INTL 102 - Final (Broz)

Import Substituting Industrialization (ISI)

The goal of ISI was to replace imports of manufactured products by promoting the expansion of domestic industries, using high tariffs to protect these "infant" industries. The rationale was to break away from comparative advantage, where developing nations specialized in primary products & imported manufactured goods from the North. While it did lead to industrialization, it didn't lead to growth or convergence. - SIGNIFICANCE:

Kleptocracy

Kleptocracy is a form of political and government corruption where the government exists to increase the personal wealth and political power of its official and the ruling class at the expense of the wider population, often with a pretense of honest service. These are generally associated with corrupt forms of authoritarian governments. It is most common in developing countries who economies are based on the export of natural resources (Resource curse and Settler Death). The effects are typically adverse in regards to the state's economy. An example in King Leopold in the Republic in Congo. - SIGNIFICANCE:

The "Unholy Trinity"

AKA: The trilemma. This principle includes the 3 goals of most economies: Fixed-Exchange rates, International Capital Mobility and Domestic Monetary Policy. It is called the unholy trinity because only 2 of these objectives are possible at any time. 1. Gold Standard: international capital mobility, fixed- exchange rates (gold standard) 2. Bretton Woods: Fixed Exchange Rates, and Domestic Monetary Policy. Countries had to limit international capital mobility in order to pursue the social welfare programs (like New Deal in the US, and the "cradle to grave" programs in Scandinavian countries) 3. Present: International Capital Mobility and Domestic Monetary Policy. - SIGNIFICANCE:

Liquidationism

Argued that the economy had to liquidate all bad investments, bad loans, and useless products before recovery could take place. Liquidationists argued that the excesses of the 1920's was the reason for the intense recession. Liquidationism and inaction didn't work because the Depression was a much greater economic crisis than what occurred in a normal business cycle. With the transformation of political economies due to WWI (the consumer durable revolution, rise of labor, rise in vertically integrated corporations) prices and wages did not decline as needed to sustain or restore balance in the economy as they did in the Golden Age. - SIGNIFICANCE:

Lend-Lease Program

During WWII, the US "leased" arms to the allies via this program. They supplied $50 billion in munitions, planes, vehicles, food to the allies. It was fiction because allies were supposed to return the armaments but it was just a way for the US to avoid another war debts problem. This was significant because it helped the Allies win the war and also created a huge export boom for U.S. industry. - SIGNIFICANCE:

"Beggar-thy-neighbor" Trade Policies

Each country tried to increase demand for domestic industries by raising tariffs on imports or competitive devaluation. This led to the collapse of world trade and economy. For example, Canada responded to the high tariffs the US government imposed by imposing their own tariffs on US goods. The US raised their tariffs instead of backing down, and so on. This is an instance of the prisoner's dilemma: each country individually has an incentive to follow such a policy, making everyone worse off. Tariff wars hurt all nations and goes against comparative advantage. - SIGNIFICANCE: As the world's dominant economy and major surplus nation, the U.S. needed to open its markets so that deficit countries could earn foreign exchange to pay their bills. Smoot-Hawley raised U.S. tariffs on over 900 imported goods to record levels, triggering retaliation by trading partners => sparks tariff war. These beggar thy neighbor policies of the interwar period led to the collapse of world trade.

Decolonization

In 1945, 700 million people, 1/3 of the world's population lived under colonial rule. By 1970, less than 2 million remained colonial subjects. Between 1945 & 1970, formal colonialism came to an end largely at US insistence. The US disliked empires since they were closed to American business. The US also opposed colonialism on moral grounds as a former colony. Empires were no longer vital to security since US military forces provided global security. - SIGNIFICNACE:

Unemployment in Europe

In Europe, low-skilled workers have experience high and persistent unemployment rather than falling wages. This is due to stronger labor market restrictions in Europe that prevent firms from adjusting wages such as higher minimum wages and legal restraints on adjusting wages. Since employers in Europe can't reduce wages, they don't hire as many workers, high European unemployment is thus the flip side of falling wages in the US. - SIGNIFICANCE: This is part of a global phenomenon of increasing inequality.

Hyperinflation in Germany

In order to pay the massive reparations to victors after WWI (due to war guilt clause at the Versailles Treaty), Germany simply printed money. Germany broke from the gold standard because they wanted the greater autonomy in relation to their monetary policy. Germany devalued, and massive hyperinflation was the result (> 50% per month). By the end of 1923, Germany prices were 1.3 trillion times higher than in 1914. Economic recovery required stabilization, and since the US government did not take a leadership position, US finance took the lead. In the Dawes Plan of 1924, US bankers took over the German central bank and fiscal policy. The Dawes Plan stabilized the German mark and brought increased loans/investment from US banks. This created a flow of money from the US to Germany, which made reparations to the victor nations, which then in turn could pay off war debts to US (aka the reparations-war debt triangle). - SIGNIFICANCE: Even though hyperinflation in Germany was reversed due to the Dawes Plan, it had long term effects on the politics of Germany. Hyperinflation led to massive unemployment, widespread fear, and anger at the international community for forcing Germany to pay for reparations of WW1. Hyperinflation became one of the points that fascist dictators in central/eastern/southern Europe used to bolster a turn to autarkic-authoritarian regimes (Mussolini in Italy, Hitler in Germany).

Newly Industrializing Countries (NICs)

NICs are countries whose economies have not yet reached developed country status but have, in a macroeconomic sense, outpaced their developing counterparts. Another characterization of NICs is that of nations undergoing rapid economic growth (usually export-oriented). Incipient or ongoing industrialization is an important indicator of an NIC. In many NICs, social upheaval can occur as primarily rural, or agricultural, populations migrate to the cities, where the growth of manufacturing concerns and factories can draw many thousands of laborers. - SIGNIFICANCE:

"Pax Americana"

Parallel to the name given to the British during their leadership of the world economy, Pax Americana demonstrates the acceptance of US world leadership after WWII. - SIGNIFICANCE:

Raul Prebisch and the Declining Terms of Trade

Prebisch was the head of Argentina's central bank during the Great Depression. He observed that prices of primary products (produced in the "periphery") fell much more during the Depression than prices of manufactured products (produced in the "center"). - SIGNIFICANCE: The Terms of Trade are the price of a nation's exports divided by price of imports. The TOT of nations exporting primary products & importing manufactured goods may deteriorate over time. By this train of thought, free trade based on comparative advantage may be harmful to less developed nations. He argued that developing countries should lessen dependence on primary commodity exports by developing their own manufacturing industries and this became the economic rationale for ISI.

Stagflation

Stagflation is a condition of slow economic growth and relatively high unemployment accompanied by rising prices, or inflation, or inflation and a decline in GDP (AKA: high inflation, stagnation, and unemployment). Usually, when unemployment is high, spending declines, as do prices of goods. Stagflation occurs when the prices of goods rise while unemployment increases and spending declines. Stagflation can prove to be a particularly tough problem for governments to deal with due to the fact that most policies designed to lower inflation tend to make it tougher for the unemployed, and policies designed to ease unemployment raise inflation. - SIGNIFICANCE: OPEC triggered a "wage-price inflationary spiral." Producers raised prices to compensate for higher energy costs; workers then demanded higher wages to compensate for rising costs of everything; producers then raised prices to deal with higher labor costs → repetitive cycle.

The Truman Doctrine

The Truman Doctrine committed the United States to a global effort against the Soviet Union and their allies. In 1947, launched the Economic Recovery Plan, also known as the Marshal Plan. The Marshall Plan sent $13.5 billion to Europe to rebuild the economies of the Western Europe. - SIGNIFICANCE: led to the creation of NATO (North Atlantic Treaty Organization), an American military bloc to accompany its sphere of economic influence established by the Marshall Plan. This was a way of countering the "Soviet" treat and containing communism.

The Resource Curse

This is an endowments-based argument that determines what causes good (or conversely bad) institutions. The resource curse dictates that the easy availability of natural resources such as copper in Zambia, oil, gold, etc.) stunts institutional development. Instead of promoting economic and political liberties, elites can dig wealth from ground and put it in Swiss bank accounts. Paradoxically, countries with lots of valuable natural resources are "cursed" to experience lower growth. Resources may preclude the development of good institutions. Clear negative relationship between primary product exports and economic growth. - SIGNIFICANCE:

WTO and the Shrimp/Turtle Case

U.S. law protects sea turtles from shrimp nets by requiring "turtle exclusion devices". US law prohibits shrimp imports from countries that don't require TEDs. Foreign shrimp producers from India, Malaysia and Pakistan filed a WTO case. The WTO struck down US law because the US discriminated between WTO members when it applied its law. The U.S. had provided some Caribbean countries with technical and financial assistance, as well as longer transition periods to start using TEDs. The complaining nations in Asia did not get this special treatment. The US adjusted its policy and this is significant because it shows the necessity of non-discrimination in trade laws. - SIGNIFICANCE: Some environmentalists think the WTO undermines national sovereignty by preventing countries from setting their own environmental policies due to the dispute settlement mechanism.

