POLISCI 110C: America and the World Economy Final Readings

Williamson - A Short History of the Washington Consensus

"Washington Consensus" is set of policies that the IMF recommended/imposed in 1980s for developing/crisis-wracked countries, especially in Latin America, that includes 1. fiscal discipline 2. pro-growth, long-term public investment (health, infrastructure) 3. tax reform 4. liberalize interest rates 5. competitive/floating exchange rate 6. trade liberalization 7. allow inward FDI 8. Privatize state-owned enterprises 9. deregulate (enable capital flows and easy market entry) 10. property rights. It became controversial for two reasons: it was accused of being imperialist for forcing developing countries to do whatever the US wanted, and Latin American countries that followed the "Washington Consensus" didn't really succeed by end of 1990s.

Alt and Gilligan - The Political Economy of Trading States

Alt and Gilligan Discuss the HO/SS model and the Ricardo Viner trade models and look at the concentration of winnings and costs. While Rogowski assumes that collective action costs are low, Alt and Gilligan draw on R-V model to point out that losers from free trade are rather disperse and therefore the collective action costs are quite high, except if it is more about industries losing than individuals, in which case collective action costs could be lower as lobbying is easier with industries. In a non-excludable industry, one won't see collective action and in an excludable industry, one is likely to see collective action in impacted industries. Main Idea: Political factors like collective action costs and and political institutions are just as important for determining trade policy preferences as economic factors like factor mobility and production. The R-V model is more capable of depicting preferences if collective actions costs vary.

Quan Li - Democracy, Autocracy, and Expropriation of Foreign Direct Investment

Argues that democracies are not always going to have greater FDI inflows. Instead, democracies are more likely to expropriate relative to authoritarian regimes when leaders do not face political constraints. Instead, it is about leadership turnover rate. The more frequent the leadership turnover rate, the shorter time horizons leaders have and therefore see the benefits of expropriation as higher. Authoritarian regimes are less likely to expropriate if the leader stays in power because the leader has a long term horizon. **Firms would invest when there is a high risk of expropriation.

Blinder - Offshoring: The Next Industrial Revolution?

Argues that offshoring and outsourcing are not bad. The conventional wisdom has been that the likelihood of a job being outsourced depended on education and skill level. However, Blinder argues that it now depends on whether a job has a personal component to it. The offshoring of positions is now about tradable vs. non-tradable goods instead of manufacturing vs. nonmanufacturing.

Nathan Jensen - Democratic Governance and Multinational Corporations: Political Regimes and Inflows of Foreign Direct Investment

Argues that democracies are associated with higher inflows of FDI and higher sovereign debt ratings. The mechanism is that the key is credibility. Investing carries risks, like the host government nationalizing investments, expropriation, or the renegotiation of tax/tariff rates. Businesses calculate that democracies are safer places to invest because democratic institutions have checks and balances where policy reversal is difficult and because there would be an audience cost to policy reversal. Democracies are more likely to attract FDI because they are more credible because there are more political constraints in governments and have higher audience costs, so they are therefore more likely to pursue friendly policies in the future, which reduces risks to multinationals

Scheve and Slaughter - How to Save Globalization: Rebuilding America's Ladder of Opportunity

Argues that there are significant benefits to globalization, includings ones of national security. Makes a case that globalization is well worth saving and makes the following recommendations: a three tier education system (investing in early childhood education, federal funding for two years of community college, and retraining programs), some income redistribution (eliminatating payroll tax for lowest tax bracket/increasing taxes to the wealthy), and the restoration of dignity and trust in the country through education policies.

Lawrence Broz - Partisan Financial Cycles

Broz looks into whether ideology--ie which party controls the gov't--causes economic booms/busts. "The political orientation of the government is both a cause of pre-crisis policies and a consequence of financial crises." Both the left and the right have become fiscally irresponsible. The recent trend has been that right-wing administrations have presided over booms by spurring the economy with financial deregulation, allowing "twin" deficits (current account and federal budget deficits) and credit-funded tax cuts, etc. These booms make the eventual crashes worse, and voters tend to opt for left-leaning candidates who ramp up fiscal spending and regulation. However, he notes that his findings are fairly inconclusive.

