International Political Economy Final

Global Value Chains

- fragmented supply chians w/ international dispersed tasks and activities coordinated by a lead firm (MNC) - include transactions between MNC entities (vertical integration) & "arms-length" transactions b/t different firms in different countries (no integration) - not confied to manufacturing (also services) - impact on global trade patterns: 60% of trade now in intermediate goods, ^ intra-industry and intra-firm trade

Interwar Collapse

- gold standard abandoned, and UK hegemony ended - 1920's: collapse of globalization - Great Depression--- world trade declined by 2/3, international capital flows ceased, currency wars (competitive devaluations), regional blocs - emergence of MNCs - mass production (assembly lines) - vertical integration, mass markets, new industries

Role of Power

- hegemonic stability theory (Krasner): open and stable international economic systems are more likely when a hegemonic state is willing and able to take the lead - hegemon exercises power to organize rules and regimes - corollary: system weakens when hegemon falls (interwar period)

Horizontal vs. Vertical Integration

- horizontal: production capabilities duplicated abroad, typically market oriented FDI - vertical: control production of goods & services at different stages of the production process, w/ some affiliates providing inputs to other affilitiates, intermediate goods, intra-firm trade, typically export oriented FDI

Terms of Trade

- ratio of price of exports vs. imports -states w/ ^ power can maintain TOT w/ tariffs, can also use export tax to ^ national welfare - idea of secular decreasing in TOT for primary commodities (combined with infant industry argument)

Why is agriculture a problem?

- rich countries protectionist in areas where poor countries have a CA - Subsidies increase production in rich countries which decrease world prices and revenues for farmers in poor countries

Globalization after 2008

- significant decrease in trade and financial flows - political backlash - economic stagnation - no real increase in trade - capital flows have decreased by 2/3

Explaining Gridlock

- single undertaking, conensus rule, expanding membership, shift in power, increasing complexity: harder issues, diminishing returns, WTO no longer the only game in town

Factors that Facilitate Cooperation

- small # of actors - repeated interactions (iterations) - linkages - reciprocity - information - collective action problems

Collective Action Problems

- smaller groups= easier to organize than larger groups (consumers= large group)

Global Production & MNCs

- states don't trade or produce, companies do - production facilities no longer limited to single countries - operate in 2 or more countries, parent company vs. affiliates -common system of decision making allowing coherent policies & a common strategy across MNC entities

Constructivism

-criticism of rationalism and materialism, no national fixed interests, actors= product of societal interactions - role of norms, beliefs, ideas, ideologies on actors, preferences and behavior

Measuring Development

ncome only? ○ E.g. World Bank - Or structural transformation? - Or "human development"? ○ More recent, broader conception

Neomercantilism

-idea: industry = essential to state power, security and self sufficiency (tech= good, ag= bad) - free trade isn't going to automatically lead to industry expansion (locks in CA and countries can't catch up) - industry policy: promote winding industries, including state investment and ownership - infant industry arguement: "temporary" protectionsism - strategic resources policies (energy mercantilism)

Components of Global Trade

- 80% trade in goods, 20% in services (most trade= manufactured goods) - Europe & smaller countries= usually much more open to trade - gravity model - if you are close to other countries, you will trade with them - china= largest exporter in the world (then U.S. then germnay) - largest trade surplus : China & then Germany (current account deficit) - largest trade deficit: U.S. & then U.K.

Where do refugees go?

- 86% of refugees live in developing countries ○ Turkey, Pakistan, Lebanon (35% of pop), Iran, Ethiopia, Jordan, Kenya

Why is the World Bank (and the IMF) controversial?

- Conditionality - Lending to unsavory regimes - Structural adjustment ○ Painful reforms: austerity measures hurt the poor - Limited results - Big projects with little regard to environment or social consequences - Increased debt

Coordination vs. Collaboration

- Coordination: once decision is taken, no incentive to cheat (battle of sexes, which side of road to drive on, IPE - technical standards) - Collaboration: actors gain by cooperating, but still have incentive to cheat (Prisoners Dilemma, Stag Hunt, IPE- trade)

Why trade?

- Countries can't produce everything they need/want - benefits from specialization (division of labor, leads to economies of scale and cheaper goods) - Comparative advantage- David Ricardo

Developmental Aid

- Official Development Assistance (ODA) ○ O: Official sector (not private charities/NGOs) ○ Bilateral ODA (approximately 70%) § Government agencies (e.g. USAID) ○ Multilateral ODA (approximately 30%) § Multilateral development banks and UN agencies □ E.g. World bank (IDA), IDB, IFAD ○ D: Economic development --- main objective § Not emergency relief, military aid ○ A: Concessional § i.e. low or no interest loans or grants

Where do migrants come from?

- Most come from middle income, not poor countries ○ China, India, Mexico, Russia - Top Sending countries: ○ India, mexico, russia, china, bangladesh - Largest migration corridors: ○ Mexico---US ○ Russia--- Ukraine ○ Bangladesh-India ○ Ukraine-Russia

2 key monetary decisions

- currency regime: fixed or floating, stability/credibilty vs. monetary flexibility - currency level: strong or weak, purchasing power vs. competitiveness

Where do migrants go?

- Most go to rich countries - But only about 1/2 to OECD countries - High numbers in high income non-OECD countries ○ E.g. Saudi Arabia, UAE, Qatar, Singapore - Approximately 2/3 of migrants live in Asia or Europe Top 20 Host Countries - 2/3 of migrants live in just 20 countries - US: largest single host country (47 million) - Followed by: ○ Germany, Russia, Saudi Arabia, UK, UAE, Canada, France

Regional Development Banks

- Multilateral membership ○ Lenders: members beyond the region ○ Regional borrowers - Most dominated by US ○ Foreign policy tool (Cold War and beyond) - Rise of China/BRICS---- new IFIs: a challenge to this system? ○ New Development Bank (2015) § Shareholders: BRICs § HQ: Shanghai ○ Asian Infrastructure Investment Bank (2015) § Largest shareholder: China § HQ: Beijing

Cooperation Issues

- Negative externalities: producers do not bear the full (social) costs of production (others affected) ○ Producers do not "pay" for the pollution they create § E.g. U.S. air pollution affecting Canadians - Emerging "preventive" (i.e. "good neighbor") and "polluter pays" principles

Sectoral Model

- No assumption that gov'ts prefer domestic autonomy - Instead: policy reflects pressures from sector-based interest groups - 4 groups w/ diff preferences over currency regime (fixed/floating) & level (strong/weak) ○ Export-Oriented producers ○ Import-competing producers ○ Nontraded-goods producers ○ Financial services - Export Oriented Producers: ○ Fixed XR: § Dependent on trade (want it to be stable & trade is facilitated by predictability) ○ Weak currency: § More competitive - Import-Competing Producers: ○ Floating XR § Conditions in domestic mkt matters most ○ Weak Currency § Less competition and purchasing power - Nontraded-goods producers [& consumers] ○ Floating XR § Conditions in domestic market matters most ○ Strong currency § Purchasing power - Financial services industry (bankers) ○ Fixed/floating less clear § Dependent on trade, but also profit from XR volatility ○ Strong/weak currency less clear § Strong--- purchase foreign assets § Weak --- better for their lenders (producers)

Global Financial Architecture

- No coherent global rules and institutions for monitoring, regulating, and standardizing financial activity ○ Not like the trade regime - Very fragmented and decentralized regime ○ Many institutions, actors § International financial institutions (IFIs) (formal Ios) § Intergovernmental forums § Trans governmental regulatory networks (standard-setting bodies) § Private credit-rating agencies § Private financial institutions (banks, hedge funds, shadow banking, accounting firms, etc.) ○ Mostly soft law standards § Voluntary regulatory frameworks - International Financial Institutions (IFIs) ○ IMF* ○ Bank for International Settlements (BIS)* ○ Multilateral development banks § World bank § Regional development banks - Transgovernmental regulatory structures (not formal IO's) ○ Voluntary standards ○ E.g.: § Basel Committee on Banking Supervision (BCBS)(1974)* § Financial Stability Board (FSB) (2009)* □ Created by G20 to monitor international financial stability § International Organization of Securities Commission (IOSCO) (1983)

Is Free Capital Mobility a Good Thing?

- No consensus in favor of free capital mobility like there is for free trade - Why? ○ Capital flows can push currencies far above their intrinsic value § ^ trade deficits § Decrease domestic competitiveness ○ Lead to financial crises § Capital flight can devastate economies overnight ("hot money") □ Currency runs --- self-fulfilling prophecy § Sharp ^ in frequency of financial crises since 1973

Why is it hard to agree on climate change?

- North-South Rift ○ US: wants developing countries to contribute, esp. China and India ○ EU/Japan: want greater cuts to GHGs than politically feasible ○ Developing Countries: only recently agreed to "contribute" (but at differential rates) - No cost-effective substitute to fossil fuel - Costs of action will be important, but consequences remain uncertain - Costs: by "us" today--- benefits: to "others" in the future - GHG emissions not directly controlled by governments - Needs truly global effort ○ US/China: together only 1/3 of global CO2 emissions ○ Consequence of US withdrawal ○ China's climate leadership? Uncertain

International Liberal Order

- current: based on U.S. leadership & liberal values - Western creation but extended to the rest of the world after the cold war - Threats: rise of the rest, ^ iliberal powers, leadership vaccum, relative decline of W, Globalization backlash - China: so far has benefitted but will want to shape its future, starting to exercise a leadership role, new insts. where China is the leader (BRICS)

Consumption Indifference Curves

- demand side: w/o trade, consumption= limited by PPF - represent all combinations of goods that have the same utility - downward/concave relationship/diminishing marginal utility - trade: can achieve a shift to a higher indifference curve

PPF

- different combinations of goods a country can produce/supply during some period (opportunity cost)

International Strategic Interactions

- domestic political process sets national policy - OPE often stops here - Interactions within global pol. economy also matters

Flying Geese Pattern

- dynapic CA: industries upgrading overtime - JP--- Asian Tigers--- E AS NICs-- China

Trade as a Prisoner's Dilemma

- each side prefers unreciprocated access to the other's market - Nash equilibrium: both sides prefer to not liberalize, but this is pareto suboptimal

Strategic Trade Policy

- economics of scale in high-tech industries mean world market can only support a few dominating firms - 1st mover advantages-- hard to dislodge, barriers to entry - solution: government intervention problem: beggar they neighbor (retaliation)

Gains from Trade

- economists: free trade is almost always the best policy because it increases aggregate welfare - sources of gains: increasing returns to scale, decreasing monopoly power of domestic firms, product variety and decreasing prices for consumers - note: a static, one time welfare gain

Domestic Institutional Setting

- even intense, well organized interests do not always get what they want - institutions determine how preferences translate into policy - how insulated are decision makers from interest groups? - are there incentives to represent narrow interests vs. the broad national interests

WTO Ag Rules

- excluded until Uruguay Round - Agreement on Ag. (1994): seperate rules for Ag: subsidies, quotas, tariffs, etc. - key prob: farm subsidies - Why would we do this? food security (not really though), really its about the cultural aspect of this (trying to protect small town way of life)

Uruguay Round (1986-1994)

- expanded agenda: inclusion of ag & textile, creation of WTO, investment, intellectual property - marked divisons and increasing role of developing countries - outcome: Marrakesh Agreement--- establishes the WTO - strengthened monitoring and dispute settlement

How does monetary policy impact currency levels?

- expansionary--- decreased value of currency (depreciation)--- decreased XR - contractionary--- increased value of currency (appreciation)--- increased XR

Casino Capitalism?

- "Bretton Woods compromise": market liberalization but with restrictions on capital flows (domestic policy autonomy) - End of BWS--- capital account liberalization ○ Recurrent financial crises - 1980s: Financialization of corporate sector ○ Firms deriving ever greater share of their profits from financial sector ○ Not from real investments - Financial sector: ○ From commerical to investment banking ○ Deregulation ○ Innovatoins - Global imbalances ○ Christine Lagarde, IMF Chief: "China exports and saves, Europe consumes, the United States prints money and consumes" - Lots of credit--- not always sound investments ○ E.g. pre-GFC housing bubbles ○ Access to credit (debt) replacing income growth - Era of secular stagnation: no real growth forecasted ○ + rise in inequality

Social and Political Impact of Migration

- "We asked for workers and we got people" - Cultural and religious diversity - Fear lose of national identity - "Melting pot" assimilation (US) vs. multiculturalism (Canada)

Regional Trade Agreements

- 1/2 of world trade w/i these RTAs - most significant exception to the non-discrimination principle - often go beyond trade in order to reach deeper integration - GATT/WTO rules: Artical 24: allows customs unions and free trade areas: enabling clause--- permits regional arragement among developing countries - old regionalism: N-N & S-S - New regionalism: huge proliferation since 1990s

Evolution of IMF Conditionality

- 1960s-70s: budget cuts, currency devaluation - 1980s debt crisis--- structural adjustment programs (SAPs) ○ "Macro-conditionality" (e.g. trade liberalization) - 1990s-2000s: Asian Financial Crisis, Russia, Turkey, Brazil, Argentina ○ SAPs w/ "micro-conditionality": rigid, intrusive, and detailed conditions (e.g. labor reform) ○ Backlash--- painful, with limited results + need "policy space" - Post AFC/GFC reforms: ○ SAPs--- Lagarde: "we don't do that anymore" ○ Less rigid conditionality--- policy space and ownership ○ Greater acceptance for regulation, capital controls ○ Emphasis on "good governance" § Rule of law, corruption, transparency, capacity building ○ Except most people don't see the changes of the IMF's structural adjustments