"Golden Fetters"

Under the Gold Standard, government's couldn't lower interest rates to stimulate demand. Keynes argued that in order to use monetary policy for countercyclical demand management, countries had to break from the Gold Standard. The nations that broke from the Gold Standard earlier did better during the Great Depression than those who held on to it. - SIGNIFICANCE: This is significant because it demonstrates the Unholy Trinity; the Gold Standard had fixed exchange rates and international capital mobility, but it did not allow for governments to pursue countercyclical monetary policy. To begin the economic recovery from the Great Depression, there had to be an increase in aggregate demand. There had to be devaluations in currencies, lower interest rates, and new fiscal policies.

Vertical Integration

Vertical Integration refers to MNCs with vertical FDI. In vertical integration the MNC owns and controls different stages of a worldwide production process. It also exists due to the market imperfection of specific assets (e.g. specialized/ unique human or physical inputs). - SIGNIFICANCE: An example is Exxon, who owns and controls everything from oil wells, to transportation pipelines, to refining firms, to storage and distribution facilities, to retail gasoline stations. This demonstrates the importance and the reach of MNCs within the world economy and international trade. Vertical Integration, along with Horizontal integration, allows for MNCs to participate in international/ "Intra Firm" trade, which makes about 1/3 of all international trade.

"Gains from Trade" Hypothesis "Financial Oligarchy"

1. "Gains From Trade" → Theory that claims that globalization helps the environment. Hypothesis states that trade leads to growth via specialization and comparative advantage. As people get wealthier, they demand and receive a better environment. Therefore globalization improves the environment. This theory meets the Environmental Kuznets Curve which demonstrates that there is an inverse U relationship between pollution and per capital GDP. Starts with environmental decay, where higher incomes mean more production and consumption and these activities increase pollution. These are "bad" institutions with limited political freedom, weak rule of law, and poor property rights. Then, reaches turning point where we see improvement: as income grows, demands for environmental protection increase, leading to a development path characterized by both economic growth and environmental improvements. This is characterized by "good" institutions with political and economic freedoms, rule of law and strong property rights. 2. "Financial Oligarchy" → Form of power, governmental or operations, where such power effectively rests with a small, elite group of inside individuals, sometimes from a small group of educational institutions, or influential economic entities or devices (banks, commercial entities, lobbyists) that act in complicity with, or at the whim of the oligarchy, often with little or no regard for constitutionally protected prerogative. Monopolies are sometimes granted to state-controlled entities (Royal Charter to the East India Company). Today's MNCs function as corporate oligarchies with influence over democratically elected officials. - SIGNIFICANCE:

Käthe Kollwitz

A German expressionist painter. Käthe Kollwitz captured the horror of World War I. One of her sons was killed in ww1, who made a memorial dedicated to him and those who died during the war. The casualties and costs of war were numbers never seen before. The misery, suffering and poverty that ensued deeply marked this era. Kollwitz's paintings, such as "Widows and Orphans" (1919), are mostly in black, and attempt to portray the tragedy of the world's first world war on all those involved, notably the civilians left behind by their husbands and brothers and sons, as well as their government and economy. - SIGNIFICANCE:

Cap-and-Trade System

A "Cap and Trade" system issues tradable permits, representing a right to emit a specified quantity of a public bad. In the Kyoto Protocol the cap and trade system was put in place for greenhouse gases. By issuing only a limited number of permits (a "cap"), treaty members can reduce the total quantity of gas emitted at the international level. Because permits are limited to a quantity that is less than the amount of gas that would normally be emitted, the right to emit becomes a valuable commodity. Buying and selling permits establishes a market price of them. Nations wishing to emit gases beyond permitted levels must either reduce their emission or purchase permits to emit. Polluters able to reduce their emissions relatively cheaply will do so, rather than purchase permits. Polluters who face higher abatement costs will buy permits to satisfy requirements. In this way, reduction in emissions are made by those polluters who can do so at least cost, being compensated by polluters who face higher costs. - SIGNIFICANCE: In the US, the 1990 Clean Air Act sought to reduce acid rain by reducing SO2 emissions from electricity generating plants to half their 1980 levels by 2000. This cap and trade system Created a market in tradable permits to pollute. The clean air act was successful. In 1995, emissions fell to about 5.3 million tons from 10.3 million tons in 1980. It is important to note that the success of acid rain was due to the fact that it was not a global problem. The localized nature of acid rain meant that countries could solve it by taking individual action. Whereas climate change requires global action. This is why Kyoto "died". Kyoto was plagued by free-riding. Furthermore, A major weakness was that only developed countries had emissions reductions. With China the world's largest emitter, this approach was bound to fail - Since the world's 2nd largest emitter - the U.S. - also did not participate, other nations failed to meet their targets

Secure property rights

A secure property right is the exclusive authority to determine how a resource is used, whether that resource is owned by gov't or by individuals. Society approves the uses selected by the holder of the property right with governmental administered force and with social ostracism. - SIGNIFICANCE: Having secure property rights allows for protection of environmental services like biodiversity/ prevention of public bads (like pollution) being produced. In relation to pollution, we see that institutions play a vital role. With good institutions, there are secure property rights, strong rule of law, and political/economic freedom that allows for people to push for environmental policies to be put in place. In relation to the Kuznets Curve (the inverted U-shaped curve relating pollution with increasing GDP per capita), countries with better institutions have a lower curve compared to countries with bad institutions. In other words, the costs of pollution and abating pollution in countries with better institutions are less than the costs of countries with bad institutions. When ordinary people have both political power and civil/economic rights, economic growth is more environmentally friendly and "sustainable".

Bretton Woods Exchange-Rate System

After WWII, delegates met to design a new international system (promised by England to the US in the Atlantic Charter during WWII). It established a new form of international governance to manage the financial interactions of nations. It is the landmark system for monetary and exchange rate management established in 1944. It was developed at the United Nations Monetary and Financial Conference held in Bretton Woods, New Hampshire. Under the agreement, currencies were pegged to the price of gold, and the U.S. dollar ($35/ounce) was seen as a reserve currency linked to the price of gold. The system also established the IMF to provide BOP loans and the World Bank to provide loans for economic development and reconstruction. - SIGNIFICANCE: A compromise was made with regards to the Trilemma; US had to give up capital mobility to get a fixed exchange rate and monetary policy. The Bretton Woods exchange-rate system prioritized the need for full employment & social insurance policies at the national level over complete international capital mobility. In the 1960s, high inflation caused by the need to finance the Vietnam War led to the collapse of the Bretton Woods system. The "Nixon shock" suddenly ended gold convertibility of US dollar in 1971. The currencies of industrialized countries' exchange rates were allowed to float.

War Debts and Reparations

After World War 1, allies owed the U.S. government over $10 billion. During the war, the U.S. had gone from the world's largest debtor to the world's largest creditor through loans from private banks and government "Liberty Loans". The war helped the US become the world's dominant financial power. After the War, the U.S. refused to reduce or forgive these debts, a decision that posed major problems. The allies also demanded reparations (war damages) from Germany, who they required to pay $33 billion in damages to victors. This imposed a harsh "victor's peace" on Germany, one that they were clearly unable to pay. Created a triangle: Victors required reparations → Allies required to pay back war debts → Dawes Plan in order to stabilize German economy so they could pay victors. Dawes Plan created a cycle of money from U.S. to Germany, which then made reparations to other Europeans nations, which then used the money to pay of their war debts to the U.S. - SIGNIFICANCE: The United State's refusal to forgive the war debts incurred by the Allies led the Allies to push Germany to pay for the entire war costs/reparations. This cycle set the precedent for the Great Depression and the economic problems that helped lead to World War II. Interwar hyperinflation in Germany, lower demand for imported goods from Latin America/developing countries, and trade wars, were all influenced by War Debts and Reparations policies. It resulted in shocking changes in international economics and politics. It helped set the precedent for WWII.

