Today's Economic Governance: Tracing the Demise of Embedded Liberalism

Image By: International Monetary Fund

During the 1930s, the international political economy regressed to economic nationalism and entered the propelling spiral of beggar-thy neighbour protectionism. Countries abandoned the gold standard and sought to enhance competitiveness via exchange rate depreciation. By doing so, states would circumvent the multilateral norms embedded in the international political economy, jeopardizing its stability. Essentially, domestic welfare goals and interstate economic rivalry took precedence over the stability of the international political economy. As a result of states’ predilection for global economic contraction and solving their own balance of payments issues, domestic policies were implemented at the benefit of each nation’s own citizens at the detriment of other states. As a result, the world political economy would collapse during the late 1930s, and it would leave states eager to create a new macroeconomic regime that abstained from the issues witnessed in the interwar years.

After the destruction of the Second World War, Western democracies set in place two main priorities. The first item on the political agenda was to achieve the level of economic growth that existed prior to the First World War. Moreover, it was critical for states to foster economic and social reform through policies “embedded” in the national management of the economy. The second was to create new macroeconomic regimes, such as GATT and Bretton Woods, which would create institutions that foster greater economic interdependence between states. Thus, the Bretton Woods conference sought to reconcile the tensions between the desire for domestic autonomy and the promotion of multilateralism at the international level. On top of that, John Ruggie argued that the Bretton Woods Conference had two main objectives. The first was evading the subordination of domestic economic activities to the stability of the exchange rate embodied in the classical gold standard. The second was to prevent domestic politics from undermining the stability of the international political economy. This is the compromise of embedded liberalism - allowing states to freely pursue Keynesian growth policies at the domestic level while not compromising the stability of the international system at large. It would be embedded liberalism - a shared “social purpose” where states would commit to multilateralism and domestic interventionism that would undergird the normative framework of the Bretton Woods system. The framework was to be guided by free trade internationally, yet national management of the economy would be conducted by the state.

The Bretton Woods conference became infamous for the establishment of the International Monetary Fund and the General Agreement on Tariffs and Trade. Furthermore, the International Monetary Fund was designed to help states cope with disequilibria. For example, the IMF has the power to provide resources to a state in need of a way of financing their deficit in current payments. Another important design feature of the IMF is that the US dollar is the “de facto” currency of the international system. These features, amongst a litany of others, helped promote growth of international trade and the stability of international payments. The overall aim of its institution was the restoration of multilateralism and economic competition that was lost in the interwar years. The General Agreement on Tariffs and Trade (GATT) was also integral to the Bretton Woods regime. However, GATT lacked structural organization, and was simply an elaboration of principles and norms that states abided by. For example, a significant tenet of GATT was that it allowed states to invoke temporary safeguards to prevent harm to domestic industries in the event of a sudden surge in imports. 

Although the Bretton Woods system and GATT evolved in the 1970s, embedded liberalism did not disappear. It is true, however, when Bretton Woods and GATT evolved, many components of these regimes changed. So, how is embedded liberalism still pervasive in economic governance? Most obviously, the IMF took on a prominent role in the 1980s and 1990s in Latin America, Asia and Africa with its implementation of Structural Adjustment Programs which promoted neoliberal goals. Moreover, the conditionality provision of the IMF has transitioned from mandating capital controls to neoliberal Structural Adjustment Programs. The trend towards neoliberalization at the international level was still accompanied, however, by commitments to the social purpose of embedded liberalism. For example, after the 2008 Financial Crisis, soft-law international financial standards were strengthened in ways that combined new kinds of liberal multilateralism, such as the creation of G20, albeit a form of “ad-hoc embedded liberalism,” and even active support for national management of the economy. Additionally, the more recent COVID-19 pandemic has illustrated that OECD countries are heavily committed to social spending. Furthermore, in 2019, the United States spent 18.7% of their GDP on social spending whereas Canada would spend 17.3% of their GDP towards spending, which remains slightly below the OECD average. Although both countries are similar social spenders, their social policy architectures are remarkably different. Canada relies on universal-based services whereas the United States relies on a mix of social insurance and social assistance. Therefore, although both countries could practice embedded liberalism to a similar extent, the way in which they do so can differ because both states have distinct social policy frameworks. 

While the demise of embedded liberalism in the 1970s marked the end of the Bretton Woods system, it did not disappear but instead has coexisted with neoliberalism. At the domestic and international level, embedded liberal norms are supplemented with neoliberalism. However, the degrees to which states abide by embedded liberal norms vary. The OECD average for social spending is just over 20% of GDP whereas Canada and the United States lag behind this number by a couple percentage points. Additionally, the way in which embedded liberalism is practiced can vary. The United States and Canada are both liberal welfare regimes but have moderately different social policy architectures.