The UN and Development

- 1960s: UN became dominated by issue of development ○ Decolonization --- 100 new, poor members ○ Third World Solidarity § Group of 77 (G77) coalition (1964) - UNDP: UN Development Program (1965) ○ Coordinating forum for all UN development activities § E.g. UNICEF, WFP, WHO, FAO, UNFPA, etc. ○ Idea of "human development" - UNCTAD: UN Conference on Trade and Development (1964) ○ Pushed as alternative to GATT/IMF/World Bank

The UN & the Environment

- 1972: UN conference on the Human Environment (UNCHE) ○ Creation of UNEP ○ Main outcome: Stockholm Declaration (nonbinding) -26 principles ("green rights"), incl: § Development is needed to improve the environment § Developing countries therefore need assistance § Environment policy must not hamper development - 1987: Brundtland Commission ○ Idea of "sustainable development" § Development that meets the needs of the present without compromising the ability of future generations to meet their own needs ○ Melding of the development and environment agendas ever since § Essential part of global discourse □ Rio declaration □ Millennium/sustainable development goals (MDGs/SDGs), etc. - 1992: Rio Earth summit ○ UN conference on environment and development ○ Rio Declaration (non-binding) § 27 principles, including sustainable development ○ 2 binding treaties (MEAs): § Convention no biological diversity § UN Framework Convention on Climate Change (UNFCCC)

Key Financial Crises Post-BWS

- 1980s LAM debt crisis (impt) - 1992 ERM crisis (euro) - 1994 Mexican Peso Crisis - 1997 Asian Financial Crisis (impt) ○ 1998 Russia ○ 1999 Brazil - 1999-2002 Argentina - 2007-08 Global Financial Crisis (impt) - 2009 - European sovereign debt crisis (impt)

Economic Reforms

- 1980s-2000s: shift from ISI to neoliberal model ○ ISI failures, East Asian success*, debt crises, failure of communism, triumph of neoliberalism § *Misdiagnosed by IFIs as neoliberal because it emphasizes export markets and fiscal discipline □ E.g. World Bank's 1993 "East Asian Miracle" report: no reference to developmental state and industrial policy --- key role for state, but "market friendly" intervention - Neoliberal reforms ○ Market let policies--- trade and capital account liberalization, deregulation, privatization, fiscal discipline, etc. § Washington Consensus at IMF & World Bank - Economic crises in developing and transition economies made borrowing from IFIs (IMF/World Bank) necessary ○ Conditionality: loans in exchange for reforms - Reforms are painful: short-term vs. long term growth

Montreal Protocol

- 1987 Montreal Protocol on Substances that Deplete the Ozone Layer ○ Binding protocol to 1985 Vienna "Framework Convention" ○ Aim: phasing out ozone-depleting substances (ODSs) like CFCs and HCFCs § Ozone layer: blocks UV radiation - Extremely Successful ○ 1st universally ratified treaty in UN history ○ Ozone layer started shrinking, expected recovery by 2075 - Became the model for climate change - What facilitated its success? ○ Small number of relevant actors § States, companies (e.g. Dupont) ○ No North-South rift: § Producers mostly in a few rich countries § Common but differentiated responsibilities □ Longer phase out periods + technical and financial assistance for developing countries § Cost-effective alternatives to ODSs □ HFCs □ But greenhouse gas- 2016 Kigali amendment to phase them down - Is it replicable? ○ Climate: perhaps, global governance challenge of 21st century

NAFTA

- 1988= Canada & U.S., 1994: Add mexico (1st N-S RTA) - No tariff on most products (including ag) - deeper integration--- env't standards - really about political and security interests for America post 9/11 - U.S. has moved away from multilateralism

Economic Reforms-- Transition Economies

- 1989-1991: Fall of Communism in Central and Eastern Europe ○ Marketization: transition from planned to market economy ○ Reintegration into global economy ○ IMF loans and deep structural reforms from the start - "Shock therapy" (e.g. Poland's "Balcerowicz Plan") vs. gradualism (e.g. China since 1978) ○ In retrospect, speed was important § Divergence among post-communist countries □ One group: better off, more democratic ® Central europe, Baltic countries □ Another: Poorer, less democratic ® Central asian, belarus, caucasus - Geography matters (proximity to W. Europe) ○ Transition officially over for those that joined the EU (2004) - Pic on phone

Debt Relief Initiatives (HIPC and MDRI)

- 1990S-2000S: Pushed by civil society for debt reduction and cancellation for 39 heavily indebted poor countries (HIPCs) ○ G7/8 proposals - HIPC Initiatives (1996) ○ Reduction of debt owed to IMF and World Bank for 36 HIPCs (30 in Africa) ○ 1999: Enhanced HIPC initiative - MDRI (2016) ○ Multilateral Debt Relieve Initiative § 1000% debt cancellation for 37 countries □ Owed to IMF, World Bank (IDA), AfDB, and IDB

United nations Framework Convention on Climate Change

- 1992 UNFCCC ○ 197 parties (universally ratified) ○ Aim: stabilize climate, return to 1990 emission levels ○ Global "framework" treaty: legally binding treaty, but no binding targets - Conference of the Parties (COP): ○ UNFCC Governing Body ○ Yearly UN Climate Change Conferences § E.g. COP-3 in Kyoto, 1997--- Kyoto Protocol § E.g. COP-21 in Paris, 2015--- Paris Agreement - Intergovernmental Panel on Climate Change (IPCC) ○ Intergovernmental body of scientists ○ Compiles periodic Assessment Reports (Ars) § Drafted by 800+ experts § Latest: 2014 (Ars) □ The most sobering or alarmist report yet

Origins of the Crisis: adoption of the Euro

- 1999 --- Eurozone Created ○ Borrowing costs for all members fell to German levels § Credit rating agencies: Spain, Greece, Portugal, e.t.c. no longer seen as risky --- as safe as German bonds - PIIGS (Portugal, Ireland, Italy, Greece and Spain) borrowed heavily ○ Debt-financed economic boom ---- asset bubbles (housing0 - Core countries invested in periphery ○ Creating higher inflation there than in rest of Eurozone ○ Asymmetric shocks (Northern Europe vs. periphery) - GFC (2008): credit crunch, harder to service debt ○ Governments bailed out private banks --- became a sovereign debt problem --- 2009 start of debt crisis

The Euro

- 1999: established as virtual currency ○ All eurozone currencies pegged - 2002: coins and banknotes introduced - 19 current members ○ 9 EU members not in eurozone

Combating Poverty: UN Millennium Development Goals

- 2000 target: halving between 1990 to 2015 the number of people living on $1.25/day ○ Global Poverty Line: § Previously: $1.25/day § Now: $1.90/day in consumption (revised 2015) - Did it work? ○ 1990: 43% of the world lived on $1.25/day ○ 2010: 31% of the world lived on $1.25/day

Post Kyoto

- 2009 Copenhagen COP-15 ○ Original deadline to replace Kyoto § Set to expire in 2012 - 2010 Cancun Agrement COP-16: ○ Warming should be limited to 2.0 degrees celsius - 2012 Doha COP-18 ○ Kyoto extended until 2020 ○ 2nd commitment period: 2012-2020 § Russia and Japan didn't extend/Canada withdrew - 2015 Paris COP-21 ○ Kyoto Replacement

Greece, the Euro, and the Crisis

- 2009: new Greek government announced that previous deficit was not the official 3.7% but > 12.7% ○ Eurostat revised calculations: 15.4% - Apart from Greece, through, fiscal irresponsibility not main source of crisis --- the Euro and the single monetary policy are ○ Inability to devalue currency to adjust (to make them competitive, grow their economy) ○ Instead gold-standard like "internal devaluation" via deflation: § Painful austerity measures, wage cuts, high unemployment § Bad economic conditions = government incomes are falling (while debt is rising) - Plus: no European fiscal union ○ Germany (and others): no obligations (or desire) to bail out "profligate" members (moral hazard) § But danger of contagion

GATT (1947-1994)

- 23 founding members (mostly rich countries) - became main trade forum by default - there's still the GATT as a subsection of the WTO

The EU

- 28 countries - truly unique: supranational institutions, common policies, common currency -single market: free movement of godos, services, people and capital - EU institutions: EU comission, council, council of the EU, EU parliament, court of justice, central bank - single market, economic and monetary union, Schengen Area: open borders, common commercial policy, competition policy, common ag policy - EU challenges: recent enlargement (more countries= more decision makers), migration, Brexit, populism, increasing unemployment

5th Assessment Report (2014)

- AR5: 3 "Working Group" WG reports +1 synthesis report (SYR) ○ WGI: "The Physical Science Basis" § Warming is unequivocal □ Unprecedented changes since 1950s □ Rise in atmosphere and ocean temperature □ Rise in sea levels, melting polar ice caps § Main driver: increased CO2 concentration since 1750 § Extremely likely to be primarily human induced ○ WGII: Impacts, Adaptation, and Vulnerability § Climate Change is already impacting life on earth § Food supply at risk, especially in poor countries ○ WG III: "Mitigation of Climate Change" § GHG emissions increasing faster than ever § Acting now cheaper than doing nothing in the long run Not too late to avoid worst scenarios but next 15 years are crucial

ISI

- Adopted by most developing countries, 1950s-1980s ○ E.g. Brazil, Mexico, Argentina, India, Nigeria, etc. ○ Model: Soviet Unions apparent success (but w/o renouncing capitalism at home) - Top-down industrialization ○ Key: decrease imports, increase domestic manufacturing ○ Tools: import barriers, subsidies, state ownership, and state planning Why adopt ISI? - Dependency theory: core vs. periphery - Belief I: Prebish-Singer Hypothesis ○ Need to industrialize because their exports suffer from declining terms of trade § i.e., over time, the value of what they exports (primary products) would decrease relative to the value of what they import (manufactured goods) - Belief II: Industrialization would not occur "naturally" through market forces ○ Stuck forever in producing/exporting raw materials, getting poorer (dependency theorists refute modernization theory) ○ Not modernizatino theory --- structuralist ○ Two market failures: § Complementary demand: need mass mobilization (need to have increased demand before this will happen) § Pecuniary externality: investments need to be coordinated (need to be able to demonstrate that someone out there is going to buy it-- need a coordinator in chief, a central government to make sure that everyone will get returns on their investments) ○ Solution: state-led "big push" to industrialize Problems with ISI - Persistent current account deficits: ○ Ironically, policies meant to decrease imports actually created trade deficits § Decrease exports: domestic production not competitive, decrease in agricultural and raw material production § Still dependent on imports: machinery and key inputs § Overvalued XR ○ Large budget deficits: § Investments in local production w/o growth in export earnings § State-owned enterprises not profitable § Growing debt --- 1980s debt crisis

Bargaining Power

- Affects outcomes - Sources: coercion/threat, outside alternatives, agenda-setting power - Market power matters (held by US, China, EU)

Managing the Debt Crisis

- Aims: ○ Prevent collapse of international banking system ○ Restore capital market access for debtors ○ Restoring debtors' economic growth - Solutions: ○ Emergency lending (e.g. IMF) (if it's a liquidity, not a solvency, problem) ○ Debt rescheduling agreements ○ Debt reduction or cancellation agreements - Key actors: ○ IFIs: IMF, World Bank ○ Governments of borrowing and lending countries ○ Private lenders (commercial banks) The Paris and London Clubs - Informal structures to negotiate debt rescheduling - Paris Club: forum of 22 creditor governments ○ Ad hoc negotiations with debtor countries ○ Set up in 1956 (prior to widespread debt crises) ○ 430 bilateral agreements with 90 countries - London Club: similar forum involving private creditors (commercial banks) - 1982-85: Emergency lending by IMF & "involuntary lending" by large commercial banks (at IMF insistence) ○ Debt rescheduling and new lending in exchange for macroeconomic stabilization (decrease budget deficits) ○ Solve the free rider problem with commercial banks - 1985-88: Baker Plan ○ IMF/World Bank rescheduling and new lending in exchange for deep economic reforms ('structural adjustment") --- much more structured plan than in 1982 - 1989-97: Brady Plan ○ Debt reduction for most severely indebted countries ○ Creation of Brady Bonds § Bonds to repay commercial banks provided by IMF in order to repay private lenders § To reduce debt owed to commercial banks § Facilitated by IMF/WB loans § Helped end the crisis ○ Ended the crisis in many places § Though not for heavily indebted poor countries

Paris Agreement

- All states joined ○ 170 parties so far and 195 signatories ○ US withdrew (2017) - Goal: limit warming below 2.0 degrees celsius (ambition 1.5 degrees celsius) - No common binding targets--- voluntary commitments ○ Nationally determined contributions (NDCs) for all countries ○ NDCs to be re-evaluated every 5 years (Global Stocktake) § Infinite duration from 2020 ○ US withdrawal unlikely to change anything - No enforcement mechanism ○ Instead: monitoring, transparency - Common but differentiated responsibility ○ Everyone contributes (new), but different NDCs (also new) ○ Financial help to developing countries ($100 billion/year) V. Important (also endangered by US withdrawal)

Rules on Subsidies (Box system)

- Amber box: trade distorting (export subsidies)-- subject to decrease support - Blue box: like Amber but designed to reduce distortion- subject to cap - Green box: non or minimally distorting -de minimis: countries allowed a minimum of support - goal: shift towards acceptable forms of subsidies

Cohen Transatlantic Debate

- American IPE (OEP): positivist, empirical; quantitative; rational choice theory; focus on interests/institutions o Dominant approach - British IPE (Constructivists): post-positivists; normative - distributive justice; focus on social structures and socially constituted identities

The Trilemma

- An economy cannot simultaneously have these 3 potentially desireable policies: fixed XR, domestic monetary policy atuonomy, free financial flows - Only 2 out of 3 can happen; lots of interdependence between 1 & 3 as well because the monetary system is the basis for the financial system

Politics of Immigration

- Anti-immigration politics more prevalent in last few years in Europe and US (although its not new)

BWS: Liquidity and Confidence Issues

- BWS didn't operate properly until 1959-why? - Euro currencies not fully convertible until 1958 - But also: liquidity problem- Dollar shortage: central role of USD as reserve currency, but other countries didn't have enough - solution: U.S. deficits (financed by printing USD) - Results: led to dollar glut, Euro dollars: billions of USD out of US control--- harder to manage XR-- credibility problem

DDA Recent Breakthroughs

- Bali Package: 1st global agreement in WTO history, Trade Facilitation Agreement (simplifies customs procedures)-- 1st and only multilateral deal at the WTO, ministerial decisions on food security and other decisions - Nairobi Package: ministerial decisions (phase out export subsidies for ag at some point, special safeguard mechanisms for dev'l countries), information technology agreement --- plurilateral side deal, 1st tariff liberalization agreement at WTO (not part of DDA)

The BIS and the Basel Committee

- Bank for International Settlement (1930) ○ Formal IO; HQ: Basel ○ "The central bank's central bank" ○ Role in coordinating monetary policy ○ Among other things, supervises activities of the G10 § 11 countries (G7 + Belgium, Netherlands, Sweden, Switzerland) § Provide IMF with additional funds when necessary □ General Agreement to Borrow (GAB) - Basel Committee on Banking Supervision (1974) ○ Housed w/I BIS secretariat, but distinct entity ○ A transgovernmental regulatory network (not a formal IO) ○ Sets voluntary banking standards Basel Accords (I, II, III): standards on capital adequacy, stress testing, market liquidity risk, etc.