Communism

Another Autarkic Authoritarian response to the Great Depression. Communism was developed in the Soviet Union. It was characterized by protectionist dictatorships that served labor at the expense of land and capital. This was a backlash in developing countries against globalization that they felt had been unjust. Separated from world economy, through protectionism and state control over the economy. - SIGNIFICANCE:

Business cycles

Business cycles are periods of of economic growth and recession. During the Great Depression, Liquidationism (and others who adhered to financial orthodoxy) believed that the economy always went through stages of boom and bust. They argued that business cycles were self- correcting, and that that the Great Depression was just another "bust" stage. They believed that the reason the Great Depression was so severe was due to the excesses of the 1920's. They also argued against government intervention in the business cycle due to economic beliefs like the invisible hand. - SIGNIFICANCE: In America, the Republican Hoover administration's inaction simply worsened the Great Depression. Never before seen levels of unemployment, seen in the existence of the shantytowns dubbed "Hoovervilles", is an example of how severe the depression was. In a global context, those believing in letting business cycles run their course and adhering to the Gold Standard led to the rise of either Social Democratic (reliant on countercyclical demand management) or Autarkic- Autocratic (protectionist) responses to the downturn.

Collective Action Theory and OPEC

Cartels are inherently unstable due to incentives to free ride and cheat. Each member wants others to cut production but wants to maximize its own production and profits. Free riding occurs when a member enjoys benefits of the high cartel prices without reducing its own production; this increases individual profits, but decreases cartel profits. If too many producers cheat, the cartel is unsuccessful. Conditions for cartel success are inherent in Collective Action Theory. Small groups are easier to organize: fewer members organize, cheating is more obvious and enforcement relatively easy. Groups with unequal members collude better as well. A very large member can manipulate prices even if others free ride in order to keep the cartel together. - SIGNIFICANCE: We see collective action theory at work in the maintenance/ initial success of OPEC. OPEC had one dominant producer, Saudi Arabia, which made it easier to collude. Saudi Arabia had half of OPEC's oil reserves. Saudis had the power to punish free riders in OPEC by flooding the market with oil, driving prices very low in OPEC.

Collective Action Problems in Agriculture

Collective Action Theory states that there is a free-rider problem because government policies that benefit a group of people do not differentiate between individuals in that group. This creates incentives for individuals to "free ride" on the efforts of others in the group because lobbying is costly. Solutions to free riding are small group solutions because fewer members are better able to organize, form lobbies, and keep each other accountable. Unequal Groups is another solution, when some members in a group benefit more than others. "Selective incentives" is a third solution that gives special benefits to members that contribute, motivating them to help (think of AMA- american medical association, and the medical journals talking about new medicines/ new information). Members contribute to obtain these special goodies, and the surplus is used to promote the group's general political goals Finally, "Social" Selective incentives used by orgs like the sierra club that pine on doing the right thing and social benefits (give stickers out, water bottles, etc. showing you contributed to the cause). - SIGNIFICANCE: In agriculture, the problem is that producers have high incentives of maintaining tariffs on agricultural imports. Producers face a much larger per-capita gain through the maintenance of agriculture programs than a consumer that wants to lower the price of sugar. For example, US sugar producers are an unequal group (only a few large plantations in Florida control the majority of the industry), therefore it's easy for them to create powerful lobbies. Also, now Corn growers now lobby for the continuation of the Sugar Program because it increases the demand for high fructose corn syrup.

Consumer Durables Revolution

Consumer durables are things like cars and household appliances (washing machines, etc.) that can last for years. New consumer durables were being produced in the interwar period due to changes in the production processes spurred by the second industrial revolution and WW1. World War 1 spurred the development of electric grids, petroleum refining, and new steel alloys. This led to the development of the airplane and automobile industries. Technological advancements allowed for the scale of production to increase (Ford assembly line); the mass production of consumer durables lowered their prices considerably. The increased demand for consumer durables necessitated large-scale operations and the big plants/ firms that accompanied them. Americans and Europeans were able to afford things that were previously too expensive for any middle class family. - SIGNIFICANCE: The consumer durables revolution helped transform the auto industry into the largest industry in every major developed country. This revolution also supported countless other industries which were used as inputs into the production of durables like tin, nickel, steel, etc. Furthermore, this revolution led to the development of multi-plant corporations that effectively vertically integrated (think of GM buying Fisher Body in order to move past the hold up problem). In the United States (and europe), having widespread access to cars provided unprecedented individual mobility.

Social Democracy

Countries reacted to the Great Depression either by social democracy approaches, or by "autarkic-authoritarian" responses. Social democracy emphasized staying connected with the world economy, whereas the autarkic authoritarian responses pushed for protectionism and isolation from the world. SIGNIFICANCE: 1. Responses to the Great Depression in US: Counter-cyclical demand management, Social insurance (unemployment, social security), Class bargain between labor and capital, with the appeasement of land (farm sector). 2. Responses in Scandinavian countries (e.g. Sweden): Same as U.S. but with more extensive "cradle to grave" social insurance and a direct role for labor in industrial relations.

"Race to the Bottom" Hypothesis

Countries that are open to trade and investment adopt weaker environmental (or labor) regulations out of fear of a loss in competitiveness. The hypothesis makes two main predictions: 1) MNCs choose to invest in countries with less restrictive standards (little or no evidence). The argument being it is cheaper to produce in places with lower standards. 2) Foreign countries competitively undercut each other's standards in order to attract FDI (some evidence). Therefore leading to the lowest levels of environmental/labor regulations. - SIGNIFICANCE: This hypothesis is used as a reason against globalization; it makes the claim that the environment is hurt by globalization. The turn to protectionism and unilateral reforms is not the way to go in relation to international public bads like global warming. Global warming is affected by all countries and there has to be international cooperation in abating it.

What went wrong with ISI?

Despite initial positive outcomes, countries that adopted ISI never managed to let their infant industries grow up, and they never exported high quality manufactured goods that other countries wanted to buy. Under the cover of high tariffs, domestic firms had little incentive to be competitive, efficient, or productive. ISI created vested interests with stakes in continuing ISI. Since consumers couldn't buy foreign products, they suffered with shoddy outdated domestic goods. - SIGNIFICANCE: Ironically, ISI caused greater dependence on industrial countries because new factories needed capital goods that went into producing final goods, which all had to be imported. This created BOP problems where imports were greater than exports. This set the stage for the Debt Crisis of the 1980s where Latin American countries were unable to repay their loans used to support ISI.The Anti-market philosophy of ISI also promoted excessive regulations and corruption that these countries still struggle with today.

U.S. Sugar Program

Due to tariffs and quotas, the price of sugar in the US is much higher compared to the world market price for sugar. American consumers bear the burden of protection of the sugar industry. The reason protection persists is because the cost of sugar protection to each consumer is just $10/year, whereas farmers gain huge benefits from protection. The small group of sugar producers therefore have a much stronger incentive to lobby than the large group on sugar consumers. On top of this, sugar producers are an unequal group. More than ½ of all sugar is produced in Florida by 17 plantations. Since the payoff to these huge plantations is enormous, they have very strong incentives to lobby, even if the 12,983 free ride. The implication is that farmers are powerful in rich countries, where they benefit from a vast array of trade policies, subsidies, etc... Their costs are borne by everyone else. They are powerful because they are such a small and unequal group. - SIGNIFICANCE:

Liberty Loans

During the war, European countries borrowed from the US via Liberty Loans to finance their efforts. After the war, the US expected the loans to be returned in full. Unlike other countries, the US economy benefitted from the war and became a leading economic nation. The US refused to forgive or reduce the debts despite its economic prowess over war-torn Europe and this paved the way for the Great Depression and WWII. - SIGNIFICANCE:

Depression of 1873-1896

During this depression, the economy contracted for 65 months, which was longer than the 1930s Great Depression. The government had to let this depression run its course since it could not use domestic monetary policy due to Gold Standard. Deflation during the depression was followed by inflation after gold discoveries led to rising world prices. - SIGNIFICANCE: This event demonstrates the main downside of adhering to the Gold Standard (lack of domestic monetary policy sovereignty).

Rules of the GATT

GATT was founded to foster trade liberalization after WWII and to unwind protectionist measures. Reciprocity is key to the GATT; bilateral negotiations set the terms of reciprocal tariff/trade agreements. UNLIKE THE RTAA, the final bargain is then able to extend to all members via the MFN clause. The most favored nation clause binds parties to extend benefits to other nations, which allows for the spread of free trade and low tariffs. Reciprocity makes trade agreements politically palatable within member nations as export industries have a special interest in their success - SIGNIFICANCE: GATT was very successful. It brought tariffs down considerably. By the Tokyo Round in 1979, the average tariff on manufactured products was 4.7% (compared to about 40% in 1948) - GATT was able to survive the Cold War, the Vietnam War, many wars of independence, decolonization, the creation of EC. The WTO incorporated all GATT provisions, but added the dispute settlement mechanism that gave a greater voice to smaller countries.