Richard Caves - The Multinational Enterprise as an Economic Unit

Explains the types of multinational enterprises (MNEs) are. A multinational enterprise has a parent and plants in multiple countries. They can be organized in the following ways: Horizontal MNEs have the same kind of factories in many countries, which gain access to more markets. Vertical MNEs has different parts of the production chain in different countries to take advantage of cheaper production in certain countries. Diversified MNEs have a parent company that has lots of different production activities in different countries that don't have anything to do with each other.

Edward Mansfield and Helen Milner - The New Wave of Regionalism

Explores whether the recent rise of regional preferential trade agreements "will erode the multilateral system that has guided economic relations since the end of World War II, promoting protectionism and conflict [or] foster economic openness and bolster the multilateral system." Ie the question of are RTAs/ bilateral agreements "building blocks" or "stumbling blocks" to global trade liberalization. Their answer: looks like they're building blocks. This is because bilateral and plurilateral trade deals are much easier to do than multilateral ones. Once countries get used to such deals, they tend to be more open to bigger ones. They suggest the spread of bilateral trade dealing could be attributed to 1. The decline of American power. 2. The spread of democracy (democracy broadly associated with free trade). 3. The failure of international institutions.

Cletus Coughlin - The Controversy over Free Trade: The Gap Between Economists and the General Public

Free trade is the optimal policy for all countries. Opponents reject free trade on the basis of unfair distributional effects & public concerns about the environment and labor standards. Opposition to free trade can be reduced by increasing education on benefits of trade, implementing trade adjustment assistance or wage insurance to help losers, and expanding issues covered in trade negotiations such as the environment and labor.

Peter Goodman - More Wealth, More Jobs, but Not For Everyone: What Fuels the Backlash on Trade

Goodman follows the stories of real people (one person from a Netherlands shipyard and another a laid off American steelworker). He points out that the majority of the job loss in the shipyard at least is due to technology (robots) and although it has cost some people their jobs, to those that remain the technology has made their jobs easier and safer as well as a bit more high paying. In the steelworker case, it shows the ineffectiveness of workers insurance programs, and the difficulty of finding jobs as good as that of a steelworker, without a degree.

Cohen - The Triad and the Unholy Trinity

Governments forced to decide between the three parts of the trilemma will be forced to abandon the goal of exchange rate stability if it is too costly relative to other policy objectives. This makes international monetary cooperation difficult because states have varying national political objectives.

Eichengreen - Globalizing Capital Chapter 1-2

History of Gold Standard Gold standard arises out of Britian during the industrial revolution. Britain is on a bi-metalic system (gold and silver) but Sir Isaac Newton sets to low a gold price for silver, causing silver to flow out of the country and a de-facto gold standard. Since Britain is the premier economic and trading power after the industrial revolution, most other countries soon adopt a gold standard so they can trade with Britain. Bimetalism can only work if market and mint ratios for each currency are the same, but this is hard to ensure because global shocks to one metal often affect market prices/ratio. Two ways to deal with this problem: the mint exports/imports currency in order to match the market ratios, or it can lower the value of coins by lowering the amount of gold/silver actually in them = token money The invention of the steam press also enables a successful gold standard. Makes counterfitting impossible.

Jeffry Frieden - Currency Politics Chapter 1

Introduced the Mundell Fleming Model (The Trilemma): A government can only have two of the three following characteristics in regards to monetary policy: monetary policy autonomy, fixed exchange rates, and capital mobility (financial integration). However, technology and the global nature of capital markets really makes this a dilemma where governments are forced to choose between fixed exchange rates and monetary policy autonomy.

David Vogel - Trading Up and Governing Across: Transnational Governance and Environmental Protection

Investigates the fear that free trade creates an incentive for a "race to the bottom"-- the so-called "Delaware effect" in which countries lower their standards/regulatory burden to attract FDI. He concludes that no, the trend has been a "California effect": standards have been pushed up, meeting consumer demand of rich countries, where most of global production is still done. "Trade agreements and environmental treaties have played a critical role in strengthening many national environmental practices. However, current governance mechanisms do not adequately address regional and global environmental problems which require substantial changes in the behavior of poorer and less green nations." This is because the majority of products made in emerging economies are consumed domestically.