Politics of Sovereign Debt Crises--- Debtor-creditor conflict: who adjusts (internationally)

- Bargaining over repayments ○ Lenders want to be repaid ○ Borrower want to repay as little as possible - Bargaining tools ○ Lenders can threaten to cut off future financing ○ Borrowers can threaten to default - International conflict: who rebalances? How? ○ Borrowers: cut spending, austerity (decreased consumption, increased exports) ○ Lenders: increase consumption, increase imports - But fundamental asymmetry: lenders don't have to adjust

Development Strategies

- Before 1914: most focused on primary products ○ Exported: raw materials, agricultural goods ○ Imported: finished manufactured goods - 1914-1945: turned inward ○ No Western investments ○ Stagnant and heavily protected export markets - Postwar strategies --- either: ○ Socialist system (central planning, collectivization) § Eastern Europe, China, Vietnam, Cuba, Ethiopia, Tanzania, etc. ○ Resource cartel § OPEC ○ Import Substitution industrialization (ISI) § Latin America and most post-colonial states ○ Export-oriented Industrialization (EOI) § East Asia

Global Environmental Cooperation

- Centrality of the UN ○ Global environmental conferences ○ Multilateral environmental agreements (MEAs) ○ Ideas and knowledge

Is Capitalism Compatible with Democracy?

- Classical political economists (and not just Marx) didn't believe so ○ Context: 19th century laissez-faire capitalism § Gold standard: submitting domestic policy goals to the dictate of world capitalism § Political equity vs. economic inequality-- unsustainable - Post-WWII: marriage of capitalism and democracy ○ Dramatic transformation of capitalism in rich countries ○ All created a large welfare state, which was allowed to coexist with openness to world markets § Embedded liberalism ○ Made democracy compaitble with capitalism § Communism: no longer only alternative § Mixed system: market and state intervention (social insurance)

Geography

- Climate (latitude) ○ Tropical vs temperate regions § Disesases, climate, rainfall, soils § Agricultural productivity ○ Key: latitude!! - Resource Endowmnets: ○ Natural resources ("resource curse") - Location: ○ Landlocked countries (bad) ○ Distance from major markets ○ Arbitrary borders - But: ○ Great deal of variation among similarly located countries ○ Correlation does not equate causation...

Global Trading System: Historical Antecedents

- Cobden- Chevalier network: Pan-Euro ntwk of interlocking BTAs, treaty--- MFN status created, triggered several FTAs, rested on B hegemony and gold standard - Closure: long depression (1873-96), WW1 collapse of globalization, interwar cooperation failures, Smoot-Hawley - 1934 Reciprocal trade agreements, served as a template for post war GATT, not multilateral

Cooperation Issues-- Collective Action Problems

- Collective action problem: situation in which each person/state has individual incentives not to participate in action that benefits all members of the group ○ Why? Incentive to free ride § I.e. benefiting from collective action without contributing to it □ After other people put in time/energy/money to generate collective mobilization § E.g. individual country's contribution in the fight against climate change ○ Rational belief that one's individual action will have little or no effect on outcome, yet can still reap benefits ○ Conflict between individual interest vs. group interest § If everybody is rational ---- collective action won't happen ○ Public goods and collective goods - Public goods: ○ Nonexcludable, nonrival in consumption ○ Lead to undersupply of public good ○ E.g. clean air, climate change mitigatoin - Collective goods: ○ Nonexcludable (open access), but rival in consumption ○ E.g. fish stocks ○ "Tragedy of the commons" § Leads to overexploitation of common pool resources □ E.g. 34% of global fish stocks are over-exploited or collapsed

History (colonial legacy):

- Colonial-era institutions have a tendency to persist ○ Systematic impact on subsequent growth - Settler Colonies ○ Europeans didn't settle in areas with high mortality rates (temperate climates) ○ Inclusive political and economic institutions (to protect Europeans own political/economic interests) § Protection of property rights § Constraints on actions of elites § Some degree of equal opportunity for broad segment of society ○ Vs. - Extractive Colonies ○ Lots of people (coerced labor, slavery), lots of resources, inhospitable environment --- no permanent European settlement ○ Absolutist political institutions and extractive economic institutions § Trade oriented toward the mother country § Restriction on manufacturing § Preferential access to the colonial power § Predatory policies (resource and labor exploitation)

The Time-Consistency Problem

- Commitment problem: ○ Governments cannot credibly commit to deliver low inflation b/c they have an incentive to boost the economy (reduce unemployment) right before an election through inflationary policies § i.e. they have time-inconsistent preferences - One solution: peg ○ Commitment is to fixed XR, not low inflation - Another solution: get the gov't out of the monetary policy business altogether ○ Independent central bank

Capital vs. Trade Flows

- Compare to trade in goods, money is extremely: ○ Mobile § Can move instantaneously at low cost § Can be stored freely and w/o physical deterioration ○ And fungible § Can change its identity easily (+difficult to trace) ○ Making it difficult for states to control effectively - Liberalization of capital also does not face same type of collective action problem as trade ○ Can be done unilaterally ---competitive deregulation § Benefits don't depend on what others are doing ○ + much less politicized § Low domestic visibility, technical § So primarily driven by (neoliberal) economists, technocrats and financial sector

Cooperation Issues- Political-Economic Considerations

- Competing priorities ○ Environment vs. econmic growth and competitiveness - Economic intersts lobbying against environmental regulations ○ Polluters usually win - Who will pay?

EMS (1979-1998

- Creation of a new unit of account: the European Currency Unit (ECU)--- b/4 the EURO was created ○ Based on a basket of EC currencies - Exchange Rate Mechanism (ERM): ○ Plus or minus 2.25% trading margins against the ECU § ERM-I (after euro adoption: ERM- II) - Deutsche Mark (DM): served as defacto anchor for ECU ○ Crucial role of the German Bundesbank --- low-inflation policies (fear this b/c of the 1920s era of hyper inflation) - 1992 Crisis (black Wednesday): speculative attacks against Italian lira and British pound ○ Forced Italy, UK off ERM ○ "The Man who broke the Bank of England" § George Soros made 1 billion short selling the pound - But 1992 EMS crisis couldn't stop EMU

Post BWS: Floating Rate System (since 1970s)

- Current monetary regime: no formal rules - XR: free floating currencies (unthinkable until then), or at each states discretion (adjustable pegs, including European monetary coordination) - Domestic monetary policy still important - Few capital controls: financial globalization, but frequent crises - USD remains key reserve currency, but declining US hegemony, 1970s-80s: rise of W Europe and Japan, 1990s-2000s: emerging markets (As. Tigers, BRICS), Rise of Euro (to compete with USD) - Change in ideology: from "embedded liberalism" to "neo-liberalism"--- less government intervention

Politics of Sovereign Debt Crises

- Debt crises are a problem for lenders (creditors) as well as borrowers (debtors): ○ Threat to the banking system § E.g. 1982: the 9 largest US commercial banks had outstanding loans to 17 debtor countries worth 184% of the banks capital and reserves ○ Cost of rescuing borrowers and domestic banks § Governments must sometimes intervene to "bail out" borrowing countries or/and domestic commercial banks ○ Domestic Conflict: who will pay? - For borrowers, debt crises typically lead to economic recessions and unpopular austerity measures: ○ Decreased consumption (imports) ○ Decreased government spending ○ Increased taxes ○ Restricting wages ○ Domestic conflict: who will bear the burden of adjustment?

Convergence Criteria

- Debt: <3% annually; <60%/GDP - Inflation: <1.5% above 3 least inflationist states - ERM-II: remain with EMS for 2 years - Low interest rates ○ One country didn't meet these criteria, but was nonetheless allowed to join... Greece - 1997 Stability and Growth Pact: ○ Convergence criteria will remain in place once euro is adopted ○ All members have violated the SGP at some point (including Germany)

New International Economic Order

- Declaration for the Establishment a New International Economic Order ○ 1974 UNGA Resolution - Restructure global economy to help facilitate development and wealth redistribution: ○ Improved terms of trade ○ Reduced tariff barriers to rich export markets § Adopted by GATT: Generalized System of Preferences (GSP) ○ Full control over natural resources (right to expropriate) ○ More say in IFIs ○ Planning of the economy (not free markets) ○ Increased aid § ODA target: .7% of GNI

Remittances --- a capital flow

- Def: money sent by a migrant to her/his nation of origin - Important source of income for many developing countries ○ Globally: approximately $430 billion/year* to developing countries § Much more than amount of ODA ○ Largest recipients: India, China, Philippines, Mexico § As % of GDP: Tajikistan (42%), Krgyzstan (30%) Nepal (29%) - Fairly stable flows (unlike FDI) ○ E.g. 2008-09: 40 % drop in FDI, 5% drop in remittances - * official (part of bop) vs. unofficial remittances (believed to be much more)

What is Migration?

- Def: permanent change of residence of a person or group - International (across borders) vs. internal ○ Latter also important in IPE § E.g. urbanization in China - Immigration (in) vs. emigration (out) ○ Impact on both host and sending countries

The Welfare State

- Def: provision by the staet of basic safety net for the most vulnerable ○ E.g. poor, sick, disabled, old, unemployed - Goals: ○ Decrease poverty/inequality, equality of opporutnity, social stability, social integration Elements of the Welfare State - Progressive Taxation: ○ Tax burden go up as income goes up - Social expenditure--- social insurance ○ Health care, child care and parental leave, old-age pensions, public housing, unemployment benefits, labor standards, public education, etc. The Welfare State Under Pressure - Starting in 1970s-80s, under pressure from: ○ Ageing population ○ Sluggish economic growth ○ Mass unemployment ○ Changing family structures and life-cycle patterns ○ Post-industrial labor markets (new risks/needs) ○ Erosion of labor unions ○ Neoliberal ideology § "welfare reform"- less redistribution, cuts in spending § Push for tax reductions by rich/corporate sector □ Decreasing tax revenues □ OECD average corporate tax: 1981: 50% --- 2009: 30% § Push for deregulation

Central Bank Independence

- Delegation of monetary policy to indp third-party ○ Solution to time-consistency prob - Central Bank indp: ○ Degree to which central bank can set monetary policy free from gov't interference ○ Function of: § Freedom to choose which econ objective to pursue § Freedom to set monetary policy in pursuit of that objective § Extent to which central bank decisions can be reversed by other branches of gov't - Central bank indp should generally lead to lower inflation (vs. being left to gov'ts)

Electoral Institutions

- Democratic vs. authoritarian regimes (demo = more responsive, less insulated) - Election rules, district size, Do the rules represent the mass public/median voter as opposed to localized/special interests

Developing Countries and Economic Growth

- Developing countries should, on average, grow faster than mature economies ○ Start from lower base ○ Convergence - Before Industrial Revolution: most people are extremely poor (only really developing countries) - Industrial Revolution: developing and developed countries - Does the sharp distinction b/t developing and developed countries still make sense today? ○ Look at how much Asia has expanded! - Trend expected to continue! (the decrease in global poverty) - Where are the poor? Africa, India (Sub-Saharan Africa and South Asia) Multidimensional Poverty Index

Open Economic Policies

- Dominant approach; theoretical pardigm - Focuses on interests, institutions, and interactions - Narrow framework - Integrate domestic and int'l politics: IPE research had ignored the domestic realm - issues: neglects roles of norms/rules narrow materialistic conception of interests; reductionist - too focused on the mirco-level (individual) incentives (doesn't explain international contagion or knowledge diffusion), not enough focus on systems; fails to account for macro-level changes (rise/fall of econ powers, world changing events); linearity from dom. pol. to FP - neglects important feedback affects (role of IOs) -

