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Lidia Garcia Chach

Professor Michael Allen

International Political Economy

30 September 2022

Governing the Global Economy Reading Digest

Globalization developed rapidly in the last few decades resulting in economic, social,

political, and cultural integration. The impact of globalization has influenced the interaction of

states and their economies in positive and negative ways. For example, the globalization of

International Finance has made it difficult to monitor and control International Banking and the

transnational flows of goods and services. In Governing the Global Economy, the political

economist Ethan Kapstein breaks down the actions that many governments have taken to manage

the economic and political consequences of the globalization of international finance. He writes

about banks and their relations with various governments and pays special attention to

intergovernmental efforts to supervise and regulate banking operations.

One of the problems the author starts analyzing in the book is how the term

"globalization" challenges the relationships between states and their economies and how they

operate on an international level. More and more economies are becoming interdependent,

allowing for the flow of goods and services, causing uncertainties for the future of those living in

these economies. In chapter one, Governments and Global Markets, Kapstien starts by stating

how the term "globalization conveys the widely held belief that we are living in a borderless

world"(pg. 1). The implication of such a term suggests that states have no control over the flow
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of goods and services, making them appear weak and powerless. If states cannot ensure their

citizen's interests, they have failed and therefore need to evaluate their influence as a state.

In this chapter, Kapstien analyzes the relationship between the states and their role in

international finances. He believes that if he can prove that states are responding to the

challenges posed by globalization, it means that "they are the most important actors and play a

key role in governing the other sectors of the global economy"(pg. 2). This idea implies that the

state might have more power than we assumed in international finances and the global economy.

He argues that "states have responded to financial globalization through the development of

international cooperation based on home country control and that it is a two-level approach"(pg.

2). By 'International Cooperation, he means that states have reached formal or informal

agreements to supervise the financial marketplace and that through 'home country control," they

are responsible for defining their national financial institutions and how to regulate them. He

believes in the two-level approach, which means that any policy moved to the international level

is the product of domestic negotiation. Here he highlights the importance of domestic politics in

the era of globalization.

He explains that in recent years, many industries have faced the challenge of losing their

"National Identity" because of international expansion. Due to the fast pace of globalization,

these industries had to scatter around in search of capital, market, labor, and technology to

survive. The state's power to control domestic economic activity has been in question and is at

risk because citizens do not feel protected from the threats posed by international expansion. The
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author states that "conflicts between nation-states and the international economy are nothing

new"(pg. 3). He points out that the conflict between the nation-states and the international

economy is an ongoing problem that economists have studied. He uses the work of Eugene

Staley and Richard Cooper, who analyze the tensions between States and International markets,

to explain the solution. Kapstien cites Richard Cooper in his classic work of The Economics of

Interdependence, where Cooper suggests that to fix the relationship between the two, the

domestic goals of the state need to align with its international goals to find a balance. Cooper

also believes that to achieve this, "it would require increased policy coordination among the

major industrial powers"(pg. 3). The proposition asks for the major industrial powers to work

together to define their policies regarding commercial practices.

The author also states that the rise of multinational corporations is a threat to the

management of economic policy because the "firms responsible for product development for

both goods and services have created business structures that appear to put them beyond the

reach of any single public authority"(pg. 3). In the age of multinational corporations, technology

has been a key to creating these business structures and shaping the way firms interact with each

other. He points out that finance is the most global in its orientation and operation because of the

technological advances in how it can operate from anywhere. Nowadays, "transactions are linked

in an electronic network and as consequence borders and territories have become irrelevant"(pg.

5). These electronic networks have shifted how firms interact and have made it difficult to

monitor and control international banking. The government also has limited authority over the

value of currencies or monetary policies. The author points out that an issue present in the mind
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of nation-states is how "banks have accumulated the bulk of their earnings outside their home

country"(pg. 4). This is a factor that contributes to the idea of how nation-states are losing their

"National Identity." It challenges the power of the nation-states and their ability to control

International Banking and secure their citizen's interests.

Throughout this chapter, the author analyzes how the state responds to the globalization

of finance and its consequences while also paying attention to the state's regulatory response to

international banking. Kepstien points out that "states do not trust the financial marketplace to

produce outcomes that are always in their interest and that multinational banks still depend on

the state to gain market access and to "level the playing field" of the international

competition"(pg.). Here we see how multinational banks still depend on the states, which

supports Kepstien's argument that states might have more power than we assumed in

international finances and the global economy. He also points out that there is no more

distinction between economics and foreign policy, where he breaks down the reasons and

provides evidence to support his claim. In the era of globalization, we see the patterns of

interaction between nation state and international banking.

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Works Cited

Kapstein, Ethan. Governing the Global Economy: International Finance and the State. Harvard

UP, 1998.