INTL 102 Finals- Broz

Réussis tes devoirs et examens dès maintenant avec Quizwiz!

Asian Financial Crisis

- caused by poor institutions ->> corruption, cronyism, and law banking policy - Banks took risks -> borrowing of foreign money & figured gov't bail them out - used foreign investments -> buy real estate, creating a bubble - Collapse began with devaluation of the Thai baht -> followed by speculation on Hong Kong, other Southeast Asian countries, & Japan. - Devalued markets & rise in privates' debt - IMF stepped in initiate $40 billion program to stabilize the currencies of South Korea, Thailand and Indonesia (Malaysia didn't want help). SIGNIFICANCE: • Demonstrates fragility of international finance system • Easily crisis spread from one Economy to others • exemplifying interrelated globalization has made countries • ignited the debate on exchange-rate regime ->> viable for small economies open to international capital flows • Foreign Capital Flows were volatile ->> fewer countries chosen these regimes

Petrodollar Recycling

1. In 1973, Rise in oil prices provided OPEC members with huge profits 2. OPEC nations deposited these "petrodollars" in British & American commercial banks. 3. Onward lending by these banks to developing countries-> who were keen to industrialize under ISI & saw loans as a way to finance development and... 4. 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 • Producers raised prices to deal with higher labor costs: a vicious cycle • With many price uncertainties, & high energy costs eating into profits -> firms cut back on production & investment • Slow growth & high unemployment resulted • Resulted debt crises -> major threat to borrowers & to the world financial system • Banks over lend -> wanted to recycle OPEC petrodollars • Initial success of ISI encouraged herd mentality that investing in developing in countries was a good idea • Borrowers over borrowed -> loans were needed to pay for factory machinery & oil imports Borrowers were wary of MNCs & threat of losing domestic control to them (think of CIA intervention in deposing Allende => Pinochet).

"Gains from Trade" Hypothesis "Financial Oligarchy"

1. Theory claims -> globalization helps environment a. Hypothesis: trade leads to growth specialization & comparative advantage b. As people get wealthier -> demand & receive a better environment c. Globalization improves environment -> theory meets Environmental Kuznets Curve -> demonstrates an inverse U relationship between pollution & GDP capita d. Starts with envir. decay, higher incomes -> more production, consumption -> increase pollution e. "Bad" institutions -> limited political freedom, weak rule of law, and poor property rights f. Reaches turning point -> see improvement: as income grows, demands for envir. protection increase, leading to a development path characterized by both economic growth and envir. improvements. g. Characterized by "good" institutions with political, economic freedoms, rule of law, & strong property rights. 2. "Financial Oligarchy" → Form of power, gov't or operations -> power > rests with a small, elite group of inside individuals, from a small group of educational institutions, a. or influential economic entities or devices (banks, commercial entities, lobbyists) -> act in complicity with, or at the whim of the oligarchy, often with little or no regard for constitutionally protected prerogative b. Monopolies sometimes granted to state-controlled entities (Royal Charter to the East India Company) c. Today's MNCs function as corporate oligarchies with influence over democratically elected officials. - SIGNIFICANCE:

The Resource Curse

Endowments-based argument -> determines what causes good (or bad) institutions • dictates -> easy availability of natural resources (e.g. copper in Zambia, oil, gold, etc.) • stunts institutional development • Instead of promoting economic & political liberties • Elites (chosen) can dig wealth from ground & put it in Swiss bank accounts. • Paradoxically, countries with valuable natural resources "cursed" experience low growth • Resources may prevent development of good institutions • Clear negative relationship between primary product exports & economic growth. - SIGNIFICANCE:

Washington Consensus

Set of 10 policies -> US government & International Financial Institutions (IMF, world bank, WTO believe -.> all countries should adopt ->> increase economic growth) Emphasizes -> macroeconomic stability & integration ->> international economy The framework: 1. Fiscal Discipline - (strict criteria for limiting budget deficits) 2. Public Expenditure Priorities - (moving away from subsidies & administration ->> neglected fields with high economic returns) 3. Tax Reform (broadening tax base and cutting marginal tax rates) 4. Financial Liberalization - (interest rates 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) - (reducing barriers ) 8. Privatization - (state enterprises ->> privatized ) 9. Deregulation - (abolition of regulations -> impede entry of new firms or restrict competition) 10. Secure Intellectual Property Rights (IPR) - (w/o excessive costs & available -> informal sector) (Implications: Support of free trade through WTO and NAFTA - North Atlantic Free Trade Association ->> reduce tariff barriers. - IMF involve free market reforms ->> a condition of receiving money Belief in free trade ->> specialize in (G&S) goods / services -> comparative advantage. - Developing economies need to stick with producing primary products. SIGNIFICANCE:)

Delegation and Reciprocity

• 2 key components of RTAA: 1. Congress delegated its constitutional authority on trade matters to executive branch: President a. led to more free-trade policy -> in opposition to Congress -> influenced by personal interest President has national interests at heart b. reduced logrolling because Congress gave up power to set tariffs on specific goods. 2. Reciprocity couples US tariff reductions with reciprocal foreign tariff reductions a. Means: trade policy was no longer unilateral & US was not subject to foreign protectionism while it was free trader. b. Reciprocity bolstered lobbying position of exporters, creating winners from trade and increasing size of export sector -> made Republicans begin to support free trade, explaining why RTAA was not repealed in 1953 when Republicans took power again. SIGNIFICANCE:

Käthe Kollwitz

• A German expressionist painter • captured the horror of WWI • One of her sons was killed in WWI -> made a memorial dedicated to him & those who died during the war. • Casualties & costs of war were numbers never seen before. • The misery, suffering and poverty that ensued deeply marked this era. Significant: Kollwitz's paintings, "Widows and Orphans" (1919) -> mostly in black, & attempt to portray tragedy of world's first world war on all those involved, notably civilians left behind by their husbands, brothers, sons, & gov't, economy.

Stagflation

• A condition of slow economic growth & relatively high unemployment accompanied by rising prices, or inflation, and a decline in GDP (AKA: high inflation, stagnation, and unemployment) • It occurs when the prices of goods rise while unemployment increases & spending declines. • Can prove to be a particularly tough problem for gov't to deal with -> due to the fact that most policies designed to lower inflation tend -> make it tougher for the unemployed, & 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 demanded higher wages to compensate for rising costs of everything; producers then raised prices to deal with higher labor costs → repetitive cycle.

The "Unholy Trinity"

• AKA: The trilemma. • Principle includes 3 goals: Fixed-Exchange rates, International Capital Mobility and Domestic Monetary Policy. Called the UT because only 2 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) Present: International Capital Mobility and Domestic Monetary Policy. SIGNIFICANCE:

Competitive Devaluations

• Abrupt national currency devaluation by one nation = matched by devaluation of another • If both have managed exchange-rate regimes • Currency devaluation improves a nation's export competitiveness -> since it lowers 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 harm it may have on other countries. SIGNIFICANCE:

Bretton Woods Exchange-Rate System

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

War Debts and Reparations

• After World War 1, allies owed U.S. government over $10 billion. • During war, U.S. had gone from world's largest debtor to the world's largest creditor through loans from private banks and gov't "Liberty Loans" • War helped US become world's dominant financial power. • After the War, U.S. refused to reduce or forgive these debts, a decision that posed major problems. • Allies also demanded reparations (war damages) from Germany-> required to pay $33 billion in damages to victors. • This imposed a harsh "victor's peace" on Germany -> 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 -> made reparations to other Europeans nations -> used money to pay of their war debts to U.S. SIGNIFICANCE: • U.S. refusal to forgive war debts incurred by Allies led Allies to push Germany to pay for entire war costs/reparations. • Cycle set precedent for Great Depression and economic problems 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 intern'l economics and politics. It helped set the precedent for WWII.