Combating Poverty: Great News

- Dramatic fall in global poverty over past two decades ○ % of world's population living in extreme poverty (i.e. living on less than US$1.90 a day) § Fell below 10% last year (9.6%) - How? ○ Unprecedented economic growth (esp. in China, but also India, etc.) has lifted hundreds of millions of people out of poverty ○ Regions with fastest economic growth in the last 10 years? § East Asia, South Asia, Sub-Saharan Africa - China: extremely important, but not the whole story

Types of Migration

- Economic migration: ○ Labor migration § Highly trained professionals and low-skilled labor - Forced migration: ○ Asylum seekers and refugees: fleeing war or persecution § Principle of non-refoulement: no person may be sent back to a country when they may face inhuman treatment, torture or the death penalty § 21 million refugees worldwide ○ Internally displaced persons (IDPs) § 40 million IDPs worldwide ○ Human trafficking ○ Hist: Atlantic Slave trade

European Monetary Integration

- End of BWS (1971-3): attempt to stabilize European exchange rates ○ 1972-78: "snake in the tunnel" § Plus or minus 2.25% currency bands fluctuation among EC currencies ○ 1979-98: European Monetary System (EMS) § Fixed but adjustable XR

The World Bank

- Est. 1944 at Bretton Woods (as IBRD) ○ HQ: Washington D.C. ○ 189 members (borrowers, lenders, donors) ○ Quota based voting: § E.g US: 16.28%, Japan: 7.02%, China: 4.53%, Germany: 4.11% ○ Staff: 10,000 (huge "think tank") - Originally for European postwar reconstruction ○ Displaced by Marshall Plan (1948) - Not very active until late 1960s ○ Creation of IDA ○ New focus: development in poor countries

US. Vs. Europe

- Eu countries trade a lot with each other, but nowhere near as much as different US regions trade with each other - Adjustment through migration --- much more labor mobility w/I the US than within the EU? ○ Why? Language barriers

Cultural Explanations (he doesn't like0

- Examples: ○ Max Weber: "Protestant work ethic" ○ "Asian" (i.e. Confucian) values ○ Islam's restriction on lending with interests - Role of religion, views on frugality, competition, control over one's destiny, individualism, achievement, etc. - But how can we explain: ○ China vs. Taiwan/Hong Kong? ○ North Korea vs. South Korea ○ These countries have been poor before (same people, same culture, but different past vs. present)

Export Oriented Industrialization (EOI)

- Export led model of development ○ E.g. Asian Tigers, then East Asian, then China ○ Model: Japan - Focus: selectively producing goods for export markets - 3 stages --- industrial upgrading: 1. Labor-intensive light industry i. E.g. textiles 2. Capital-intensive heavy industry i. E.g. steel, shipbuilding 3. Technology intensive products i. E.g. semiconductors, aerospace - More market oriented than ISI, perhaps, but strong role of state planning ○ East Asian developmental state

Hecksher-Ohlin Model

- Factor endowment - relative abunadance/scarcity of land, labor and capital - goods require a particular mix of these factors - in some places, factors are plentiful and others are rare - Countries have a CA in producing goods making intensive use of the cheaper/locally abundant factors - specialize and export goods using abundant factors, import goods using scarce factors

Stages of Regional Economic Integration

- Free trade agreement/Area: zero/low tariffs, preferential trade agreements - Customs Union: - FTA plus common external tariff (for other countries) ---EU - Common Market: CU plus free movement of capital and labor, some policy harmonization (EU) - Economic Union: CM plus common economic policies/institutions-- Eurozone - Political and Fiscal union: USA

Global Governance Response (G20, the Fed, and Basel Committee)

- From G7 to G20 ○ 2008 leaders' summit ○ Coordination: large-scale programs (incl. U.S., China) § Renewed Keynesianism § Europe: austerity to deal with debt crisis (hurt) ○ Unconventional monetary policy § Interest rates already near zero --- quantitative easing □ QE: buying assets from financial institutions to increase money supply ○ Avoiding beggar-thy-neighbor policies § E.g. currency wars, protectionism - The Fed as ILOLR ○ Currency swap programs § w/ 14 other central banks (to meet demand for USD) ○ Effectively emerged from crisis as "world's central bank" - Basel Committee on Banking Supervision ○ Tougher standards on financial sector ○ Basel Accord III (2010) § More transparency, fewer high-risk activities, more liquidity, minimal capital requirements, lower leverage ratio, etc. § Regular "stress test" to assess solvency - The IMF ○ 2010 IMF reforms ○ Massive increase in lending capacity § + more flexibility in loans (not strict conditionality) § But key emerging markets did not have to borrow from IMF □ Self-insurance after AFC (large forex reserves) ○ Change in quotas (voting) § China > European States § Greater role for key emerging markets § Now: combined US-EU quotas <50% ○ Greater surveillance capacity ○ Endorsed capital controls (2012) --- reversal - Financial Stability Board ○ 2009: created by G20 ○ Monitors global financial stability and cooridnates supervision § Replaced G7 Financial Stability Forum (FSF) □ Est. 1999 (context: post-AFC) ○ Participants: § G20 countries □ Finance ministers and central banks-- incl. ECB & EU Commission § Ios (IMF, World Bank, BIS, OECD) § Key transgovernmental regulatory networks □ BCBS, IOSCO, IASB, etc. ○ "Fourth Pillar" of global economic governance? § IMF, WB, WTO, FSB? ○ Weakness: no legal mandate, no enforcement powers

The Emergence of Financial Globalization

- From globalization to capital controls (make connection with this also being an important era for trade) - 1870-1914: previous era of financial globalization ○ Gold standard, currency convertibility -- (unwritten) "rules" required free capital flows § US Gilded Age: booms and busts + financial panics (1873, 1893, 1907---systemic crisis for all banks, not localized like the others) - 1914-44: Interwar Collapse ○ WWI: breakdown of gold standard, collapse cross-border investment and trade ○ 1920s: currency instability, unregulated finance ○ Great Depression --- suspicion of capital flows § International capital flows stopped for 30 years!!! - 1944: Bretton Woods System --- restrictive financial order ○ Capital controls: on in-/outflows of money § Promote long term "productive" capital (e.g. FDI) § But limit/regulate short-term "speculative" capital (i.e. "hot money") □ To prevent currency crises and runs (XR stability) - 1960s: pressures to relax capital controls ○ Growth in Euromarkets (i.e. transactions in Eurodollars) § Currency convertibility (by 1958) □ Decrease US gold reserves --- increased interest rate on USD □ But capped in US --- so USD moved to Europe (no cap)--- birth of Eurodollar market § Key role for City of London (and, later, Wall Street) --- deregulation to attract activity □ = tacit acceptance of liberalization by UK and US ○ In addition: § Increase private capital flows □ FDI, commercial bank loans § Sovereign governments began borrowing on international financial markets □ For 1st time since 1930s □ Sovereign bonds --- debt - 1970s: Collapse of BWS and oil shocks ○ Euro dollar put a lot of pressure on the BWS ○ Collapse of Bretton Woods (1971) § Speculative flows in Euromarkets--- difficult to maintain fixed XR □ Nixon and "International money speculators" § Post-BWS: more volatility in XRs ○ Oil Shocks (1973, 1979) § OPEC cartel asked to be paid in US dollars § Petrodollar recycling: huge petrodollar reserves deposited in Western commercial banks □ Loaned to developing countries □ Help maintain USD as world's key currency § Key event: transformed the system into a global financial network almost overnight - 1980s-90s: rise of neoliberalism ○ 1980s-90s: financial globalization takes off § Ideological shift--- policy change ○ From embedded liberalism to neoliberalism § Free markets (incl. for capital)= good □ "Neo": suggests renaissance of pre-WWI classical liberalism □ Thatcher (UK) and Reagan (US) § Wall Street & US Treasury: capital controls "do not work" ○ Policy change: capital account liberalization § Deregulation of financial markets (1974-90) □ i.e. capital flowing freely across borders, with minimal restriction and regulation § Capital controls 1st abolished in us (1974) and UK (1979) □ Led to competitive deregulation: first Japan, then Germany □ Mid-1908s: US, UK Japanese, and German banks operating in multiple countries ○ Europe's Key role § France and Mitterand's U-Turn □ 1981: new socialist government tried imposing strict capital controls -- failed (+ punished by markets) □ 1983: reversed course § EU & OECD --- most liberal rules □ EC/EU: complete liberalization (1988) ® Not only among members □ OECD Code of Liberalization of Capital Movements (1989) ® Incl. short-term capital □ By 1990: capital liberalization among all advanced economies

Multilateral Trading System

- GATT/WTO (1947, 1995) - Rules-based system (predictability in trade relations) - progressive liberalization w/ safeguards (not free trade, but instead embedded liberalism) - settle trade disputes - forum to negotiate new trade rules (hardest to do)

Explaining Immigration Policies

- Immigration policies are mostly determined by social dynamics ○ Balance of social views on immigration § Cosmopolitans □ Open admission and generous rights for immigrants § Free market expansionist □ Open admission, restricted rights § Exclusionists/nativists □ Restrictive admission, restricted rights § Nationalist egalitarians □ Restrictive admission, but generous rights - Political economy dynamics also matter --- role of interest groups ○ Mostly business (pro-immigration---want cheap labor) vs. low skilled workers (anti-immigrant--- impact on wages) § Sectors in which labor unions are more important--- more barriers to immigration (e.g. fewer temporary work visas) § Sectors in which business lobbies are powerful---- fewer barriers to immigration (e.g. more work visas)

Is capitalism in Crisis?

- In advanced industrialized democracies: ○ Recurrent financial crises ○ Growing inequalities ○ Since 1970s: stagnant income for most ○ Trade and financial liberlaization didn't lead to obvious economic growth ○ Neither have recent technological innovations led to huge increases in growth and employment ○ Political impacts: populism, anti-immigration, wariness of globalization - No real growth in household incomes since 1970s

The Asian Financial Crisis

- Global Financial Crisis (GFC) rooted in 1997-98 Asian Financial Crisis (AFC) - 1980s debt crises ---- sharp decrease in loans to developing countries - By 1990s: "East Asian Miracle" ○ Asian Tigers: South Korea, Taiwan, Singapore, Hong Kong ○ New Industrialized Countries (NICs): Thailand, Malaysia, Indonesia, Philippines - Financial liberalization in Asia = new investing opportunities ○ Higher returns at seemingly less risk than other developing countries ○ Primarily short-term portfolio investment as opposed to bank loans to governments (not sovereign debt) - 1997 financial contagion ○ Asian currencies pegged to USD § 1990s ^ XR in US --- rise in USD vs. Japanese Yen ○ Fears of devaluation of Thai baht --- capital flight! § 1st Thailand, then South Korea, Indonesia, Malaysia, etc. - IMF loans to Thailand, Indonesia, and South Korea ○ International lender of last resort (ILOLR) ○ Unpopular structural adjustment programs § Washington Consensus - Malaysia: imposed capital controls ○ Risking its ability to attract future investments ○ Different path: at first criticized; later used as evidence that controls could work - Contagion to other "emerging markets" ○ Russia (1998), Brazil (1999), Turkey (2001), Argentina (2001) - A capital - account crisis, not sovereign debt problem: ○ Debt contracted by local banks and companies, not governments

Global vs. International Inequality

- Global and inter-national inequality 1952-2014 - Concept 1: inequality between countries (Hans) - Concept 2: inequality between countries, weighted by population Concept 3: global inequality between people

Global Finance

- Global financial Markets: cross-border buying/selling of currencies and of financial products representing credit, debt & risk ○ Bank borrowing/lending § Debt repayments ○ Stocks and bonds § Portfolio investments (equities) ○ Sovereign lending ○ FDI ○ Derivatives ○ Remittances (when foreigners send money back home) ○ Public capital (foreign aid, concessional loans) - Finance, credit & debt -- prime movers of economic activity ○ Annual value of transactions in global financial system: about 10-12 times larger than in "real economy" (i.e. world GDP, production of goods and services) § + total stock of debt is considerably larger - Globalization of finance emerged in the 1980s ○ Due to developments in markets and technology ○ But, also --- political shifts! - After the crisis, we have more equity and less debt

Globalization and the Environment

- Globalization ○ = ^ economic activity (esp. transboundary) ○ =^ environmental impact - Globalization and development: ○ Negative effects: ^ resource use and waste, development associated w/ "dirty" industries, regulatory "race to the bottom" (environmental standards)? ○ Positive effects: diffusion of technology, innovation in "clean" industries, greater desire for environmental regulation and cooperation

Electoral Model

- Governments: ○ Prefer autonomy to stability ○ Want to be reelected - Elections determined partly by economic conditions ○ Pressure from voters ○ Politicians less inclined to adopt monetary policies that slow economic growth and raise unemployment - So expansionary monetary policy more likely in the 18 months prior to an election (timing) ○ ^ growth/employment ○ E.g. Nixon shock: 15 months b/4 1972 presidential election - Inconsistency b/t fixed XR & expansionary policies

Other WTO notable challenges

- Great recession, anti-G movements, leadership vaccum

The G20

- Group of 20 ○ Not a formal IO ○ Originally: a meeting for 20 finance ministries (1999-present) ○ Since 2008: heads of state also meeting § Has since mostly replaced the G7 as the main coordinating forum for economic policy □ G7 increasingly seen as unrepresentative □ G20 includes many emerging markets, crucially China and other BRICs □ 85% of world trade; 90% of world GDP; 2/3 of world population ○ Central coordinating role during GFC ○ Main issue today: global imbalances between deficit and surplus countries ○ Notable non members: Switzerland, Iran, Norway, UAE, Taiwan, Thaliand § Spain ('invited" every year), Netherlands, Poland, etc. represented by EU

USD as world reserve currency

- Harry Dexter White - "exorbitant priviliedge"- annoyed the french - while others have to acquire USD to finance BOP deficits, the U.S. can just print them at will

Immigrants as a Proportion of the Population

- Highest percent in small, rich, mostly non-OECD countries ○ Ex. UAE, Qatar, Kuwait, Lichtenstein, Andorra, Macao, Monaco, Bahrain, Singapore, Luxembourg - US? ○ Only 12.5% ○ Similar to UK, Germany, France - Vs. Canada (20.6%) ○ Canadians in struggling towns want immigrants § Belief they'll bring jobs ○ Point system (skills) § Vs. US emphasis on family reunification ○ Less unauthorized ("illegal") immigration ○ Multiculturalism (part of social fabric) § Vs. US pluralism/melting pot

The Anthropocene?