Export-Oriented Industrialization (EOI)

In the 1960s, East Asian countries adopted policies that promoted exports. These nations experienced rapid growth in exports of manufactured goods and rapid economic growth and convergence. The high export volumes followed comparative advantage; countries took advantage of their heavy endowments in unskilled labor. Government policies focused on promoting export industries rather than protecting import-competing industries. South Korea went from one of the least developed countries in the world to a leading industrial nation. - SIGNIFICANCE: It's hard to say whether EOI caused rapid economic growth, but helped it along with other factors such as mass education, government policies, & high savings/investment. EOI shows the benefits of following comparative advantage.

Fernando Henrique Cardoso

He was the first Brazilian President to start a program to address the inequality issue in Brazil—the enormous gap between rich and poor in the country. He started the following programs: Bolsa Escola, the Auxílio Gás, the Bolsa Alimentação, and the Cartão Alimentação. - SIGNIFICANCE: A key feature of Cardoso's administration was the deepening of the privatization program. During his first term, several government-owned enterprises in areas such as steel milling, telecommunications and mining, such as Telebras and Companhia Vale do Rio Doce were sold to the private sector, marking the deepest process of denationalisation in Brazilian history amidst a polarized political debate between "neoliberals" and "developmentalists". Ironically, this time Cardoso was against the latter group, generating uproar among former academic colleagues and political allies that accused him of reneging his previous work as an intellectual. Economists still contend over its long-term effects; research shows that the companies sold by the government achieved better profitability as a result of their disengagement from the State.

George Soros

Hungarian-American George Soros was one of the world's most prominent financiers/philanthropists. He was the target of the Malaysian prime minister who accused him of obtaining his wealth by impoverishing others, arguing that investors like him had too much money and power. Soros was a strong proponent of global capitalism and currency trading. He started of by working for an international banking firm. His reputation grew as he bet billions of dollars against the British government and he won (England devalued its currency). To many, his speculation against the Sterling made it seem like wealthy speculators had single-handedly pushed a major government to reverse its economic course. His actions showed that governments were under massive pressures to satisfy international investors, even if the domestic political costs were high. The Malaysian prime minister's attack on Soros represented a broadly held view that global capital markets had gone too far in constraining government policies. - SIGNIFICANCE: Soros' financial and philanthropic activities put him in a unique position to encourage the development of capitalism and democracy in the former Communist countries. He was also a strong supporter of open societies on both principled and pragmatic bounds, believing that the new international economic order necessitated a commitment to social justice. He argued that global capitalism would be safe only if attention were paid to national and social confers. Soros represented both the achievements and the anxieties of international finance. Global financial system moved trillions of dollar around the world with extraordinary speed and efficiency.

Fiscal Implications of Immigration

Immigration has tax implications for welfare programs; immigrants are more likely to benefit from these programs. Immigration increases the net tax burden on native taxpayers. Adults in low-skilled workforce tend to be more anti-immigrant since their jobs face a direct threat. Larger welfare states i.e. California are more anti-immigrant because of the increase in tax burdens, versus Texas with its smaller welfare programs. - SIGNIFICANCE: In the 19th century, tariffs brought fiscal benefits while immigrants imposed no fiscal burden so high tariffs and free immigration made political sense. Now, we have alternatives to tariffs for revenue and much larger welfare programs. Today's policy mix of free trade and closed immigration makes political sense.

Fed Chairman Paul Volcker

In 1979, Jimmy Carter appointed Paul Volcker to head the Federal Reserve. Volcker's goal was to end high inflation. Volcker used high interest rates to reduce inflation from above 10%. The high interest rates worked in reversing inflation but they resulted in a deep recession with unemployment near 10%. Recovery did not happen until the late 1980s. - SIGNIFICANCE: The Oil Crisis sparked by OPEC's successful cartelization created stagflation which directly impacted developed nations. The Fuel- Dependent United States experienced a "wage-price inflationary cycle", low growth, and high inflation. Volcker's actions show the Bretton Woods Era ability to have autonomy in monetary policy and stable exchange rates.

Welfare capitalists

In the U.S. during the 1920s, welfare capitalism refers to the policies of large, usually non-unionized, companies that have developed internal welfare systems for their employees. Based on the idea that Americans should look not to governments or labor unions but to the workplace benefits provided by the private sector for protection against the fluctuations of the market economy. The benefits offered by welfare capitalist employers were often inconsistent and varied widely from firm to firm. They included minimal benefits such as cafeteria plans, company-sponsored sports teams, lunchrooms and water fountains in plants, and company newsletters/magazines—as well as more extensive plans providing retirement benefits, healthcare, and employee profit-sharing. Welfare capitalism was also used as a way to resist government regulation of markets, independent labor union organizing, and the emergence of a welfare state. - SIGNIFICANCE: Welfare capitalists went to great lengths to quash independent trade union organizing, strikes, and other expressions of labor collectivism — through a combination of violent suppression, worker sanctions, and benefits in exchange for loyalty. Also, employee stock-ownership programs meant to tie workers to the success of companies (and accordingly to management). Workers would then be actual partners with owners—and capitalists themselves. Owners intended these programs to ward off the threat of "Bolshevism" and undermine the appeal of unions. In the end, welfare capitalism programs benefited white-collar workers far more than those on the factory floor in the early 20th century.

Intangible Assets

Intangible assets are a case of "Market Imperfection", one of the conditions for horizontal FDI. They are considered firm "knowledge", assets that are difficult to price and protect (like secret formulas, managerial skills, prestige, etc.). Once intangible assets are out in the open, any competitor can use the assets at no cost, and they become worthless. Horizontal FDI exists to control and protect these intangible assets in order to maintain the asset within the firm where they can control them. - SIGNIFICANCE: Examples of Horizontal FDI: Walmart, Coca Cola, McDonalds. This is explained by a combination of intangible assets (secret formula, brand name) and locational advantages (market/ efficiency/ natural resource oriented investments). MNCs engage in Horizontal FDI over contracting production to local firms or exporting from home due to these locational advantages and intangible assets.

International Commodity Cartels

International commodity cartels were seen as an alternative path of development from ISI. When a group of developing countries cooperates to artificially reduce supply in order to raise the price of a commodity (like oil) it has formed a cartel. A cartel is an attempt by producers to cut production in order to obtain higher prices for their products. The goal of these int'l commodity cartels was to improve the terms of trade by way of production limits: to raise export prices of primary products. This rationale came from Raul Prebisch. The Organization of Petroleum Exporting Countries (OPEC) is the prime example of a successful international commodity cartel. - SIGNIFICANCE: Like ISI, Int'l Commodity Cartels sought to address the terms of trade problem identified by Prebisch. Other than in OPEC, other efforts to cartelize commodity output (bauxite, copper, tin, coffee, bananas) were not successful. This was due to the inherent instability of cartels and their tendency to free-ride. Each member has the incentive to cheat the cartel and cut production in order to maximize it own production and profits (cheaters enjoy the benefits of the high cartel prices without reducing its own production). The problem is that when too many people free-ride the cartel falls apart => production rises and prices go down.

Keynes' Economic Consequences of the Peace

Keynes's criticism of the Versailles Treaty. Argued that the demands on Germany were immoral and impossible to pay off. The war reparations placed on Germany by Belgium and France would only lead to disaster. - SIGNIFICANCE: This book accurately predicted that German's would have a hard time paying off these debts and that it would lead to revenge for the war reparations it was being forced to pay.

"Good" Political Institutions

It is thought that government policies and institutions impact economic growth. Countries with good policies and endowments but "bad" institutions have lower growth rates and are diverging. Endowments have a large historical influence on institutions. Engerman and Sokoloff argue that initial endowments have led to extreme inequalities such as plantation and conquest economies. Where elites established "bad" institutions that were characterized by vote restrictions, restricted access to education, etc..., that maintained their positions but were harmful to growth. By contrast, where initial endowments led to greater equality like settlement economies, "good" institutions were established, characterized by unrestricted franchise and public education, that provided the foundations for long-run economic growth. - SIGNIFICANCE: Having secure property rights allows for protection of environmental services like biodiversity/ prevention of public bads (like pollution) being produced. In relation to pollution, we see that institutions play a vital role. With good institutions, there are secure property rights, strong rule of law, and political/economic freedom that allows for people to push for environmental policies to be put in place. In relation to the Kuznets Curve (the inverted U-shaped curve relating pollution with increasing GDP per capita), countries with better institutions have a lower curve compared to countries with bad institutions. In other words, the costs of pollution and abating pollution in countries with better institutions are less than the costs of countries with bad institutions. When ordinary people have both political power and civil/economic rights, economic growth is more environmentally friendly and "sustainable".