Stanley Fischer - Central Bank Independence Revisited

It is important to have a central bank that isn't influenced by political objectives because without it, there would be an inflationary bias present in monetary policy as seen from the high inflation rates of the 1970s and early 1980s. Fischer concludes that the theoretical and empirical literatures find that a central bank should have instrument independence but should not have goal independence. In other words, central banks should be given a clearly defined goal and be held accountable to achieving it through whatever means they deem necessary. Fischer thinks that accountability is needed, "to set incentives for the central bank to meet its goals and explain its actions; and...to provide democratic oversight of a powerful political institution"

Eichengreen - Exorbitant Privilege

Key things we need to know include the definition of exorbitant privilege and whether or not Eichengreen thinks the dollar is going anywhere Because nearly 60% of world trade happens in US dollars, the US can run an external deficit every year without becoming more indebted to the rest of the world. Eichengreen believes that the dollar isn't going anywhere soon because its closest rival, the Euro, is a currency without a state. Eichengreen also argues that economic growth, rather than strength of currency, is the most important determinant of strategic power.

Daniel Kono - Optimal Obfuscation: Democracy and Trade Policy Transparency

Kono complicates the idea that democracies have more liberal trade policies than autocracies. He argues that democracy induces politicians to reduce transparent barriers to trade but also to replace them with less transparent ones. He finds that democracies have lower tariffs, but higher non-tariff barriers to trade that allow politicians to protect their markets while maintaining a facade of liberalization through "optimal obfuscation."

Richard Freeman - Are Your Wages Set in Beijing?

Looks to answer the question of whether globalization leads to factor-price equalization? Has it caused the drop in wages for low-skilled workers? Argues that while trade may have contributed to a drop in wages and prices, we have not gotten to a point of factor-price equalization (which one would expect since factors are fully mobile) (factor-price equalization is the notion that the price of a factor (like labor) will equalize among markets that are integrated). There is no race to the bottom.

Mary Burfisher, Sherman Robinson, and Karen Thierfelder - The Impact of NAFTA on the United States

NAFTA had a slight positive aggregate economic impact on the US and a big one on mexico. Much more important are macroeconomic trends (eg the Great Recession, consumer demand changes, etc.). NAFTA's impact on trade with Canada was negligible, because the US had a preceding FTA with them.

Joseph Nye - American and Chinese Power After the Financial Crisis

Nye examines soft power in China and finds that despite the fact that China has $2.5 Trillion of US reserves and could bring the U.S. to its knees if they dumped the currency, this would hurt the Chinese economy too much for them to consider it. The economic interdependence of the two countries make it less likely that either will attempt to hurt the other's economy. As such, Nye doesn't think people's fear of the rise of China is reasonable

Frieden - Invested Interests: The politics of national economic policies in a world of global finance

Preferences for exchange rate regime type and price level vary in the short and long run. In the long run, H-O/S-S theory applies and holders of capital benefit from economic integration. In the short-run, the R-V, industry specific model best explains exchange rate preferences. Owners and workers in specific industries face serious costs in adjusting to capital mobility.

Dani Rodrik - Goodbye Washington Consensus, Hello Washington Confusion?

Rodrik analyzes two alternative methods, besides the Washington Consensus, that the world could possibly utilize to assist developing nations: institutions and foreign aid. He argues that the one size fits all model of the Washington Consensus wasn't a good idea Controversy surrounding Washington Consensus(WC) Viewed as neoliberal & American imperialism Failures of loans due to Washington Consensys Developing countries haven't improved despite these policies Some believe Washington Consensus went wrong due to bad/weak govt institutions and corruption

Dani Rodrik - Straight Talk on Trade: Ideas for a Sane World Economy

Rodrik argues that economics deals with human behavior so propositions in economic science are inherently context specific rather than universal and subsequently, economists need to choose the correct model to explain a situation and its circumstances. However, trade economists are prone to exaggerate the benefits of trade and downplay its distributional/other costs as to not empower "protectionist barbarians" and as a result, economists are not viewed as honest brokers in public debate about globalization.

Rogowski - Commerce and Coalitions: How Trade Affects Domestic Political Alignments

Rogowski uses a modified Stolper-Samuelson Model to explain what coalitions will form in favor of free-trade policies vs. protectionist policies depending on what factor is abundant of scarce in an advanced or backwards economy. Increasing exposure to trade causes urban-rural conflict in two kinds of economies and class conflict in two others. Easy way to summarize the table below: Article states only 2 of 3 are possible at the same time: land, labor, and capital. Given there is exposure to trade, if land is the sole abundant or scarce factor, you have urban-rural conflict. If labor is the sole abundant or scarce factor, you have class conflict. Changes in exposure to trade affect domestic political cleavages.