Communism

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

Liquidationism

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

The Brady Plan of 1989

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

Collective Action Theory and OPEC

• Cartels -> 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 -> 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. • Large members -> manipulate prices even if others free ride in order to keep the cartel together. SIGNIFICANCE: • 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 -> had the power to punish free riders in OPEC by flooding the market with oil, driving prices very low in OPEC.

"Race to the Bottom" Hypothesis

• Countries open to trade & investment adopt weaker environmental (or labor) regulations -> fear of a loss in competitiveness • Hypothesis -> 2 main predictions: 1) MNCs choose to invest in countries w/ less restrictive standards -> argue it is cheaper to produce in places with lower standards. 2) Foreign countries competitively undercut each other's standards -> attract FDI -> leading to lowest levels of envir./labor regulations. SIGNIFICANCE: • Hypothesis used a reason against globalization • Makes claim that environment is hurt by globalization • Turn to protectionism & unilateral reforms -> not the way to international public -> global warming Global warming affected by all countries and intern'l cooperation in abating (decline) it.

Social Democracy

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

What went wrong with ISI?

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

Newly Industrializing Countries (NICs)

• Countries whose economies have not yet reached developed country status • But, 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 (disturbance) can occur as primarily rural, or agricultural, populations migrate to the cities, where the growth of manufacturing concerns & factories can draw many thousands of laborers. SIGNIFICANCE:

Dawes Plan of 1924

• Created by an American Banker -> to alleviate (lessen) burden of war reparations owed by Germany to allies and by allies to the US. • US bankers took charge of German central bank & fiscal policy. • This created a cycle of money from US to Germany, which made reparations to other European nations -> who used money to pay off war debts to US. This was an effective but risky solution to war debts issue. SIGNIFICANCE:

Kyoto Protocol

• Demand rich countries cut emissions greenhouse gases< 5% (global target) (1990 - 2012) • Offset cuts by properly managing forests & farmlands -> absorb CO2 • Developing nations -> not required to reduce emissions, but monitor & report emissions • This developed a "Cap and Trade" system -> issued tradable permits • Representing a right to emit specified quantity of greenhouse gases • Issuing only limited number of permits (a "cap") -> reduce total quantity of gas emitted at the intern'l level • Less amount of gas that would normally be emitted -> becomes a valuable commodity • Buying and selling permits establishes a market price • Beyond permitted levels -> must reduce their emission or purchase permits to emit • Reduce emissions rather than purchase permits -> face abatement costs -> least cost SIGNIFICANCE: • Problem: Developing Nations -> not willing to reduce emissions • US & China refused to take parts in the Kyoto Protocol • Developing nations had no incentive to join Failure of the Kyoto Protocol -> essential it is for intern'l cooperation in resolving international issues like global warming.

Environmental Kuznets Curve

• Describes inverse-U relationship between pollution and GDP per capita • Increasing national income -> intern'l trade & globalization work to protect environment • Appropriate institutions> extent & duration of high pollution can be mitigated (lessened) • Curve begins -> upward sloping: envir. Decay • Higher incomes -> mean more production & consumption • Activities increase pollution -> turning point -> begin to see environmental improvement characterized -> by downward sloping curve. SIGNIFICANCE: • As income grows, demands for envir. protection increase -> lead to development path characterized by econ. growth & envir. improvements Good institutions flatten EKC for pollutant -> demands of citizens effect -> regulation & reduction of pollution -> no evidence of Kuznets curve for CO2.

U.S. Sugar Program

• Due to tariffs and quotas, price of sugar in the US is much higher compared to the world market price for sugar • American consumers bear burden of protection of sugar industry • Reason protection persists is because cost of sugar protection to each consumer is $10/year -> whereas farmers gain huge benefits from protection. • Small group of sugar producers -> have much stronger incentive to lobby than 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 payoff to these huge plantations is enormous -> have very strong incentives to lobby, even if 12,983 free rides. • Implication is farmers are powerful in rich countries -> they benefit from a vast array of trade policies, subsidies, etc... • Their costs are borne by everyone else -> powerful -> unequal group. SIGNIFICANCE:

Lend-Lease Program

• During WWII, U.S "leased" arms to allies via this program. • Supplied $50 billion in munitions, planes, vehicles, food to allies. • Was fiction because allies were supposed to return armaments (weapons) but it was just a way for US to avoid another war debts problem. SIGNIFICANCE: helped Allies win the war & created a huge export boom for U.S. industry.