- Holocene ○ Official name of current geological epoch § Started approximately 12,000 years ago - Anthropocene ○ Proposed name for current era: reflects significant impacts on human activity on land, oceans, biodiversity, and the atmosphere

Multilateral Development Banks

- IFIs, not private commercial banks ○ World Bank ○ Regional development banks § Asian Development Bank, African DB, Islamic DB, Inter-American DB, European Bank for Reconstruction and Development (EBRD) - Grants and concessional loans to developing countries ○ For specific projects: § E.g. health, education, infrastructure ○ Policy advice and technical assistance

Inequality Adjusted HDI (IHDI)

- IHDI: inequality-adjusted version ○ Captures losses in human development due to inequality in health, education, and income

The IMF and BWS

- IMF: 1944, 189 countries, quota system: member contributions= economic size, voting= based on quota system, managing director= always Euro - radical change over time: During BWS- oversee BWS monetary relations, monitors members and approves of countries adjustments, lender of last resort in the case of a BOP crisis, Post BWS- managing debt and financial crises

The BW System (1947-1971)

- Monetary regime: all currencies fixed to the value of the US $, only US $ convertible to gold, stable, but adjustable XR's - Imposition of capital controls on short term speculative flows (no financial Globalization, aims: currency stability, financial crisis avoidance) - flexible monetary policy to manage economy- strong desire for policy autonomy to respond to domestic needs, no need for GS style adjustment process, embedded liberalism: stability and autonomy - not an era of globalization - but an era of unprecendented propsperty and financial stability

Economic Impact of Migration

- In general: free flows (of goods and factors of production, incl. labor= efficient gains ○ But involve adjustment (e.g. move between sectors) - For sending country: ○ Brain drain: loss of workforce and human capital § E.g. 93% of highly skilled persons born in Guyana live outside the country (75% for Haiti) ○ Remittances - For Host country: ○ Source of labor, esp. low-skilled (alternative to trade) ○ Short term impact on wages and income § New labor (human capital), more income/efficiency but distributional trade-offs § Specific-sector model: influx of labor in one sector= decreased wages in that sector □ E.g. low skilled workers ○ Fiscal effects--- net contribution of immigration to government revenue? § Demands on welfare state (but also new revenues) § Aging population: retirement system

S-F Model and Distributional Consequences

- Industries that expand win (export oriented), and vice versa - all factors w/i the industry are similarly affected (labor and owners of capital in aircraft can both benefit now) - nature of policy conflict= around industrial sectors - Eichengreen: distinction b/t "sheltered and unsheltered" agriculture and light vs. heavy industry sectors during Smoot-Hawley

Poverty: proportion vs. individuals

- It's not just the proportion of extremely poor people in the world has declined. There are fewer extremely poor people, period (despite rapid global population growth)

Intra-Industry Trade

- Japan exports cars and so does germany - cannot be explained by H-O - explanations: technology differences, increasing returns to scale, consumer differentiation - rise of global value chains (parts of a product are produced all over the world)

Managing the Eurozone Crisis

- Key actors: the "Troika" (IMF, European Commission, ECB) - Emergency measures: ○ IMF loans ○ Temporary EU funding programs § 2010 EFSF (European Financial Stability Facility) § 2011 EFSM (European Financial Stabilization Mechanism) ○ European Stability Mechanism (2012): § Permanent institution replacing EFSF/EFSM § Formal IO (eurozone members) - Troika bail outs: hundreds of billions euros ○ 1st Greece (2010)--- Ireland (2011) --- Portugal (2011)--- 2nd Greece (2013) ---- Spain (2012)--- Cyprus (2013)--- 3rd Greece (2015) - Strict terms (at EC/Germany's insistence, not IMF) ○ Austerity measures ○ Fiscal Compact (2013): stricter version of the 1997 SGP ○ Single Supervisory Group (2013): ECB supervision of banking systems

Globalization and International Migration

- Key drive of globalization alongside trade and financial flows ○ Approximately 250 million people live outside their country of birth today ○ Impact labor markets, but also capital flow s(e.g. remittances) and trade § E.g. doubling of immigration from a particular country associated with 9% increase in trade flows to that country - As a flow, though, migration considerably lower today than in 19th century ○ Unlike trade and finance ○ Late 19th century migration was massive § Perhaps the primary cause of economic globalization in this period

Domestic Institutions

- Key mediating role of dom. ints - determine how interests are aggregated into the policy - Interests --- Institutions --- Policy

The East Asian Development State

- Key role for trade, but not quite "free market" ○ Role for state (industrial policy): § Investments in targeted industries § Protection of "infant" industries § Selective import liberalization (key inputs) § Incentives for exports § Acquisition of skills and technology - Stable macroeconomic policies: ○ Low inflation (price stability) ○ Competitive (i.e. low) XRs ○ Governments: no large deficits, no excessive borrowing

Legislative and Bureaucratic Institutions

- Legislative: rules shown in constitution -Bureaucracies: Insulate politicians from unwise/unmotivated policies

Is the Eurozone an OCA?

- Less clear: Lots of trade in goods and services Lots of borrowing and lending Not a lot of migration No fiscal transfers - Also asymmetric shocks: ○ Individual members hit by individual shocks § E.g. Northern vs. Southern Europe (Portugal, Italy, Greece, Spain) - The Euro was primarily a political, not an economic project ○ European unity

Nature of the Problem

- Local ○ E.g. indoor air quality ○ E.g. ecological disaster - Domestic ○ E.g. pollution - Transnational ○ E.g. rivers - Global ○ E.g. oceans ○ E.g. climate Transnational and global require international cooperation

Where do refugees come from?

- Main sources (excl. Palestine) ○ Syria, Afghanistan, South Sudan, Somalia, Sudan - Global refugee crisis in last few years ○ Highest levels since WWII ○ European migrant crisis (2015-)

Doha Development Agenda

- Make WTO work for dev'l countries - dev'l & implementation issues - AG, Non-ag market access, "Singapore" issues: trade faciliation, competition, investment, gov't procurement - Gridlocked for many years-- key prob: ag subsidies

The UN Development Agenda

- Millennium Development Goals (MDGs) ○ 2000-2015 ○ Broad view of development § Poverty, but also maternal health, diseases, gender equality, environmental sustainability, etc. - MDG #8 calls for: ○ More generous aid ○ Debt relief - The Monterrey Consensus (2002) ○ Consensus on new developmental commitments, including: § Pledges .7% of GNI in foreign aid § Debt sustainability & relief - Sustainable Development Goals (SDGs) ○ 2015-2030 (supersede MDGs) ○ 2030 Agenda for Sustainable Development

Economic development means structural transformation

- Modernization Theory (1950s-60s): ○ "Natural" path from "traditional" (lower productivity) to "modern" (higher productivity) activities § Industrialization but also westernization - Pre industrial ---- industrial (--- and now post-industrial) ○ Quite different terms of location, organization, and technology ○ More diversification (less specialization)

Managing the Float

- Monetary coordination among G7 economies - Key political issue: US wanting to address its external payments deficits by pressing Germany and Japan to revalue their currencies and pursue more expansionary domestic economic policies ○ US: encouraging others to adjust their macroeconomic policies instead of adjusting itself ○ Still an issue today (stop saving so much, spend more)--- global imbalances

European Central Bank

- Monetary policy for all eurozone members by ECB ○ Based in Frankfurt ○ Core of the Eurosystem § European System of Central Banks - Main aim: price stability (fight inflation) ○ German influence

Does inequality matter?

- One view: what matters is reducing poverty, not inequality ○ The rich becoming richer not a problem so long as the poor are also getting richer (even if less rapidly) - Growth may tend to create inequalities ○ E.g. China's inequalities among highest in the world. Bad? - Inequality and economic growth ○ More unequal countries may tend to grow more slowly (but evidence is mixed) ○ Growth spells are affected by inequality: last longer in more equal societies ○ Rich don't consume as much as poor in terms of % of income § So rich getting richer: don't stimulate economy as much as poor getting richer ○ "Economic growth" in Equatorial Guinea: impressive, but how much does it benefit most Guineans? - Other negative consequences: ○ E.g. crime, weaker property rights, corruption, lower social mobility, etc. ○ Social mobility is lower in more unequal countries (USA)

Partisan Model

- Parties: ○ Left: care about unemployment ○ Right: care about inflation - Why? ○ Pressures from economic classes (base) § Left--- labor § Right --- holders of wealth - Preferred policies ○ Left: expansionary monetary policy ○ Right: tight policy

Who wanted the Euro?

- People: ○ Pro: high-skilled labor, trade-related jobs (trade is a lot easier with a common currency) ○ Against: poor, low-skilled labor, citizens who relied more on government social policies (no policy autonomy for government to help out the poor when crises happen and are even in more direct competition w/ other low skilled labor) - Countries: ○ Pro: more integrated, higher inflation ○ Against: role of national identity, social democracy § E.g., Denmark, Sweden, UK

Intensity and Organization of Interests

- Pol. org. of interests - org. is costly, intensities shape how much actors are willing to lobby - Preference intensities - size of stakes, specificity of assets (single skilled - more likely to desire to keep jobs, have a harder time switching jobs)

Monetary Coordination post-BWS

- Post BWS: no formal rules, but need for informal economic coordination among major economies ○ ^ volatility in currency markets - G7 (est. 1975): key venue ○ G5/7: U.S., Japan, Germany, France, UK [Italy, Canada (+EU)] § Not a formal IO ○ Since GFC, G20 has mostly replaced G7 as main economic forum § But G7 still key in monetary relations ○ Key G7 agreements: § Plaza Accord (1985): USD value too high □ Reagan deficits, high interest rates, current account deficits § Louvre Accord (1987): USD depreciated too much -- stabilize

The IMF

- Post-BWS: crisis of purpose ○ Not overseeing monetary system - New roles: 1) Lender of last resort and managing financial crises (not intended role) i. Conditionality: emergency lending in exchange for policy reforms (structural adjustment programs) 2) Surveillance of global economy i. Reports on Observance of Standards and Codes (ROSC)

Regional Monetary Integration

- Post-BWS: no formal rules --- some countries choose monetary union/integration instead ○ Eurozone (19 countries) ○ Common Monetary Area § South African rand (4 countries) ○ Eastern Carribean Currency Union § East Caribbean dollar (6 countries & 2 British territories) § Pegged to US $ ○ CFA Franc (2 currencies): § West African CFA Franc (8 countries) § Central African CFA (6) § Pegged to Euro ○ "Dollarization" (currency substitution) § E.g. Ecuador--- USD § E.g. Kosovo --- Euro

Global Inequality and Poverty

- Poverty: lack of sufficient income ○ Insufficient nutrition, housing, health care, education, etc. ○ Absolute vs. relative ○ Key measures (e.g.): § GDP per capita (PPP) § Extreme poverty lines □ Global vs. national poverty lines § Multidimensional poverty index (MPI) - Inequality: distribution of income ○ Relative measure ○ Key measure (e.g.): Gini coefficient - Higher income, the more satisfied you are

Kyoto Protocol

- Protocol (a binding agreement linked) to the UNFCCC ○ All states joined § Except US never ratified - Set specific binding targets for reducing GHG emissions ○ Common but differentiated responsibilities: § Developed nations (Annex 1): □ Collectively reduce GHG emissions by 5% from 1990 levels by 2012 § Developing nations: nothing - Fist commitment period: 2008-2012 ○ Later extended: 2012-2020 (2nd commitment period) ○ Not nearly enough, but a start

Why Migrate?

- Push factors: circumstance in the country of origin leading people to emigrate ○ E.g. lack of opportunity, poverty, crime/safety, war, environmental disasters (droughts), persecution, famine - Pull factors: conditions in the destination country making emigration attractive ○ E.g. economic opportunities, political freedom, favorable immigration policies, diasporas, migrant networks, family reunification, culture/language, labor shortage

Why did the US crisis spread Globally?