Robert Baldwin and Magee Christopher - Is Trade Policy Safe? Congressional Voting on Recent Trade Bills

Say campaign contributions/lobbying are the major determinants of trade policy. They look at voting records, finding that lawmakers who got most of their campaign money from unions tended to be anti-trade. Those who got mostly PAC money tended to be free-traders. They say the H-O & R-V models matter too, but they are not the primary drivers of trade policymaking.

Scheve and Slaughter - What Determines Individual Trade-Policy Preferences

Scheve and Slaughter argue that factor-employment matters more than specific-industry employment in determining individual trade policy preferences, aligning with the Heckhsher-Olin model. They also found that home ownership matters in determining individual preferences towards trade, as people who own homes in areas with high amounts of manufacturing industries at a comparative-disadvantage through trade tend to be protectionist regardless of their own individual factor-employment. The lower the skill level of a worker, measured by education and average occupational earnings, the stronger is the worker's support for new trade barriers.

Drezner - The Outsourcing Bogeyman

Seeks to answer of whether outsourcing is bad. Argues that no, outsourcing is not bad. Outsourcing brings more benefits than costs, both in the short term and the long run. Outsourcing is the scapegoat during economic downturns because the benefits of trade are diffuse and the costs are concentrated. Ultimately, outsourcing is a way to take advantage of comparative advantage and the creation of new jobs overseas will eventually lead to more jobs and higher incomes in the United States. Technology is a problem that is underaddressed.

Jack Citrin, Donald Green, Christopher Muste, and Cara Wong - Public Opinion Toward Immigration Reform: The Role of Economic Motivation

Seeks to answer the question of what determines peoples' preferences on immigration policies? They argue that factors like personal economic situations do not influence immigration positions. Rather than personal economic circumstances, individuals' preferences related more to pessimism about the national economy, beliefs that immigration would be harmful for employment opportunities, and unfavorable feelings towards hispanics or asians.

Nita Rudra - Globalization and the Decline of the Welfare State in Less Developed Countries

Seeks to answer the question of whether globalization leads to low social welfare in developing countries. The HO model would suggest that globalization would benefit low skilled workers in developing countries because they are the abundant factor. But data has shown that the opposite is happening, low-skilled workers in developing countries have been left worse off. Rudra argues that this is because low-skilled worker in developing countries face a large collective action problem (few unions and if a worker protests, there are tons of other workers who could take his/her job) and because developing countries have largely not institutionalized workers' rights or bargaining positions. The low-skilled workers also tend to have considerably less education and financial resources.

Margaret Peters - Open Trade, Closed Borders

Seeks to answer the question of whether immigration policy is explained by trade policy. Peters argues that immigration and trade policy are substitutes for each other in labor scarce countries (like the U.S.). When trade is closed, it will always lead to open immigration policies. For example, trade restrictions in a labor scare country leads to an increase in production in labor intensive industries (because they don't face competition from abroad), which leads to wage increasing because supply and labor is limited, which leads to profits for business going down, which leads to businesses pushing for open immigration.

Keith Bradsher - The Free Trade Accord: NAFTA: Something to Offend Everyone

Simple NY Times article from 1993 when NAFTA was being debated covering the various arguments and the agreement's potential impact on various industries. The main point: NAFTA is such a long bill and included so many political concessions to different interest groups, it has "something to offend everyone." Eg. the environmentalists got labor and environmental protections added to the bill, which alienated traditional conservative free traders.

Randall Stone - The Scope of IMF Conditionality

Stone questions the autonomy of the IMF by examining a data set that shows that the US plays a role in determining the conditions certain important countries must meet in order to get loans from the IMF. Stone finds that US interventions decrease conditionality and that the US will only intervene if countries really need it. Basically, the IMF will reduce conditionality depending on how much the country needs the loan. Conditionality refers to a promise to change government policies that led to the current economic situation in exchange for a loan.