Liberty Loans

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

"Beggar-thy-neighbor" Trade Policies

• Each country tried to increase demand for domestic industries -> by raising tariffs on imports or competitive devaluation. • Led to collapse of world trade & economy. • Ex: Canada responded to high tariffs -> U.S gov't imposed their tariffs on US goods. • U.S raised tariffs instead of lower it. -> Instance of prisoner's dilemma: each country has an incentive to follow such a policy, making everyone worse off. Tariff wars hurt all nations & goes against comparative advantage. SIGNIFICANCE: • As world's dominant economy & major surplus nation, U.S. needed to open its markets -> 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 -> led to the collapse of world trade.

Depression of 1873-1896

• Economy contracted for 65 months -> longer than 1930s Great Depression. • Gov't had to let this run its course -> could not use domestic monetary policy due to Gold Standard. • Deflation in depression followed by inflation after gold discover.-> rising world prices. SIGNIFICANCE: • Event demonstrates main downside of adhering to Gold Standard (lack of domestic monetary policy sovereignty).

Secure Property Rights

• Exclusive authority -> determine how a resource is used, whether that resource is owned by gov't or by individuals • Society approves uses selected by holder of property right with gov't administered force and with social ostracism (isolation). SIGNIFICANCE: • Have secure property rights allows for protection of envir. services (e.g. biodiversity/ prevention of pollution) • With good institutions, there're secure property rights, strong rule of law, and political/economic freedom -> allows people push for envir. policies to be put in place • Relation -> Kuznets Curve (inverted U-shaped curve related pollution with increased GDP per capita), countries with better institutions have a lower curve compared to countries with bad institutions • In other words, costs of pollution & abating pollution in countries with better institutions are less than costs of countries with bad institutions When ordinary people have both political power & civil/economic rights, economic growth is more environmentally friendly and "sustainable".

Trade Adjustment Assistance

• Federal Program provides path for employment growth & opportunity through aid • US workers -> lost their jobs -> result of foreign trade • Act put in place -> way to reduce damaging imports felt by sectors of the U.S. economy • 4 components: Workers, Firms, Farmers, Communities. SIGNIFICANCE: • Way for gov't to compensate effects of free trade • TAA participants enter the program -> with a wide array of skills and experience • Face similar challenges -> obtain reemployment -> include no post-secondary degree • Job Skills in manufacturing sector -> may no longer exist • TAA program developed -> legislation, regulation, & administrative guidance -> best serve the needs of unique population.

MNCs and National Sovereignty

• Firms that own & manage productive facilities in more than 1 country. • Engage in FDI & important for world trade • Ex: In 2000, world's 500 largest MNCs had sales of $13.7 trillion - nearly half value of all goods & services in the world • Largest MNCs have revenues greater than GDPs of some nations • Tensions can arise because goals of MNCs may conflict with goals of governments. • Huge size of MNC's, combined with control of its assets (aka: FDI) creates potential problems for national gov'ts on a range of issues: use of profits, location of production, jobs, technology, managerial expertise, etc. SIGNIFICANCE: • Historically, developing countries -> more concerned about MNCs -> because of legacy of colonialism & 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, gov'ts can turn to expropriation -> where Host Gov't can seize and nationalize company • Expropriation can happen due to "obsolescing bargain"; power of MNCs grows weaker over time relative to the host gov't. • At some point host gov't no longer needs MNC to operate affiliate & expropriates it. Expropriations peaked in 1970's -> have gone down since then -> due to fact that MNCs investments are primarily in manufacturing (vertical integration requiring specific assets).

