and nations. We will here focus on the theoretical presumptions pertaining to the strategies of East-West economic interdependence.

The Origins of Economic Interdependence: A Historical Note on Peace Through Trade

Abstract: In this chapter we will present an overview of those historical contentions which have, more or less intuitively, assumed a positive correlation between the level of trade and the chances for stable peace.1 This chapter serves to indicate that the Functionalist position on the political side-effects of economic relations among nations has a long tradition, and that it is certainly not confined to East-West trade alone. This short historical note intends to enhance our understanding of one of the basic sets of beliefs pertaining to international trade in general, and East-West trade in particular. We will mainly focus on the pre-theory assumptions, under the label ‘peace through trade’. These lines of thought are optimistic about the conciliatory effects of commerce, and many of these arguments are still regularly aired in the debate on the political consequences of East-West trade.

Economic Interdependence as a Strategy: German Ostpolitik Since the Late 1960s

Abstract: Most Functionalist assumptions of economic interdependence center around the idea that ‘free trade’ has a propensity to peace, and since the maintenance of peace is considered the ultimate foreign policy goal, economic relations are appraised positively. However, occasionally ‘free trade’ is not sufficient. Since the desired web of economic ties between East and West can not be woven without overcoming several serious political and economic barriers, economic interdependence has also been pursued as a specific political strategy by consciously stimulating trade. When East-West trade needs some governmental activity in order to gain momentum, be it by government guarantees of credits, the conclusion of trade treaties or by a favorable, relaxed political atmosphere, the conscious guidance and stimulation of interbloc commerce may become the central element of Western economic doctrine. As we have seen in Chapter 4, such Western strategies of economic interdependence were sometimes reminiscent of providing ‘pure aid’, without an equivalent anticipated political counterperformance. Yet, there are several other Western economic policies which foresaw substantial political benefits accruing from intensified East-West economic relations. Based on the assumption that ‘free trade’ (in the sense of ‘intensified trade’) among nations would in time lead up to political conciliation, commerce between East and West has been enthusiastically promoted in order to reap these kind of ‘peace dividends’.