"Beggar-thy-neighbor" trade policies

Keynes argued that the modern world no longer consisted of the political economies of the Golden Age. The modern world was in a more organized form capitalism and the rise in industry (consumer durables revolution of the early 1900's in the US/ mass production) had changed the way people accepted prices. During the golden age, most people were farmers, individual workers, or in small firms. People accepted whatever prices they had to pay, and whatever wages they were given. With the consumer durables revolution, large corporations were able to have market power that allowed them to have some control over their prices. In addition the increases in the amount of industrial laborers ushered in unionization. Workers were able to organize into unions that could resist the wage cutting that would have taken place during the Golden Age. - SIGNIFICANCE: Essentially, the rise in organized labor (and in corporations) meant that prices and wages did not decline as needed to sustain or restore balance in the economy. This meant that efforts by the British to bring the Gold Standard back into place would be near impossible. Furthermore, it helped reinforce Keynesian economics in the belief that the government had to intervene using fiscal and monetary policies to influence market forces and aggregate demand.

Countercyclical Demand Management

Keynes argues that if the aggregate demand is too low, investors will not put their capital into new ventures. This is due to investor expectations that are dependent on the behavior of other investors. With low aggregate demand, there would be abysmal profits from creating new businesses because nobody would buy the goods/ services they created.Keynes argued that with government's growing involvement in the market and higher worker demand for basic protections (unionization,etc.) there had to be a turn away from orthodoxy. Keynes recognized that only the government could help break from orthodoxy (laissez faire, business cycles, liquidationism). Keynes emphasized that government needed to use public policy to shift expectations about demand. Keynes emphasized fiscal policy because it stimulates aggregate demand directly, and even if interest rates were pushed to 0, capitalists wouldn't invest if they expected demand to stay low. By increasing government spending and lowering taxes, economic activity and aggregate demand would increase. Keynes also argued that countries had to break away from the Gold Standard to allow for countercyclical management to take place (allows for greater autonomy in monetary policy). - SIGNIFICANCE: In the United States the fiscal policy using Keynesian countercyclical demand management policies can be seen through FDR's New Deal Programs. The WPA (millions of construction jobs/ art work/ etc.), CCC (temporary jobs to unemployed), CWA (employing unskilled youth by putting them to work in rural areas under U.S. supervision) all worked to employ Americans and increase aggregate demand for goods and services. Countercyclical demand management was successful and it allowed the US to move past the Great Depression. The United States and Scandinavian countries had social democratic responses to the Great Depression whereas the developing world, Central/Eastern/Southern Europe, and Soviet Union all turned to Autarkic- Authoritarian responses.

Logrolling in the U.S. Congress

Logrolling is the process of voting for tariffs on goods in one congressman's district in exchange for his vote for tariffs on goods in your district. In other words, legislators would trade votes in order to ensure that their protectionists trade policies were ensured in the districts and states they represented. An example of logrolling can be seen during the Smoot-Hawley Tariff Act of 1930 which was amended over 2,000 times. With the RTAA, Congress delegated trade policy decisions to the executive branch (president), and made it impossible for Congressman to influence the outcome of trade policies, ergo severely limiting logrolling. With this delegation of trade matters to the President, the process of unilateral trade agreements shifted to bilateral trade agreements (trade policies more efficient). Therefore allowing the United States to prevent the "beggar thy neighbor" policies that had defined the destructive trade policies of the InterWar period. - SIGNIFICANCE:

OPEC "Hawks" and "Doves"

Members of OPEC are internally divided into "Hawks" and "Doves". "Hawks" are those countries like Iran and Iraq that have large populations and relatively small oil reserves. Hawks prefer high oil prices in the short run. "Doves" are those countries such as Saudi Arabia, Kuwait and UAE, which have small populations and large oil reserves. Preference is for moderate oil prices to prevent consumers from reducing dependence on oil by finding substitutes. The Yom Kippur War united OPEC in 1973, when they overcame differences and achieved a four-fold increase in oil prices by cutting production. The key to success was Saudi Arabia, who absorbed the largest burden of production cuts and punished free riders by flooding the market with oil, driving prices very low. - SIGNIFICANCE: OPEC has been unsuccessful since 1973. In addition to this, when the hawks and doves came together to form OPEC, they pursued policies that led to the 1973 Oil Crisis. OPEC triggered a "wage-price inflationary spiral" where producers raised prices to compensate for higher energy costs; workers then demanded higher wages to compensate for rising costs of everything; producers then raised prices to deal with higher labor costs...repeat. "Stagflation" defines the mix of recession and inflation (sustained rise in prices) in response to OPEC policies. With so much uncertainty about prices, and with high energy costs eating into profits, firms also cut back on production and investment. This led to slow growth and high unemployment (recession).

Jean Monnet and European Integration

Monnet was a French brandy salesman; he believed in "economic internationalism." He believed "that the new industrial capitalism would look American and that Europe's economic and political fragmentation crippled its ability to take advantage of the new mass production and mass consumption". Monnet argued that "American-style industrialism required a market the size of the American market, corporations as big as American corporations, financial markets as deep as Wall Street. European businesses could not compete with American businesses without a home base like that of the US, and if they could not compete, they could not tap the potential of the Continent. In addition, Monnet worked during WWII in Washington/New York to "channel supplies to the French and British". - SIGNIFICANCE: European unification embraced the Bretton Woods compromises. On the one hand, it was the most ambitious trade liberalization in history, eliminating tariffs among six rich societies". Monnet argued that "High standards would reinforce productivity growth, which would permit funding of the region's generous welfare states". In 1955, Monnet founded the Action Committee for the United States of Europe in order to revive European construction following the failure of the EDC. It brought political parties and European trade unions together to become a driving force behind the initiatives which laid the foundation for the EU as it eventually emerged: first the European Economic Community (1958), established by the Treaty of Rome of 1957; later the European Community (1967) with its corresponding bodies, the European Commission and the European Council of Ministers, British membership in the Community (1973), the European Council (1974), the European Monetary System (1979), and the European Parliament (1979).This process reflected Monnet's belief in a gradualist approach for constructing European unity.

MNCs and National Sovereignty

Multi National Corporations are firms that own and manage productive facilities in more than 1 country. They engage in FDI, and they are important for world trade. For example, in 2000, the world's 500 largest MNCs had sales of $13.7 trillion - nearly half the value of all goods and services in the world. Largest MNCs have revenues greater than GDPs of some nations. Tensions can arise because the goals of MNCs may conflict with the goals of governments. The huge size of MNC's, combined with the control of its assets (aka: FDI) creates potential problems for national governments on a range of issues: use of profits, location of production, jobs, technology, managerial expertise, etc. - SIGNIFICANCE: Historically, developing countries have been more concerned about MNCs because of legacy of colonialism and the concern of foreign domination. Typically, MNCs face a higher degree of regulation in developing countries: restrictions on profit repatriation, technology transfer requirement, employment requirements, local content requirements, ownership restrictions. At one extreme, governments can turn to expropriation, where the Host Government can seize and nationalize the company. Expropriation can happen due to the "obsolescing bargain"; the power of MNCs grows weaker over time relative to the host government. At some point the host government no longer needs the MNC to operate the affiliate and expropriates it. These expropriations peaked in the 1970's but have gone down since then due to the fact that MNCs investments are primarily in manufacturing (vertical integration requiring specific assets).

Offshoring of services

Offshoring of services refers to moving a company's processes or services overseas. Until recently, offshoring involved sending manufacturing jobs overseas to take advantage of lower labor costs. - SIGNIFICANCE: Now, information technology (like the internet/ video calling) has made it possible to deliver services from afar. Not only low-skilled services, but also high-skilled services can now be done from abroad. Entry of 1.5 billion "new" workers into the world economy means that there are plenty of people willing to provide services from afar, and many are not low skilled. Think of x rays being sent from the US, being analyzed in labs in Bombay. Offshoring has created a lot of anxiety in relation to globalization. Conversely, most economists would say that US economy is enriched by off shoring, but some have also expressed concern about the distributional implications. Winners: US capital owners who substitute cheap foreign labor in the service sector for expensive domestic labor AND US consumers who gain from decline in prices. Losers: US workers that experience falling wages and increasing job insecurity at all skill levels. With powerful lobbies, these groups could initiate a backlash. Yet, not everything is off-shorable: physical proximity, experience and cultural nuance are needed to perform the higher level services. Highly specialized and require physical proximity should remain immune.