Import Substituting Industrialization (ISI)

• 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 • 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:

Keynes' Economic Consequences of the Peace

• He criticism Versailles Treaty -> argued demands on Germany were immoral & impossible to pay off. • War reparations placed on Germany by Belgium & France would only lead to disaster. SIGNIFICANCE: • Accurately predicted -> German's would have a hard time paying off these debts &would lead to revenge for war reparations it was being forced to pay.

George Soros

• Hungarian-American, George Soros, was one of the world's most prominent financiers/philanthropists • Was the target of the Malaysian prime minister -> 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 & currency trading • He started by working for an international banking firm -> reputation when • He bet billions of dollars against British gov't & won (England devalued currency) • His speculation against Sterling made it seem like wealthy speculators had single-handedly pushed a major gov't to reverse its economic course • His actions showed gov't 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 & 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 & pragmatic bounds, • believed that new intern'l economic order necessitated a commitment to social justice. • He argued that global capitalism would be safe only if attention were paid to national & social confers • Soros represented both achievements & anxieties of international finance • Global financial system moved trillions of dollars around the world with extraordinary speed and efficiency.

Fiscal Implications of Immigration

• Immigration has tax implications for welfare programs ->Increases net tax burden on native taxpayers • Low-skilled workforce -> anti-immigrant -> since jobs face a direct threat • Larger welfare states i.e. California are more anti-immigrant -> increase in tax burdens SIGNIFICANCE: • In19th century, tariffs brought fiscal benefits while immigrants imposed no fiscal burden • High tariffs & free immigration made political sense • Alternatives to tariffs for revenue and much larger welfare programs • Today's policy mix of free trade & closed immigration makes political sense.

Welfare Capitalists

• In 1920s, welfare capitalism refers to policies of large, non-unionized, companies that have developed internal welfare systems for employees. • Based on idea -> Americans shouldn't look -> gov't or labor unions -> provided by the private sector for protection against fluctuation (changing) of market economy. • Benefits offered by welfare capitalist employers -> inconsistent & varied widely from firm to firm. • Included minimal benefits (e.g. cafeteria, newsletters—provides retirement benefits, healthcare, & employee profit-sharing). • This was also used as a way to resist gov't regulation of markets, independent labor union organizing, and emergence of a welfare state. SIGNIFICANCE: • This went to great lengths to quash (defeat) independent trade union organizations, strikes, & other expressions of labor collectivism — through a combination of violent suppression, worker sanctions, & benefits in exchange for loyalty. • Also, employee stock-ownership programs meant to tie workers to success of companies • Workers -> be partners with owners—& capitalists themselves • Owners intended programs to ward off threat of "Bolshevism" & undermine union appeal • In the end, welfare capitalism programs benefited white-collar workers far more than those on factory floor in early 20th century.

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 • US disliked empires -> closed to American business • US opposed colonialism on moral grounds as a former colony Empires no longer vital to security -> US military forces provided global security. - SIGNIFICANCE:

Export-Oriented Industrialization (EOI)

• In 1960s, East Asian countries adopted policies that promoted exports • Nations experienced rapid growth in exports of manufactured goods (economic growth) -> convergence • High Export Volumes followed comparative advantage • Countries took advantage of their heavy endowments in unskilled labor • Gov't policies focused on promoting export industries rather than protecting import-competing industries • Ex: South Korea went from one of the least developed countries in the world to a leading industrial nation. SIGNIFICANCE: • Hard to say whether EOI caused rapid economic growth • But helped it along with other factors (e.g. mass education, gov't policies, & high savings/investment) EOI shows the benefits of following comparative advantage.

Fed Chairman Paul Volcker

• In 1979, Jimmy Carter appointed Paul Volcker to head the Federal Reserve • Volcker's goal was to end high inflation -> used high interest rates to reduce inflation from above 10% • High interest rates worked -> reversed inflation but 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, & high inflation. Volcker's actions show the Bretton Woods Era ability to have autonomy in monetary policy & stable exchange rates.