- Real estate bubbles in other countries ○ E.g. Ireland, Spain --- fueled by savings glut - Toxic assets held in foreign (European) commercial banks - Freezing of global credit markets in the fall of 2008

Post-Washington Consensus- Development Strategy

- Rejection of "one-size-fits-all" approach ○ Washington consensus dead ○ "Policy Space" for innovative growth strategies - GFC: "Western" economic model damaged - Turn to East Asian Model (EOI)? ○ Role of neomercantilist "developmental state" in industrial policy § Highly skilled bureaucracy "guiding" the market ○ Focus on exports § But selective trade restrictions (infant industries) ○ Worried of financial flows ○ Focus on investment, rather than consumption (repression) - Towards a Beijing Consensus? ○ Chinese model: how attractive? How replicable? § State capitalism, authoritarianism, export-oriented, incremental reforms

Remittances in LDCs

- Remittances and ODA now main source of external finance in LDCs, ahead of FDI (unlike other developing countries) Remittances and Poverty - Can have an impact: ○ 10% increase in migration --- 2.1% decline in poverty ○ 10 % increase in remittances --- 3.5% decline in poverty - In general, can be important for poor, small countries, but unlikely to have significant impact on long-term development - High transaction costs: role for international policy coordination

Political Consequences: Global Power Shift

- Rise of emerging markets ○ BRICs, esp. China, less affected by crisis Stagnation in Europe/US

Causes of Financial Crises

- Wide variety of causes - One view is Hyman Minsky's: ○ Financial fragility is a feature of capitalist economy ○ Speculative euphoria leads to investment bubbles § --- debt soon exceeds what borrowers can pay--- credit crunch ○ Cycle: stability ---- fragility ---- crisis

Domestic Factors and Institutions

- Several factors matter here, e.g.: ○ Basic infrastructure § Transportation, telecommunication, power/water supply, etc. ○ Healthy and skilled/educated workforce ○ Legal institutions (protection of property rights, constraints on elites) ○ Corruption ○ Regime type? § Democracy: more provision of public goods § Dictatorship: better at mobilizing resources § Democracies tend to be wealthier on average § But poor democracies have performed relatively poor in recent decades ○ Government Policies and development strategies

GDP growth, 2007-2014

- Since 2014: ○ Economic crises in Russia and Brazil ○ Collapse of oil and commodity prices

Actors

- Societal groups - Owners of Factors of Production - Individuals -States

Cooperation Issues- North-South Divides

- South: focus on development --- north mostly responsible for environmental damage ○ Environment: a rich country's (privileged) concern? - North: not really interested in development ○ More recently: want South to adopt greener practices ○ Sometimes: not willing to do more for the environment if it hurts the economy in the short run (increasingly minority view) - Is it fair to ask the south to be environmentally responsible while they are developing, while the north didn't have to? ○ Emerging "commun bu differenitated responsibility" principle - Should developing countries be "allowed" to pollute as much as current industrialized nations have polluted in the past? ○ If rich countries' ecological footprints expanded to whole world, we would need at least 3 additional planets ○ Emergying "sustainable development" principle

Global Financial Crisis (2007-09)

- Started in the US (and Europe) --- not in LDCs - Safe loans already out, but you still have more money--- give out risky loans - Led to "Great Recession" ○ Worst since the 1930s ○ Very slow recovery - "Global Financial Meltdown" barely averted ○ Sept 15 2008: failure of Lehman Brothers (investment bank)--- triggered a panic ○ Failure of several large financial institutions; bailout of others ○ Credit crunch: US economy dependent on access to liquidity and credit --- financial flows stopped

Which Region is poorest? Which Region has experienced most dramatic changes?

- Sub-Saharan Africa does not seem to have experienced as much poverty reduction (is the poorest region) East Asia = most dramatic changes

Global Imbalances: Who Adjust?

- Suprlus countries (Germany & Asian countries) ○ US & others should save more, consume less - Deficit countries (US & Other countries) ○ Germany & Asian countries should stop distorting policies that reduce consumption & artificially lower XR

The AFC and Global Imbalances

- The GFC rooted in Asian governments' response to AFC ○ Creation of Asian "savings glut" --- pile up money because they never want to experience that again - Asian countries stopped running current-account deficits ○ Fear of repeat, "mistreatment" by IMF ○ Key tool: large forex reserves ○ Precautionary --- self insurance in case of currency crises - Led to "Bretton Woods II": ○ Large savings rate, large forex reserves, low-value currencies, and high levels of exports in Asia (+Germany) § Global savings glut ○ High levels of spending in most Western countries - Global Imbalances: ○ Current-account surplus in China, Germany/Northern Europe, Japan, emerging Asia, and oil exporting countries; ○ Current-account deficit in US nad ROW - Imbalance = unsustainable --- but, who adjusts?

Bilateral Donors--- how generous is the U.S.?

- The U.S. is the country that provides the most money, but in terms of size it is actually one of the least generous (ODA as per cent of GNI) Bilateral Donors - Rich countries: DAC + a few wealthy oil states (e.g. Saudi Arabia, UAE) - OECD Development Assistance Committee (DAC) ○ Mina venue to discuss bilateral ODA for donor countries ○ 1969: concept of ODA - Increasing amount of South-South cooperation ○ Esp. China (but also Turkey, Brazil, Russia, RSA, etc. ) ○ AIDData ○ More to come: Belt and Road Imitative (China's future investments in trying to connect everyone to them)

Is the U.S. an OCA?

- The US satisfies most OCA criteria: Lots of trade in goods and services Lots of borrowing and lending Lots of labor mobility A unified government budget - Though not perfectly: ○ 5 US regions appear to form an OCA § New England, Mideast, Great Lakes, Rocky Mountains, Far West ○ 3 tend to experience shocks that differ from rest of country § Southeast, Plains, Southwest

Last year (2016) hottest on record

- The last 3 years= hottet on reord - 2017: set to be 3rd hottest on record October 2017 vs. previous octobers Greenhouse Gasses (GHGs) - Co2 (carbon dioxide) ○ Mostly from burning fossil fuel ○ Leading long-term cause of anthropogenic climate change § Long lifespan---- main target of governance efforts (e.g. Kyoto protocol) - But, CO2 not only GHG, e.g.: ○ Water vapor, ozone, nirous oxide (laughing gas), methane (cow burps/farts) HFCs (ODS replacement), black carbon (soot particles), some of these are short-lived GHG § Climate and clean air coaliiton (CCAC) □ Est in 2012 by UNEP: states, Ios an NGOs - All GHGs contribute to the greenhouse effect, i.e. warming of the atmosphere (and therefore of oceans, etc. ) ○ So why "climate change" instead of "global warming"

Multilateral Environmental Agreements

- There are dozens of MEAs: - Examples: ○ 1973 CITES (Conventional on Interantionl Trade in Endangered Species) ○ 1979 CLRTAP (Convention on Long-Range Transboundary Air Pollution) ○ 1987 Montreal Protocol on Substances that Deplete the Ozone layer

Is there a controversy surrounding climate change?

- There is no longer a scientific debate about: 1) whether it is happening (it is "unequivocal") 2) And what the source is ("extremely likely"/"almost certainly" anthropogenic) - But uncertainties remain about: ○ Likely impacts ○ Costs of action vs. inaction ○ What we can do to adapt ○ What technology can do to mitigate ○ Who is going to pay - All states agree: it is a serious threat that needs to be dealt with ○ A lot of efforts, but no effective solution yet ○ The problem is mainly political

Aid Critics

- William Easterly's The White Man's Burden ○ Aid has failed: too much "planning," not enough accountability and feedback - Dambisa Moyo's Dead Aid Aid has fostered dependency, encouraged corruption, and perpetuated poor governance and poverty

Why Invest/Borrow Abroad?

- To make money (duh!) - Average profit rate depends on how plentiful capital is ○ Scarce capital= more expensive - So expectation --- movement from capital rich to capital poor countries (invest where capital is more scarce because you will make more) - Lenders: seek higher returns on interests or investments (will get higher interest rates in capital poor countries) - Borrowers: access to cheaper, more plentiful capital from rich countries Investment Risk - But most investments occur among (capital-) rich countries. Why? ○ Risk - Investing in poor countries is particularly risky:

Explaining Immigration Policies--- The Trade Dimension

- Trade in goods=embodied flows of factors (labor+capital) - Trade as substitute for immigration ○ Free trade allow buying goods produced by cheap labor in other countries ○ If trade is restricted--- still access to cheap goods by importing cheaper labor ○ So closed trade--- pressure by business groups to import labor --- more open immigration policies § Closed trade, open immigration ○ Free trade--- less pressure for importing labor, more influence of nativists/restrictionists--- more restrictive policies § Open trade, closed immigration

BW Conference (1944)

- U.S. leadership, during WWII -BW System: a formal set of rules to stabilize exchange rates (unprecedented)--- IMF articles of agrement: binding rules - BW institutions: World bank (IBRD)- postwar reconstruction and development, IMF - supervises the BWS of monetary relations

Is the Doha round over?

- U.S./EU= time to move on - Dev'l countries push back and want to continue - WTO future as a negotiating forum: while members can't agree on new rules, the WTO as an institution functions well (esp. the DSB), but WTO cannot liberalize trade unless its members want to

Financial Crisis Inquiry Comission

- US FCIC Report (2011) ○ Majority (6 democrats): Blame Wall Street § Excessive political influence of Wall Street □ Self-regulation § Deregulatory ideology and flawed regulations □ 1999 repeal of Glass-Steagall Act: ending the seperation of investment and commerical banking □ Complex financial institutions lack transparency ○ Dumb dissent (1 republican): Blame the "gubment" and minorities ○ Smart dissent (3 republicans): Hennessey, Holtz-Eakins, & Thomas § No single cause + explanation has to deal w/ the fact that other countries had similar shocks

Dollar Glut and U.S. Credibility

- US: decrease gold reserves, increase money supply - Gold coverage ration in 1971: 18% (can only convert 18% of money into gold) - Causes trust issues: don't believe US can back their dollars

Collapse of the BWS

- Unsustainable: erosion of confidence in USD- anticipation of devlauation- speculative attacks- less confidence, etc. - some countries (Japan and Germany) agreed not to convert USD into gold; Fr refused - Closing the window: Aug 15, 1971: Nixon shock- USD no longer redeemable for gold, Dec 1971: Smithsonian agreement: attampts to salvage BWS- 10% devaluation of USD, Nixon: Most significant monetary agreement in history in the world--- not true -1973: 2nd 10% devaluation, Japan and Europe let their currencies float--- end of BWS

Is Aid Effective?

- Very hard to assess - Might depend on quality of institutions and governance (democracy, rule of law, corruption, bureaucratic quality, etc.) ○ Conditional aid (incentives to better their economies)

Costs of Shared Currency (stability losses)

- W/o a currency of its own, a country is not able to use monetary policy to stabilize an economy in trouble ○ E.g. US Fed can create money (inject liquidity in economy), make loans cheaper (^ interest rates) - These stability losses from sharing a currency are smaller in different parts ○ Are economically integrated § Trade in goods and services § Borrowing/lending on a large scale § Great deal of labor mobility ○ Experience symmetric external shocks ○ Have a unified government budget § Allows for fiscal transfers (stabilization) --- useful to deal with asymmetric shocks

The Challenge of Mega-Regionals

- WTO/DDA maladapted to new trade realities (^ intrafirm) - not tradidiontal, but now more MNCs, etc. - Must focus on FDI -TTIP--- investment -RCEP = alternative to TPP - Fragmentation, easier to exempt most sensitive issues, forum shopping (include thier on DSB's)

Interwar (1918-1939)

- WW1: Collapse of globalization and gold standard - period of great instability and volatility - XR: collapse of GS (volatitlity), adjustment pains associated with GS were no longer political feasible (labor mov't)--- increased autonomy, free capital flows - UK no longer able and US not willing= no key currency -Great Depression: mistrust of free financial flows, desire for increased intervention in the economy (Keynesianism) - Interwar monetary diplomacy: 1922: Genoa Conference- failed efforts to restore GS, currency fixed to pound and forms of reserves, 1931-36: Competitive currency devaluations (currency wars), 1931: Britain suspends convertability, 1933: World Economic Conference (london)- aim: revive the world economy, scuttled by FDR: denounced plans for currency stabilization, took U.S. off of GS, poisned subsequent UK-US monetary relations 1936: tripartite agreemetn : US, UK, FR--- attempts to stabilize XR's (managed float)

Interests and Preferences

- What are the actors interests - Preferences: how do diff. policies affect them

Countries or People?

- When considering inequality and poverty reduction, should we focus on countries or people? ○ E.g. India (1 country, 1.3 billion people) vs. Africa (54 countries, 1.2 billion people) - Should we care about inequality within nations as well as between nations? What's the right measure of global inequality?

FDI

- When parent company creates or acquires affiliates abroad - invovles ownership/managerial control (not portfolio investment) - Greenfield investment: construction of a new plant - Brownfield investment: purchase of an already existing plant - market oriented vs. export oriented FDI: production mainly for local market vs. global market

Explaining Underdevelopment

- Why are some countries rich and other countries poor? ○ Geography, culture, history? ○ Political and economic institutions?

Financial Liberalization

- Why support financial liberalization? ○ Influence of "neoliberal" ideology § "free market" § Washington consensus ○ Competitive strategy to attract mobile financial business and capital § London's status as good financial center § "Offshore" financial centers □ E.g. Cayman Islands, BVI, Guernsey □ Ppl send there money here because they won't have to pay taxes on it

Developing Countries

- World Bank Classification: ○ Low Income § E.g. Haiti, Ethiopia, Afghanistan ○ Lower Middle Income § India, Nigeria, Egypt ○ Upper Middle Income § China, Mexico, Brazil - Other sub-categories ○ Least Developed Countries (LDCs) § 47 countries (mostly in Asia and Asia-Pacific) ○ "Emerging Markets" and Newly Industrialized Countries (NICs) § Not too rich, not too poor § No precise Definition □ BRICS, MINT, EAGLES, Nest, Next Eleven, etc. - "Third World"? ○ Outdated Cold War term § Political, not economic: non-aligned countries § 1st/2nd Worlds: advanced democracies and communist countries ○ Today: "Global South" ○ "Transition Economies" § Many former "2nd world" Communist countries now "developing countries" □ Incl. Russia ○ Some former LDCs have "graduated" to "developing countries" (Botswana, Cape Verde, Maldives, Samoa, Equatorial Guinea, Angola"

Why not a single world currency?