Petrodollar Recycling

Petrodollar recycling was when 1) the 1973 rise in oil prices provided OPEC members with huge profits. OPEC nations deposited these "petrodollars" in British and American commercial banks. 2) Onward lending by these banks to developing countries who were keen to industrialize under ISI and saw loans as a way to finance development and... 3) Pay their growing oil import bills. - SIGNIFICANCE: The 1973 Oil Crisis caused a "wage-price inflationary spiral" (and stagflation). Producers raised prices to compensate for higher energy costs, so workers demanded higher wages, so producers raised prices to deal with higher labor costs: a vicious cycle. With so many price uncertainties, and with high energy costs eating into profits, firms cut back on production and investment. Slow growth and high unemployment resulted. The resulting debt crises were a major threat to borrowers and to the world financial system. Banks had over lended because they wanted to recycle OPEC petrodollars. The initial success of ISI encouraged the herd mentality that investing in developing in countries was a good idea. Borrowers over borrowed because loans were needed to pay for factory machinery and oil imports. Additionally, borrowers were wary of MNCs and the threat of losing domestic control to them (think of CIA intervention in deposing Allende => Pinochet).

Coalition of Iron and Rye

Protectionist policies in Germany towards the end of the Golden Age were supported by those who held relatively scarce resources. Germany was the breadbasket for western Europe before the Golden Age and globalization. After the land- abundant ARS/ New World began to flood the market with cheap grains Germany lost its comparative advantage in grain production in international markets. In addition heavy industry (and its laborers) pushed for industrial tariffs because their comparative advantage was also taken away when placed on an international scale. A coalition led by Junkers (and by the president Bismarck) called the Iron and Rye Coalition kept tariffs high due to malapportionment in the Bundesrat. - SIGNIFICANCE:

Developmental Nationalism

Protectionist, populist dictatorships that served urban labor and capital at the expense of landowners. Developing countries suffered greatly from the Great Depression with the devaluation of primary products compared to manufactured products. These countries were no longer making money through exports to the North and couldn't afford to import manufactured goods from the North. After the Great Depression, many people expressed their distrust for globalization which led to the rise of dictators. - SIGNIFICANCE:

Wage inequality

Since the 1970s, low-skilled wages in the U.S. have fallen sharply while wages for the high-skilled have increased. In Europe, by contrast, low-skilled workers have experience high unemployment rather than falling wages. This is due to stronger labor market restriction in Europe that prevent firms from adjusting wages such as higher minimum wages and legal restraints on adjusting wages. So instead of lowering wages, they simply don't hire as many workers. High European unemployment is thus the flip side of falling wages in the US. Determine that with globalization, less-skilled wages are determined by the global supply of less-skilled labor, rather than by domestic labor market conditions. - SIGNIFICANCE: "Factor-Price-Equalization" (FPE) estimations suggest that globalization explains at best 30% of income inequality and attributes the other 70% of rising wage inequality with the technological upgrading of the economy which has created a wage premium, the de-unionization of the private sector which has reduced the bargaining power of workers and the super salaries of CEOs, who have seen their incomes explode since the 1970s. Also, increasing supply of low-skilled labor in the U.S. with immigration puts downward pressure on wages of native-born low-skilled adults.

Wage inequality in the U.S.

Since the 70s, low-skilled wages in the US have fallen sharply while wages for the high-skilled have increased, widening the gap between rich and poor. - SIGNIFICANCE: Government can reduce inequality if politicians and citizens wanted to, by increasing the minimum wage, increasing estate taxes, and marginal tax rates on highest earners. These policies aren't likely if rising economic equality translates into rising political inequality and top earners are opposed to such policies. Top earners are more politically active and give more money to politicians. Such redistributive policies may be possible if the super rich will accept higher taxes on themselves to ensure social stability and the preservation of the capitalist system. Fear of anti-rich, anti-globalization extremism may compel the elite to submit to higher taxes.

Dawes Plan of 1924

This plan was created by an American banker in order to alleviate the burden of war reparations owed by Germany to the allies and by the allies to the US. US bankers took charge of the German central bank and fiscal policy. This created a cycle of money from US to Germany, which made reparations to other European nations, who then used the money to pay off war debts to the US. This was an effective but risky solution to the war debts issue. - SIGNIFICANCE:

Smoot-Hawley Tariff Act of 1930

Smoot-Hawley added to the extent of the Fordney-McCumber Tariff. Endowments and interests from farmers along the Canadian border and Eastern seaboard who faced competition from cheap Canadian goods and light manufacturing industries that were labor-intensive and faced foreign competition. Republican protectionist interests in Congress traded their votes for imposing tariffs on products produced by import-competing industries. President Hoover did not intervene. Both Presidency and Congress were controlled by Republican party (Protectionist). - SIGNIFICANCE: As the world's net creditor, the US needed to open its markets so that deficit countries could earn foreign exchange and pay their bills. Instead, US raised tariffs on over 9,000 imported goods to record levels, triggering retaliation by trading partners. This started an era of economic isolation. Started a tariff "war" defined by "beggar-thy-neighbor policies" that imposed cost of adjustment on foreigners.

Specific Assets

Specific assets are a case of "Market Imperfection", one of the conditions for vertical FDI. They are both physical and human investments that are specialized and unique to a certain task. One example is the production of a certain component that may require specialized equipment. They are dedicated to a particular use and cannot easily be adapted to another purpose. They give rise to "hold-up" problems if the MNCs are dependent on a single supplier for an input, in which the seller could demand more money. To avoid this, the firm buys the supplier and "internalizes" the transaction within the firm. - SIGNIFICANCE: Vertical FDI occurs when specific assets combine with efficiency-oriented locational advantages (need both) . When Ford wants to lower its costs by sourcing production of an input to a country with cheap labor, it sets up a Ford-owned factory there to make sure it is not held.

The Brady Plan of 1989

The Brady Plan by US Treasury Secretary Nicholas Brady states that debtor countries negotiate large reductions of 30-50% of overall levels of debt, and that their bank loans be converted to dollar denominated "Brady Bonds" which diversified risk away from commercial banks. Developing countries then adopted ambitious economic reforms and regained access to the international capital markets. - SIGNIFICANCE: This plan successfully reduced debt and lowered interest rates that allowed a return to growth.

Debt Crises of the 1980's

The Debt Crises of the 1980's is tied to the 1973 Oil Crisis fueled by OPEC's four-fold increase in oil prices. The proximate causes of the Debt Crisis are: stagflation, higher interest rates, and appreciation of the US$. Stagflation caused by the Oil Crisis in the U.S. reduced the demand for developing country exports (therefore they're unable to pay off loans). The rise in interest rates to combat U.S. inflation increased developing countries' debt burden because loans were contracted on variable interest rate terms. Furthermore, the appreciation of US dollar increased the debt burden of developing countries because loans were repayable in US$. Fed Chairman Volcker's high interest rate policy strengthened the US$, and the appreciation of the dollar led to an increase in how much they owed. - SIGNIFICANCE: There were two phases of resolution of the Debt Crisis. Phase 1: Maintain loans to prevent int'l financial collapse; this put all the burden on the debtors. There were IMF-sanctioned austerity programs (raising taxes and cutting govt. spending). This resulted in a "Lost Decade" of growth for developing countries. Phase 2: Debt reduction as seen in the Brady Plan of 1989. The Brady Plan reduced debt and lowered interest rates, which led to a return to growth beginning by about 1990.

Successes of the GATT

The GATT brought tariffs down considerably and was very robust. It was successful despite many wars, decolonization, etc. By the Tokyo Round in 1979, the average tariff on manufactured products was 4.7% (compared to about 40% in 1948) - GATT was able to survive the Cold War, the Vietnam War, many wars of independence, decolonization, the creation of EC. The WTO incorporated all GATT provisions, but added the dispute settlement mechanism that gave a greater voice to smaller countries. - SIGNIFICANCE:

Destabilizing U.S. policies after World War I

The US refused to forgive war debts which would've fixed the issue of reparations (liberty loans). US also raised tariffs instead of lowering them, which intensified adjustment problems (Fordney- Mccumber and Smoot-Hawley). Finally, the US refused to join the League of Nations, which undermined the global efforts to prevent another war. - SIGNIFICANCE: America's domestic policies had not developed as far as its economy had, and the United States did not take up the leadership position that was left by England.