Eichengreen - Hegemonic Stability Theories of the International Monetary System

The presence of a hegemon may contribute to the smooth operation of an international monetary system, but the more important factor determining international monetary policy is international collaboration, not the presence of a hegemon. The problems with applying hegemonic stability theory to international monetary policy lie in how you define hegemon and ambiguieties regarding the mechanism with which a hegemon makes its power felt (military, political, social, carrot vs stick). Counter examples: Even when Britain dominated international monetary affairs, countries still tailored the gold standard to benefit them individually. Often, an entire region's hegemony has more impact than a specific country.

Koshy Mathai - Back to Basics: What is Monetary Policy?

The twin objectives of monetary policy (adjusting money supply) are to achieve price and output stabilization. The Fed changes money supply through open market operations (issuing credit in exchange for government debt to banks). The Fed sets national interest rates through the discount rate (rate it charges on this issued debt) and banks mirror this with the rates they charge each other and their debtors.

Krasner - State Power and the Structure of International Trade

This is the source of the major theory that having a global hegemon promotes international free trade. He says trade policy is largely determined by individual state interests. Since not all countries have equal power, trade negotiations are often warped by economic, military power dynamics. Governments consider trade deals if they stand to benefit from free trade. He looks at four state interests that can be affected by trade: political power, GDP, growth and social stability. He says the costs in these four areas will be the lowest for a hegemon, making it more receptive to trade. Krasner believes that having a hegemon promotes free trade because, it will gain more than it loses. Although, he admits, macroeconomic circumstances are more important.

Kyle Bagwell and Robert Staiger - The World Trade Organization: Theory and Practice

Trade agreements help governments to avoid beggar-my-neighbor trade policies driven by terms-of-trade manipulation. The design of the GATT solves the problem of terms-of-trade manipulation by reflecting lessons learns from decades of US and European tariff bargaining. Three of the most key features of the GATT/WTO are 1) reciprocity, 2) nondiscrimination, and 3) dispute settlement.

Michael Bailey, Judith Goldstein, and Barry Weingast - The Institutional Roots of American Trade Policy: Politics, Coalitions, and International Trade

Two specific rules within the RTAA (passed in 1934) distinguished it from previous attempts to liberalize trade: it mandated reciprocal, not unilateral, tariff reductions, and it authorized trade agreements on the basis of a simple majority(51%), rather than the super majority mandated in the Constitution. These rules arose because the Democratic party wanted to increase support for free trade within the party to insulate trade policy from a future Republican majority in congress. Also, because the president could now bundle tariffs together, it increased the costs to Republicans of increasing tariffs, because small adjustments would unravel many agreements. It was an attempt to institutionalize a low-tariff policy.

Michael Hiscox - Commerce, Coalitions, and Factor Mobility: Evidence from Congressional Votes on Trade Legislation

Varied clashes between political coalitions regarding trade policy can be explained by interindustry factor mobility. When inter-industry mobility is high, class coalitions are more politically salient, therefore supporting the H-O model. When inter-industry mobility is low, industry coalitions are more politically salient, therefore supporting the R-V model. Hiscox comes to these conclusions by analyzing congressional voting on major trade bills during periods of varying inter-industry mobility. In the US, the R-V model was more accurate up until around the Great Depression. In the War/post-war years, the H-O model became more applicable.

James Vreeland - The IMF: Lender or Scapegoat?

Vreeland discusses how some countries enter into IMF arrangements even when they don't need foreign exchange so that they can tie their hands with IMF conditionality. This gives governments bargaining leverage over domestic opponents of economic reform. This helps governments push through reform policies that would otherwise not be approved. This is how countries can make the tough economic decisions they need in order to improve, without hurting the status of the government itself.

Joshua Meltzer - The Future of Trade

While the WTO has been important in trade liberalization, the current Doha Round of negotiations is stalled and recent progress towards liberalization has instead been made through preferential trade agreements. Given its challenges and the progress being made through other venues, the WTO should take this time to improve on its own legitimacy. The WTO should shift its role towards managing international trade and resolving trade disputes.

Peter Hall - The Political Origins of Our Economic Discontents: Contemporary Adjustment Problems in Historical Perspective

Will the 2008 financial crisis lead to major paradigm shift in policy? Historically, changes in economic orthodoxy/ policy leanings have required three key ingredients: Motivation: reason to change Means: potential policy Motor: Political necessity: organization of social classes (revolution basically) Hall doesn't see/predict a major paradigm shift in wake of the Great Recession because a. no motor: people not organized--damage wasn't confined to one social class. B. No means: no alternative paradigm proposed.