- Wouldn't it promote cooperation and integration? ○ A common currency means a common monetary policy --- politically difficult ○ Different conditions --- policy flexibility to address them is desirable § A common currency is like the gold standard □ Facilitates transactions, but limits ability to manage domestic economies and their potential problems

Benefits from Shared Currency (efficiency gains) (similar to why states would want to be on a gold standard)

- XR stability (Fixed) - Reduced transaction costs ○ No conversion hassles, no currency risks ○ Imagine the U.S. w/ 50 different currencies - These gains are greater when different parts: ○ Trade a lot w/ each other ○ Borrow from/lend to each other on a large scale ○ Have a great deal of inter-regional migration - i.e. if area is economically integrated

Re-Globalization (1973-2008)

- ^ financial crises -washington consensus (neoliberalism resurgent) - Emergence of global capital - end of BW (floating exchange rates, free movement of capital) - 1970s-80s: stagnation (oil crises)

Infant Industry

- a potential CA may not be realized b/c infant industries cannot compete - solution: temporary protectionism until they are strong enough - problem: how do we identify these industries?

Balance of Payments

- accounting device recording all economic transactions between residents in one country and those of other countries during a fixed period of time (measure of global economic exchange) - any current account (trade deficit) is offset by a capital account surplus (investment) - current account (balance of trade) and capital account (net change in foreign asset ownership-- FDI) - double entry accounting--- should balance - therefore, trade deficit = capital suprlus

Mercantilism and Realism

- both emphasize state power, anarchy, and national interest - zero sum nature of economics (relative gains) - economy is subordinate to the state - hegemonic stability theory: one dominant national causes an increase in stability in the international system

Global imbalances

- can be a problem and threaten the stability of the world economy, but usually has to do with the capital side instead of the trade side

Currency level and central banks

- central banks can impact strength/value of a currency - Role of central banks: oversee XR, price stability (combat inflation, prevent deflation), low unemployment and economic conditions - Monetary policy: expansionary (loose) vs. contractionary (tight) - Expansionary: stimulate economic activity via rapid expansion of monetary supply (goal is to decrease unemployment) - Contractionary: decrease rate of growth via slow down or contraction of monetary supply, goal: prevent inflation

H-O Model and Distributional Consequences

- class conflict!!!! (labor versus capital) - Rogowski adds: - urban-rural cleavage (land vs. capital/labor) --- also explains coalition politics (mariage of iron and rye)

What accounts for New Regionalism:

- contagion effect: EU success - Change in U.S. policies towards RTAs - Change in scope: N-S RTAs, beyond "regional" ^ increasing bilateralism - change in purpose: South- RTAs to ^ integration into world economy, beyond tariffs - frustration with multilateralism b/c of process to create new rules

Liberalism

- critique of Mercantilism - Adam Smith - market equilibrium idea - favored free trade - Ricardo and CA ---- trade is always good - unilateral free trade is okay because most of the gains from trade come from imports - assumptions: main actors= individuals, harmony of interests, decrease gov't intervention in markets, primary objective: enhance aggregate welfare (not amass state power), gov't should enforce property rights and provide public goods

Keynesianism

- critique of classic liberalism: overestimated how much self-interest and public interest coincide - embedded liberalism: ^ priority given to providing full employment and social security - macroeconomic management to stimulate econ - welfare state, reflected in Bretton Woods

RTAs: building or stumbling blocks?

- how could they hinder liberalization: - magnify power disparities - scarce bureaucratic resources diverted away from global negotiations - "spaghetti bowl" effect - complex overlapping rules and memberships - provide adequate markets= less demand for liberalization - easier to exempt politically sensitive sectors - How could they facilitate liberalization: - small groups of states, deeper integration - increase competitveness of domestic markets and therefore might become more willing to open up - strengthen export-oriented interests to open up to free trade - "domino effect" pushes those outside the RTA to demand equivalent access

Secular Stagnation

- idea that very low growth is the new normal - may be a demand problem, and is exacerbated by increasing inequality - lack of investment= slow growth

China: World's Factory

- impact of C on global production dificult to understate - one of the leading destinations for FDI - teh China price: relative quality @ cheap prices - emphasis on processing trade: importing higher value goods from elsewhere, assembling componets into finished goods to be exported

Specific Factors Model

- in short run, factors of production are immobile (tied to one industry) - H-O instead assumes perfect mobility - contrary to S-S, factors w/i the same country are not uniformly affected by trade (depends on industry sectors, not classes)

Stolper-Samuelson Theorem

- income distribution effects trade (winners and losers) - free trade-- helps all consumers - but not all producers: benefits owners of abundant factors of production and harms owners of scarce resources

Arguments for Protectionism

- infant industry, TOT arguments, strategic trade policy - political arguments: unfair trade, retaliation & trade war, protecting jobs, national security, protecting consumers safety

Role of Institutions

- institutions can help facilitate cooperation and make free-riding less likely - regulate repeated interactions - monitoring - linkages -dispute settlement mechanism

Effects of Protectionism

- instruments: tariffs and non-tariff barriers - impact: imported goods cost more money, domestic producers sell more and higher prices, aggregate welfare loss - impact of quota: same as a tariff except there is no revenue for the government

Monetary Policy Instruments

- interest rates, open market, forex, sell/buy government securities, reserve requirements, unconventional (quantitative easing)

Legacy of the Uruguay Round

- key advances: WTO& dispute settlement body, decreasing levels of tariffs, inclusion of ag, more dev'l country participation - But not enough because of single undertaking principle

Negotiating Ag. in Doha

- key groups: protectionists (U.S./EU, G10), liberalizers: countries w/ a lot of land - in practice, small group negotiations - agreed framework: ag liberalization in developed countries & trade facilitation in developing countries - Complications: rich countries are not willing to liberalize AG, EU/JP: unilateral shift away from distorting subsidies (less to compromise on), developing countries won't agree on anything until ag is done

GATT/WTO Principles

- liberalization -reciprocity - nondiscrimination (MFN w/i WTO, and can't discriminate between local and foreign goods once they cross the border) - safeguards (temporary protection, permanent exceptions--- RTAs) - transparency

Causes of Globalization of Production

- liberalization of trade - tech & organizational innovations (lower costs) - policy changes

Explaining MNCs: Making or Buying

- locational advantages (jumping trade barriers, lower wages) - firm-specific advantage: don't have to give out proprietary assets - size related advantages: lg firms can mobilize capital more easily

Impact of MNCs

- massive global investment flows - prime shapre of globalization of production - driver of trade globalization - globalization of tech & knowledge (long term diffusion) - restructuring of global economic relationships-- shift in most important relationships from interstate to inter firm & firm-state interactions

Rise of Global Production

- mercantilist companies (BEIC) - Industrial revolution: ^ demand for raw materials, UK= largest source - 1920s: rise of modern MNCs in US, response to EURO protectionism, horizontal integration - Postwar globalization: FDI really took off, not global until recently (mostly was triad-- US, EURO, JP), since 1980s = more developing countries

Rational Choice Theory

- model of reality, actors are rational (purposive and strategic)

Do trade deficits matter?

- neo-mercantilist view: perhaps (view of states as being in competition) - standard economic view: no, states don't compete firms do, states care about improving welfare

Non-Materialist Approaches

- not based on income affects - education= linked to pro free trade views (beyon skills acquisition) - sociotropic concerns: is it good for the country as a whole? do other ppl than me get hurt? Do I care? - ideology: left wing government more protectionist in capital in rich countries, but pro-trade in power (labor rich) ones - U.S. partisan divide: unclear now which party is free trade

Outsourcing vs. Offshoring

- outsourcing: transferring part of the production process to outside suppliers - outsourcing abroad -why? location specific advantages

Role of Institutions

- persistent and connected set of rules and practices - Facilitate cooperation; reduce transaction costs; set standards of behavior; verify compliance; dispute resolution

Domestic Process

- ppl/groups have different preferences over trade policy - preference intensity (depends on size of stakes and asset specificity), free trade= diffused benefits, concentrated costs - consumers vs. producers: consumers always benefit (but this is diffused), size of stakes for import-competing industries = much more important (concentrated)--- incentive to lobby = higher for producers than consumers ---- Organization of interests (process of coalition formation, lobbying = costly, preference intensities determine a lot (how much is one willing to invest), intensity can overcome collective action problems

Factor Price Equalization

- tendency for prices to converge with trade

Triffin Dilemma

- the liquidity and confidence functions of a global reserve currency are in conflict - proposed solution (1969): speciall Drawing Rights (SRS)--- to supplement USD as reserve asset, Used to acquire own dometic currency when needed, IMF issued: 1st allocatin in 1970 (quota), 2nd in 1979-81, 3rd: 2009-2011, today: 3/11% of global reserves in SDRs, valuation: weighted basket of currencies (what a SDR is worth)

Trade Diversion vs. Trade Creation

- trade creation: when imports from a regional partner replace more expensive domestic products - trade diversion: when imports from a regional partner replace more effecient products originating outside the RTA - little trade diversion= what evidence shows

Postwar Plans for an ITO

- trade: not included at BW (1944) - Havana Conference--- sets up the international trade organization, however U.S. doesn't ratify into force

Feminism

- unequal political economic system (hierarchy) - gender divided labor

Mercantilism (1500-1750)

-"wealth is power and power is wealth" - control of markets and resources - monopolistic colonial empires - favorable balance of trade (exports-good, imports bad) - main actor= state, there are conflicts of interest, close link b/t state po;wer and economic activity - main objective: maximize state power (max. wealth) - trade= a way to acquire wealth from abroad

Marxism and Neo-Marxism

-Current capital system = exploitative by nature (workers get less than what they produce) - class struggle: labor vs. capitalists - state policy = controlled by capitalists - alientated labor - once labor "woke", they'd revolt - neo marxist versions focus on neo imperialism and North/South exploitation

Old GATT

-Dev'l countries had special & differential treatment (no reciprocity)-- free riders but also had marginal power-- started to change w/ Uruguay round

Neo Marxist and IPE

-Lenin Theory of imperialism: capitalism leads to colonial exploitation and imperialist conflicts - world system theory: division of labor b/t a core, periphery and semi periphery Dependency theory: South suffers from decreasing terms of trade, Prebish-Singer hypothesis- this leads to ISI

Classical Era (Pre-WWI)

-Mercantilism to Liberalism - Pax Britanica: British econ & polt dominance - relied on gold standard (fixed exch rate) - Emergence of free trade - Corn Laws Repealed - Cobden-Chevalier Treaty (MFN clause) - U.S. = protectionist - Trade= mainly with colonies (similar to mercantilism)

Bretton Woods & Postwar Liberal Order

-U.S. hegemony -embedded liberalism: free market w/ safeguards - LDC= ISI - Bretton Woods Conference (1944)- U.S. leadership, creation of IMF and World Bank, BW monetary system (fixed exch rate, based on dollar) - GATT (1947): reciprocity, non-discrimination, flexibility (safeguard mechanisms) - POSTWAR BOOM

WTO

-relatively small bureaucracy (member-driven) -164 countries - Decision making (voting, 1 country = 1 vote), single undertaking, decisions made at ministerial conferences, power matters --- "Green room meetings" - rules: Art. 1 MFN, 2. Tariff bindings, 3. National treatment, 5. Freedom of transit of goods, 10. Publication of trade regulations (TPRM), 11. elemination of quantitative restrictions - emergency protection: temporary suspension of concessions allowed when a sudden surge of imports causes or threatens "serious injury" to domestic industry - dumping/anti dumping--- not prohibited, but states can use as a reason for temporary protectionism - subsidies: 3 types, non- actionable (not specific), prohibited (tied to exports) actionable (permitted subsidies that can harm trade) - disupte settlement body: panel and appeliate body (wasn't in GATT), automatic after request by complaintant

Neoliberalism

-resurgence of orthodox liberalism - Friedrich Hayek: gov't intervention= ineffiency and threat to indv freedoms - Milton Friedman: econ freedom = polt freedom - 1980s-2000s: Thatcher & Reagan, deregulation, privatization, supply-side econ - Washington Consensus (IMF, World Bank) - Post 2008 = Keynesiasm Resurgence

20th Century: 2 Key Changes in Politics

1) Greater Worker's influence after WWI a. Domestic economic conditions matter more than external stability i. Not gold standard style adjustment process ii. Rise of labor and socialist parties 2) Keynesian Revolution After WWII Gov'ts can & should intervene to reduce unemployment via monetary exp.