Post-war European economic stabilization

The Versailles Treaty created new countries called "successor states" in central & Eastern Europe. These states faced serious economic challenges. They had to balance budgets & control inflation while facing strong political pressure from civil servants & the unemployed. States like Hungary and Bulgaria faced debilitating hyperinflation, and the worst was seen in the collapse of Germany's economy post ww1. Dawes Plan was established in 1924 after hyperinflation had wiped out the life savings and purchasing power of millions of central and eastern europeans. The Dawes plan was taken up by western bankers (NOT THE US GOVT.) in order to stabilize the mark and help regularize the reparations payments to the victors of ww1. This action was successful and the German economy began to grow again after the Dawes Plan. - SIGNIFICANCE: Despite this post war economic stabilization, the collapses of the 1920's led to an enduring political legacy. Middle classes determined that the prewar elites were not fit to rule.

Factor-Price-Equalization (FPE)

The process between falling less-skilled wages in the United States (and other developed countries) and increasing imports from developing countries. With globalization (trade, immigration, FDI), less-skilled wages are determined by the global supply of less-skilled labor, rather than by domestic labor market conditions. There's movement towards the law of one price (the hypothetical case under complete globalization where price differences disappear between different goods and services). At first glance, FPE seems compelling: If the U.S. imports goods that are produced by low paid Chinese workers, surely low-skilled Americans, who produce these goods at wages 10 times those of the Chinese, will face a difficult time in the labor market. - SIGNIFICANCE: Globalization "explains" at best about 30% of income inequality in the US. The other 70% is due to tech upgrading of the economy, de-unionization, and very high salaries for CEOs. The gain in wealth share is all about the top 0.01%, who have quadrupled its share of the country's wealth in 50 years. Globalization has partly led to falling wages for low-skilled labor in the United States (and high unemployment in the EU). Nevertheless, there should not be a protectionist backlash; there needs to be a New Deal for globalization that redistributes wealth in developed nations.

Grain Invasion

The transportation revolution (steam and rail) allowed farm products from the Areas of Recent Settlement (U.S., Canada, Australia, and South America) to enter European markets, exposing Europe's farmers to severe competition. Before this "grain invasion," Prussia and Eastern Europe had been the breadbasket of Europe (aka: producing grain for europe). The imported grain from the ARS threatened farmers in Europe because of their abundance and low prices. In addition, technological changes in agriculture in these ARS allowed for dramatic improvements in farm productivity that greatly benefitted land-abundant countries (therefore hurting European agriculture). - SIGNIFICANCE: This grain invasion resulted in Germany losing its comparative advantage in grain production in international markets. There was an adoption of protectionism for agriculture in central Europe, as seen in Germany. The coalition of Iron and Rye led by Bismarck helped protect the interests of the Junkers (landholding elite) and heavy industry in Germany. It resulted in high tariffs, and protected industries that Germany did not have a comparative advantage in. In England, the grain invasion pushed farmers to move away from grain production into livestock and dairy production. The grain invasion also pushed the repeal of the Corn Laws (english seeing destruction due to potato famine, seeing harm of protectionist tariffs).

Delegation and Reciprocity

The two key components of the RTAA. Delegation meant that Congress delegated its constitutional authority on trade matters to the executive branch: the President. This led to more free-trade policy, because in opposition to Congress who is more influenced by personal interest President has national interests at heart. This reduced logrolling because Congress gave up power to set tariffs on specific goods. Reciprocity couples US tariff reductions with reciprocal foreign tariff reductions, meaning that trade policy was no longer unilateral and therefore US was not subject to foreign protectionism while it was free trader. Reciprocity bolstered the lobbying position of exporters, creating winners from trade and increasing the size of the export sector. This made Republicans begin to support free trade, explaining why RTAA was not repealed in 1953 when Republicans took power again. - SIGNIFICANCE:

Atlantic Charter

This charter was negotiated by Churchill and Roosevelt aboard a warship in 1941. It was the plan for the post-WWII world economic order. The US required the UK's acceptance before it would help with the war. No territorial gains were to be sought, everyone had the right to self-determination, trade barriers were to be lowered, and there would be global economic cooperation after the war. It was a secret because many in Congress were isolationists as well as the majority of Americans. - SIGNIFICANCE: This was significant because the US planned the postwar order even before entering the war. It also influenced the way the world economy would be shaped after WW2 (Bretton Woods currency system, decolonization, WTO, IMF, World Bank). This would allow for unprecedented growth, stable exchange rates, ISI/ EOI in decolonized countries, cartelization, etc.

Environmental Kuznets Curve

This describes the inverse-U relationship between pollution and per capital GDP. By increasing national income, international trade and globalization more generally should work to protect the environment. Furthermore with appropriate institutions in place, the extent and duration of the high pollution phase of development can be mitigated. Curve begins by upward sloping: this is the environmental decay. Higher incomes initially mean more production and consumption and these activities increase pollution. At some level of GDP, there is a turning point, where we begin to see environmental improvement characterized by a downward sloping curve. - SIGNIFICANCE: As income grows, demands for environmental protection increase, leading to a development path characterized by both economic growth and environment improvements. Good institutions flatten the EKC for these pollutant because demands of citizens translate into effective regulation and reduction of pollution. However, there is not evidence of a Kuznets curve for CO2.

Asian Financial Crisis

This financial crisis was caused by poor institutions as a result of corruption, cronyism, and lax banking policy. Banks took risks with borrowing of foreign money and figured their government would bail them out. They used foreign investments to buy real estate, creating a bubble. The collapse began with the devaluation of the Thai baht, followed by speculation on other Southeast Asian currencies (Hong Kong the only one that did not devalue). As the crisis spread to other Southeast Asian countries and Japan, they saw devalued markets and a rise in privates debt. IMF stepped in to initiate a $40 billion program to stabilize the currencies of South Korea, Thailand and Indonesia (malaysia did not want help from IMF). - SIGNIFICANCE: This demonstrates the fragility of the international finance system, and how easily crisis spread from one economy to others, exemplifying how interrelated globalization has made countries. This ignited the debate on which exchange-rate regime is viable for small economies open to international capital flows. Many claimed that the intermediate exchange regimes weren't viable when foreign capital flows were volatile (these asian countries used intermediate exchange rates like crawling peg, basket of currencies, etc.). Since then, fewer countries have chosen these regimes.

WTO dispute settlement mechanism

This is the most important feature of the WTO, and it differentiated the WTO from the GATT. If the parties cannot reach a settlement, the dispute goes to an impartial panel of experts. The experts issue a ruling which goes into effect unless all WTO members vote to block the ruling. The defendant must end the policy or compensate the complainant. If no agreement can be reached on compensation, the injured party can impose retaliatory tariffs. - SIGNIFICANCE: The dispute settlement mechanism helps small countries since they are more insulated from bullying by large countries (e.g., US vs Venezuela on the gasoline issue and Shrimp/Turtle Case). In 1995, Venezuela complained to the WTO that the U.S. applied stricter rules under the Clean Air Act on imported gasoline than it did for domestically-refined gasoline. In 1996, the expert panel completed its final report, finding that the U.S. had discriminated against imports. Shows that the Dispute settlement allows smaller countries to have a fair chance as a complainant and respondent.