Product Life Cycles Theory

1) intro: new product, single market, home mkt 2) growth: increasing scales, economies of scale, export to foriegn market, competitiors enter 3) maturity: high sales, intense compeition, decreasing profit margins 4) Decline: decreasing profit, production shifts to dev'l countries (FDI) - Developed by R vernon to respond to H-O model's inability to explain trade patterns -today: speed and scale of worldwide competition = much shorter

FCIC Dissent (10 essential causes of the Crisis)

1. Credit bubble: global imbalances a. Global savings glut: $70 trillion in global savings to be invested "somewhere" i. E.g. bonds (low yield), mortgage backed securities (high yield, but also high risk) 2. Housing Bubble 3. Nontraditional (subprime) mortgages 4. Failure of credit ratings and securitization a. Transformed bad mortgages into toxic assets 5. Financial institutions concentrated correlated risks (all of the banks got onto the bandwagon with this) 6. Leverage and liquidity risks: a. Financial firms did not hold enough capital to cover risks 7. Risk of contagion a. "too big to fail" firms not allowed to fail because of interdependence 8. Common shock: large housing losses 9. Financial shock and panic: a. 2008 bank failures --- widespread loss of confidence in financial system 10. Financial crisis causes economic crisis a. Damage to the real economy (panic ended in 2009, but great Recession for years)

World Bank Group

1. International Bank for Reconstruction and Development (IBRD) (1944) a. Loans to middle income and creditworthy low income countries 2. International Development Association (IDA)(1960) a. Grants or interest free loans (credits) to low income countries - These two together = the World Bank (IBRD+IDA) 3. International Financial Corporation (IFC) 4. Multilateral Investment Guarantee Agency (MIGA) 5. International Center for the Settlement of Investment Disputes (ICSID)

Stability/Autonomy Trade Off

2 desireable goals: stable XR's (help trade, provides credibility), domestic policy autonomy (to affect domestic economic conditions). Fixed: promotes stability Flexible: promotes domestic autonomy

Environmental Kuznets Curve

Does economic development have to hurt the environment? Yes and no

Global vs. National Poverty Lines

Being "poor" depends on both your income and your country's

Eurozone Crisis

European sovereign debt crisis (covered next week) was in large part attributable to the Euro ○ Irony: creation of euro itself made asymmetric shocks more likely - Countries in crisis stuck in gold-standard like situation: ○ Cannot devalue their currency to adjust § To make them more competitive/grow economy ○ Instead "internal devaluation" via deflatoin § Painful "austerity" measures, wage cuts, high unemployment (still at 17-21% in Spain/Greece, youth unemployment: 38-43%) - Fiscal irresponsibility not main source of the crisis ○ Greece being an exception - Instead, EU is not (yet) and OCA, not a true fiscal and political union ○ Germany (and others)don't want (and have no obligation) to "bail out" other EU members ○ No fiscal transfers, little labor mobility, asymmetric shocks Can one have a monetary union w/o fiscal union? If not, what does it mean for the future of the euro?

Fixed or Pegged XR

Fixed to the value of either: another currency (or a bundle of currencies) or some other standard (gold standard-BW) A government monetary authority must restrict currency movements to a narrow range around some central rate (e.g. intervene in forex markets to buy/sell own currency to make it rise/fall) U.S. dollar = key reserve currency, used in most international transactions, safe-haven currency, $5 trillion held abroad Also: gold reserves, about 15% of total reserves

Strategic Environments

How do states preferences combine to produce outcomes? o Dependent on nature of strategic environment • Temptation to free ride (Prisoner's Dilemma) - Trade liberalization • Inhibiting Fear (Assurance Game - Stag Hunt) - financial integration • Where to meet (Coordination - Battle of the Sexes) - multinational negotiations • Bargaining and cooperation • Bargaining: zero-sum, redistributive - one actor made better off at expense of the other • Cooperation: actors adopting policies that make each of them better off (positive sum)

Flexible/Floating XR

Int'l currency markets determine value of a currency. Beyond pure floats and pegs, there can be fixed but adjustable or managed flots are also common (gov'ts can always intervene if they want)

Aid Advocates

Jeffrey Sach's The End of Poverty ○ LDCs need help to get out of poverty traps--- once they are out, aid won't be necessary ○ Favors carefully targeted and planned aid programs - Bill Gates ○ Aid is a moral imperative ○ Role for NGOs and individuals

Money and Currencies

MONEY: serves 3 main functions- medium of exchange, unit of account, store of value CURRENCY: system of money in use in a particular country FIAT CURRENCY: no intrinsic value REPRESENTATIVE CURRENCY: Commodity backed money (gold/silver) COMMODITY MONEY: rai stones, gold, salt, beads, etc. cigarretes in prison

WJB & the Free Silver Mov't

Monetary politics: central issue of 1896 & 1900 U.S. presidential elections William Jennings Bryan's "Cross of Gold" Speech - Free and unlimited coinage ○ 16-1 rate against gold (gold to silver ratio) ○ Pitted miners and farmers vs. financial and commercial sectors ○ Bryan: supported by "Silver Republicans", opposed by "Gold Democrats" - Would depreciate USD - Opposition to free silver mov't --- Mckinley

Monteary Policy & Unemployment

Phillips curves: trade-off b/t inflation & unemployment (in the SR) - Maintaining fixed XR: ○ Harder for left-wing gov'ts ○ Easier for right-wing gov'ts - Economic conditions: ○ Recessions more likely under right-wing than left-wing gov'ts ○ Why? Right focuses on inflation & stable XR, not employment & econ growth Friedman: no Phillips curve in the long-run ○ No stable long-run trade-off b/t inflation & unemployment ○ The end of Keyynesianism? § Approach based on existence of such trade-off Natural rate of unemployment: ○ Long-run equilibrium rate of unemployment > 0 ○ Monetary policy can only do so much to reduce unemployment - 1980s: fighting inflation (i.e. price stability) became priority ○ Given unemployment can't really be changed & inflation is costly ○ Inflation should be only role of monetary policy Post-Global Financial Crisis: Keynesianism is back ○ Priority to stimulating the economy § Fears of inflation never materialized

Why RTAs?

Political motivation - regional security & confidence building - improved bargaining power vs. MNCs -"Locking in reforms": signaling seriousness to free trade to investors - domestic political acceptability: reciprocity preferable to unilateralism -easier to negotiate/implement than multilateralism Economic Motivation: - compared to unilateralism: access to larger markets and increase foreign investments - compared to multilateralism: opportunities for deeper integration

Inequality: Gini Coefficient

Population divided into quintiles ---- income distribution within a country

Environmental Protection and Income

Richer countries tend to perform better in terms of environmental protection (EPI)

The Road to EMU

Single European Market completed by early 1990s--- belief next logical step should be Economic and Monetary Union (EMU) ○ 1989 Delors Report § Re-launched idea of single currency + timetable for reaching EMU ○ 1992 Maastricht Treaty Set "convergence criteria" in order to adopt common currency (the "euro"

World Population

Size of country= size of population (map)

The Classical Gold Standard (1870s-1914)

Stable XR (fixed to gold), free flows of capital, no policy autonomy Involved painful domestic adjustment process to maintain it (deflation, fall in wages, increased unemployment) - No formal agreement - Era of globalization: British hegemony -Advantages: stability of exchanges, automatic reblancing of payments: The price-Specie Flow mechanism: - current account deficit--- gold outflow--- deflation--- current account improvement -- current account surplus--- gold inflow--- inflation--- decrease of current account surpluses - problem: painful domestic adjustment process - No long-term imbalances like we see today

Lobbying

US: pro protection lobb ymore fully mobilizied than pro free trade - more likely to lobby effectively: industry size, large firm size, protection for sale, geographically concentrated - ex. U.S. sugar lobby: guaranteed minimum price for sugar and import quotas

Exchange Rates

XR: The price of currency in terms of another (most important price in an economy, affects all other prices) MONETARY REGIME: rules about what type of XR system should exist b/t national currencies (fixed-peged vs. flexible-floating XR) i.e. how much currencies are allowed to fluctuate

Global Imbalances

accounting identities ○ GDP (income side) = consumption + savings (S) ○ GDP (supply side) = consumption + investment (I) ○ So in a closed system: Savings (S) = Investment (I) - In an open economy --- S-I mismatch possible ○ Countries either importer or exporter of capital ○ Because BOP must balance to 0: § A current account (trade) surplus (i.e. S>I) means a capital account deficit (and vice versa) □ CA surplus (S>I): excess savings (S) are exported (e.g. Germany & China) □ CA deficit (S<I): must import excess savings abroad (e.g. US) § But, not net inflow/outflow of USD into the US --- always balances to 0 □ BOP: current account = capital account - How do countries create current account (trade suprlus)? ○ Tariffs/NTBs ○ Currency manipulation: artifically lowering currency value § Most people think that's because domestically produced goods now cheaper vs. foreign goods --- true § But mostly: depreciating a currency = decrease collective spending power (reduce real value of disposable income for all households relative to GDP) □ So = consumption share goes down □ Since GDP= consumption +savings --- If consumption share goes down, savings share must go up □ If no change in investment ---- savings have risen relative to investment □ Since S>I --- country exports its net savings and runs a current account surplus (literally just exporting money and flooding other markets, like the U.S., investment) ○ Financial repression: expanding credit at very low (even negative) interest rates § Transferring welath from net savers (household sectors) to borrowers (producers) --- China ○ Wage growth repression: same impact § Household (workers) share of GDP goes down --- transferring wealth to corporate sector --- consumption share contracts--- saving share goes up (mostly from business sector) --- Germany - So are Americans spendthrift and Germans prudent? ○ Not about morality, but policy choices ○ Excess savings in Germany and China --- S>I § Household, corporate sector, government ○ US ---- no need for investment, but open capital markets ○ German/Chinese excess savings in us --- US automatically run a capital account surplus § Not because of anything that happened in the US § If the US runs a capital account suprlus it must run a current account (trade) deficit § US has access to a lot of cheap savings, which it doesn't need (investments already at desired levels) --- no need for all this foreign capital! § If investment rate doesn't go up, the savings rate must go down (by definition) □ How? What mechanisms? ® Interest rate may go up ® Import foreign goods --- workers fired (reduced savings rate) ® Borrowing standards lowered --- more borrowing/debt ® Stock market/housing bubble § Result: US runs trade deficits and has low rates of savings (high debt)

The Economy and the Environment

economic activity has a material basis: ○ Draws resources from the environment ○ Provides flows back into the environment - Economic growth=rise in income at the cost of greater environmental impact - Sustainability?

Optimum Currency Area

should every country have its own currency? - Should all 50 US states share the same currency? - One answer: is the country or region an optimum currency area (OCA)? ○ I.e. area where benefits of single currency outweigh its costs (Mundell, 1961) § Efficiency gains vs. stability losses - OCA theory---- a single currency is most appropriate when an area: 1. Is highly integrated economically (trade and labor mobility) 2. Tends to experience symmetric shocks (with symmetric effects) 3. Can use fiscal transfers to deal with asymmetric shocks

Causes of Globalization

technology, econ, polt

Human Development Index

yearly UNDP report (HDI= life expectancy, education and GNI/cap)

European Sovereign Debt Crisis (Eurozone Crisis)

• Debt crises: until then in developing countries only • Cumulative economic impact on Eurozone countries: worse than Great Depression • Greece: ○ 1st industrialized country to default on IMF loans ○ 1st developed country to be downgraded to EM • Political Frictions: ○ German/Greek tensions ○ Breakup of Eurozone? Grexit? ○ Doubts about EU's future

I. Financial Crises

• Def: escalation of financial disturbances • Many forms, e.g.: ○ Sharp decrease in asset prices § Market crashes ○ Failure of large financial institutions § Banking crises ○ Disruption in forex markets § Currency crises (i.e. BOP crises) ○ Sharp increase in public debt relative to revenues § Sovereign debt crises • Associated w/ bank and/or currency runs ○ Psychologically linking financial markets together • Often lead to economic crises ○ And, sometimes, political crises, inclu. Revolution & war § E.g. Great Depression, rise of facism & WWII Example: Stock Market Crashes - E.g. NYSE (Wall Street): world's largest ○ Panic of 1907: § Spread nationwide --- European fear of contagion § Led to creation of the FED ○ Great Crash of 1929: § Led to GD ○ 1987 crash (Black Monday): § Largest daily decline § Partly result of German-US inability to coordinate monetary policy ○ 2008-9 crash: DJIA fell by 1/2 § Most severe since 1929 § Other markets fared even worse

1980s Latin American Debt Crisis

• Mid-1960s: foreign loans available to developing countries for 1st time in 30+ years ○ Borrowed at low, but flexible XR • 1970s oil shocks: ○ Increased borrowing (petrodollar recycling) (commercial banks now have more oil money and need something to do w/ it--- lend it to LAM) ○ Decreased demand in rich countries • Borrowing boom ended in 1982 --- start of crisis ○ 1982 Mexico default ○ Contagion across Latin America (Brazil, Argentina, Chile, Peru, Venezuela, Colombia, etc. ) ○ And other regions (Ivory coast, Nigeria, Philippines, Poland, Yugoslavia, Morocco, Jordan, etc.) • Investors stopped lending, hyperinflation and recession in Latin America (+ elsewhere) ○ Lost development decade (la Decada Perdida) § Incomes lower than at start of crisis

Sovereign Debt Crises

• Why do governments borrow? From whom? ○ To finance budget deficits ○ Lenders: commercial banks, foreign countries, IFIs (IMF, World Bank --IDA) • Accumulated deficits = debts • What's a debt crisis? ○ When debtor lacks sufficient forex to pay the interest and/or principal on their debt obligations (default) § Liquidity problem: temporary debt crisis § Solvency problem: indefinite ability to service debt

The IMF and Developing Countries

○ IMF and the Washington Consensus* § IMF: capital controls 1944-71 (BWS) § 1980S-90S: shift to opposing capital controls and actively promoting liberalization □ But no jurisdiction over capital accounts (IMF Articles of Agreement) ® Can't formally require liberalization as loan condition ® Attempts to amend AoA in 1990s failed § Led to liberalization in developing countries ○ Washington Consensus: set of neoliberal (market-led) policy reforms pushed by IMF, World Bank, US treasury § Trade liberalization, fiscal discipline, deregulation, privatization, free capital flows, etc. - Non-political factors ○ Technological change § Esp. global telecommunications ○ Market developments: § Expansion of international trade and MNCs activities --- ^ demand in international financial services § Corporate behavior: invest in financial (rather than productive) assets ○ Financial innovations: § Derivative products (futures, options, swaps) --- reduce costs of international financial activities