Washington Consensus

This is the set of 10 policies that the US government and the international financial institutions (IMF, world bank, WTO) believe are necessary elements that all countries should adopt to increase economic growth. Emphasizes importance of macroeconomic stability and integration into the international economy. The framework: 1. Fiscal discipline - strict criteria for limiting budget deficits 2. Public expenditure priorities - moving them away from subsidies and administration towards previously neglected fields with high economic returns 3. Tax reform - broadening the tax base and cutting marginal tax rates 4. Financial liberalization - interest rates should ideally be market-determined 5. Exchange rates - should be managed to induce rapid growth in non-traditional exports 6. Trade liberalization 7. Increasing foreign direct investment (FDI) - by reducing barriers 8. Privatization - state enterprises should be privatized 9. Deregulation - abolition of regulations that impede the entry of new firms or restrict competition (except in the areas of safety, environment and finance) 10. Secure intellectual property rights (IPR) - without excessive costs and available to the informal sector Implications: Support of free trade through WTO and NAFTA - North Atlantic Free Trade association reduce tariff barriers. IMF bailouts tended to involve free market reforms as a condition of receiving money. Belief in free trade suggests countries, should specialise in goods / services where they have a comparative advantage. This may mean developing economies need to stick with producing primary products. - SIGNIFICANCE:

Competitive Devaluations

This is when an abrupt national currency devaluation by one nation is matched by a currency devaluation of another, especially if they both have managed exchange-rate regimes. Currency devaluation improves a nation's export competitiveness since it lowers the cost of goods exported from that nation for overseas buyers. It is a "beggar-thy-neighbor" policy since a nation is trying to gain an economic advantage without considering the harm it may have on other countries. - SIGNIFICANCE:

"New Deal" for Globalization

This new deal is essential in preventing a protectionist backlash. This "New Deal" needs to link trade and investment liberalization to a significant income redistribution that serves to share globalization's gains more widely. Expanding the political support for open borders/globalization requires dramatic changes in fiscal policy. One way to expand political support for globalization would be through eliminating the full payroll tax for all workers earning below the national median. The payroll tax is large and regressive, and it reinforces pre-tax inequality. By creating this tax cut, there would be a real gain in after- tax real income for those working below the national medium (typically low-skill/ unspecialized workers affected by globalization). This would lead to meaningful income redistribution within the United States. - SIGNIFICANCE: (Background) In the US economy, real income growth has been extremely skewed, with relatively few high earners doing well while incomes for most workers have stagnated or fallen. By some measures, inequality in the US is greater today than at any time since the 1920s. US policy is becoming more protectionist because the American public is becoming more protectionist, and this shift in attitudes is a result of stagnant or falling incomes. Public support for engagement w/ world economy is strongly linked to labor-market performance, and for most workers labor-market performance has been poor.More investment in education and more trade adjustment assistance for dislocated workers (the two most common responses) are not adequate. Significant payoffs from education investment will take decades to be realized, and trade adjustment assistance is too small and too narrowly targeted on specific industries to have much effect. AKA: essential we change fiscal policy in the US.

The "Obsolescing Bargain"

This posits a negative relationship between MNC "power" over host governments and time. At the time of initial investment, MNCs are powerful but power gradually shifts to the host government over time. At some point, the host government no longer needs the MNC to operate affiliates and it expropriates it. This exemplifies the downward sloping power of MNC relative to Host Government over Time. Initially, the MNC controls capital and expertise and has bargaining power. Over time, the host country develops the skills to run the MNC affiliate and market its products. Power of MNC declines and the situation is ripe for expropriation. - SIGNIFICANCE: Extractive and raw materials industries (e.g. oil, minerals) were the most vulnerable to expropriation. Locals learned how to operate the affiliates and could easily sell the minerals and oil. However, expropriations don't usually occur anymore because those in raw materials industries have already been expropriated and others don't serve any purpose outside of MNC.

Kyoto Protocol

This protocol demanded that rich countries cut emissions of greenhouse gases by 5% from 1990 levels by 2012 (5% was the global target, but different countries have different targets). Countries are able to offset cuts by properly managing forests and farmlands that absorb CO2. Furthermore, the developing nations are not required to reduce emissions, but they had to monitor and report their emissions (it's supposed to be a form of moral suasion). The Kyoto Protocol also developed a "Cap and Trade" system that issued tradable permits, representing a right to emit a specified quantity of greenhouse gases. By issuing only a limited number of permits (a "cap"), treaty members can reduce the total quantity of gas emitted at the international level. Because permits are limited to a quantity that is less than the amount of gas that would normally be emitted, the right to emit becomes a valuable commodity. Buying and selling permits establishes a market price of them. Nations wishing to emit gases beyond permitted levels must either reduce their emission or purchase permits to emit. Polluters able to reduce their emissions relatively cheaply will do so, rather than purchase permits. Polluters who face higher abatement costs will buy permits to satisfy requirements. In this way, reduction in emissions are made by those polluters who can do so at least cost, being compensated by polluters who face higher costs. - SIGNIFICANCE: The problem with the Kyoto protocol was that developing nations were not willing to reduce emissions. With the US and China refusing to take part in the Kyoto Protocol, developing nations had no incentive to join. Other nations simply felt like they could free ride on the progress of reducing greenhouse gasses without contributing to it themselves. The failure of the Kyoto Protocol shows how essential it is for international cooperation (a treaty) in resolving international issues like global warming.

Reciprocal Trade Agreements Act of 1934

This switched the decision power for trade policies from the Congress to the president and ended logrolling of votes. The RTAA required that reciprocal foreign tariff reductions be offered. The value of tariff reductions the US offers to other nations had to equal the value that the US received in return. It aided domestic job creation through trade in the New Deal programs. - SIGNIFICANCE: The RTAA was the first time Congress and a President worked together to enact trade negotiating authority to help pass new trade agreements to increase exports and support new job creation. It served as an integral step in America's transition from economic crisis to global leadership.

Pre-1929 Orthodoxy

This was the prevailing wisdom that the economy was self-correcting. Laissez faire opposed government regulation beyond the minimum necessary for a free enterprise system to operate, and business cycles were considered natural and necessary. By this train of thought, the Recession of the 1930s was inevitable after the Roaring Twenties. Liquidationism argued that the economy had to liquidate all bad investments, loans, and useless products before recovery could happen. - SIGNIFICANCE: This was significant because it affected the response to the Great Depression. Orthodoxy believed that price and wage declines would automatically increase aggregate demand until balance was restored, so government should do nothing. Liquidationism ultimately did not work.

Trade Adjustment Assistance

Trade Adjustment Assistance is a federal program that provides a path for employment growth and opportunity through aid to US workers who have lost their jobs as a result of foreign trade. This act was put in place as a way to reduce the damaging impact of imports felt by certain sectors of the U.S. economy. It was 4 components: Workers, Firms, Farmers, Communities. - SIGNIFICANCE: It was a way for government to compensate for the effects of free trade. TAA participants come from a variety of backgrounds and industries, and therefore many enter the program with a wide array of skills and experience. However, the majority of TAA participants who enter the program face similar challenges in obtaining reemployment, which can include no post-secondary degree, job skills solely in the manufacturing sector, or experience in a specific job that may no longer exist. The TAA program has been developed through legislation, regulation, and administrative guidance to best serve the needs of this unique population.

Marshall Plan

US government foreign aid plan that provided over 13 billion in foreign aid to assist European economies in recovering from WW2. The aid was very effective and facilitated European economic integration since it erased trade barriers & set up institutions to coordinate European economies. By accepting US foreign aid, European countries had to establish a commitment to free trade and stable exchange rates (pegged to the US $). In addition to this, Marshall Plan recipients had to establish cooperative institutions in Europe. This gave the geopolitical rationale for the European Community (EC). - SIGNIFICANCE: The threat of communism was used to push past isolationist tendencies of the Republican party post ww2. President Truman exploited Republican's fears of Soviet expansion to convince them that the US had to implement the Marshall Plan. Truman warned that a post-war economic crisis in Europe would fuel support for Soviet communism. The way the US could contain the Soviet empire was by encouraging European economic prosperity. By giving US aid to Europe, they would prevent a repeat of the interwar hyperinflation and depression that fueled Hitler's rise to power. Truman thus conjoined the Marshall Plan with anti-Soviet "containment" via NATO.

Chinese Exclusion Acts

n the labor-scarce/land-abundant Areas of Recent Settlement, inequality rose due to the Great Migration. The massive influx of low-skilled workers competed directly with native residents at the bottom of income distribution. This can be explained by Heckscher-Ohlin Theorem because of the movement of labor from a place where it was abundant to a place where it was scarce. The increase in the supply of workers lowered unskilled wages relative to skilled wages. These wage decreases resulted in a "backlash" against globalization. The U.S. began imposing restrictions on immigration in the 1880s: literacy requirements, head taxes, Chinese exclusion, etc. In 1882, Chinese exclusion act suspended Chinese immigration for 10 years, this developed into a permanent ban. In 1921, national quota system banned all Asian immigration. This ended era of mass migration and restricted globalization all in response to rising inequality due to immigration. - SIGNIFICANCE: Similar policies of excluding immigrants competing with the bottom of the income distribution took place in many ARS nations like Argentina, Australia, Canada, etc. These policies demonstrate how countries reacted to the rise in inequality in New World (and the fall of inequality in Old World). This reflects a general backlash against the internationalism and free migration that had defined the Golden Age.