Unemployment in Europe

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

Chinese Exclusion Acts

• In the labor-scarce/land-abundant, Areas of Recent Settlement, inequality rose due to the Great Migration. • Massive influx of low-skilled workers competed directly with native residents at the bottom of income distribution. • Can be explained by Heckscher-Ohlin Theorem -> movement of labor from a place where it was abundant to a place where it was scarce. • Increase in supply of workers lowered unskilled wages relative to skilled wages. • Wage decreases resulted in a "backlash" against globalization. • U.S. began imposing restrictions on immigration in 1880s: literacy requirements, head taxes, Chinese exclusion, etc. • In 1882, Chinese exclusion act suspended Chinese immigration for 10 years -> developed into a permanent ban. • In 1921, national quota system banned all Asian immigration • Ended era of mass migration & restricted globalization -> response to rising inequality 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.

Cap-and-Trade System

• Issues Tradable Permits • Represent Right to Emit (product) a specified quantity • In the Kyoto Protocol, was put in place for greenhouse gases • Issuing limited number of permits • Treaty members ->> reduce the total quantity of gas emitted at the international level • Less amount of gas that would normally be emitted -> becomes a valuable commodity • Buying and selling permits establishes a market price • Beyond permitted levels -> must reduce their emission or purchase permits to emit • Reduce emissions rather than purchase permits -> face abatement costs -> least cost SIGNIFICANCE: • Created a market in tradable permits to pollute • Emissions fell to 5.3 million tons from 10.3 million tons • Success of acid rain -> due to the fact -> not a global problem • Localized nature of acid rain -> solve by individual action • Climate change requires global action. • China the world's largest emitter -> fail • U.S is the 2nd largest emitter -> did not participate, other nations failed to meet

Countercyclical Demand Management

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

Wage inequality

• Low-skilled wages in US -> fallen sharply • While wages for high-skilled -> increased -> wider gap between rich and poor. • In Europe, low-skilled workers experience high unemployment rather than falling wages • Due to stronger labor market restriction in Europe -> prevent firms from adjusting wages -> higher minimum wages & legal restraints on adjusting wages • Instead of lowering wages, they simply don't hire as many workers • High European unemployment is flip side of falling wages in the US • Determine 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) globalization "explains" at best about 30% of income inequality in US. • Other 70% is due to tech upgrading of the economy, de-unionization, and very high salaries for CEOs • Gain in wealth share is all about the top 0.01% -> quadrupled its share of country's wealth in 50 years • Globalization partly led to falling wages for low-skilled labor in U.S. (and high unemployment in the EU) • Gov't reduce inequality if politicians and citizens wanted to • By increase the mini. wage, estate taxes, & marginal tax rates on highest earners • Rise political inequality & top earners > opposed -> policies • Top earners are politically active and give more money to politicians • Redistributive policies may be possible if the richest class accept higher taxes on themselves to ensure social stability and preservation of the capitalist system Fear of anti-rich, anti-global'n extremism compel the elite to submit higher taxes.

OPEC "Hawks" and "Doves"

• Members of OPEC -> divided into "Hawks" and "Doves" • "Hawks" are those countries like Iran and Iraq -> have large populations and small oil reserves • Hawks prefer high oil prices in the short run • "Doves" -> countries (e.g. Saudi Arabia, Kuwait and UAE) have small populations & large oil reserves • Preference is for moderate oil prices to prevent consumers from reducing dependence on oil by finding substitutes • Yom Kippur War united OPEC (1973) -> overcame differences & achieved a 4-fold increase in oil prices by cutting production. • Key to success was Saudi Arabia, who absorbed largest burden of production cuts & punished free riders by flooding market with oil, driving prices very low. SIGNIFICANCE: • OPEC unsuccessful since 1973 • Hawks and Doves came together to form OPEC -> pursued policies led to the 1973 Oil Crisis • OPEC triggered a "wage-price inflationary spiral" -> where producers raised prices to compensate for higher energy costs • Workers demanded higher wages to compensate for rising costs of everything • Producers raised prices to deal with higher labor costs...repeat. • "Stagflation" defines the mix of recession & inflation (sustained rise in prices) in response to OPEC policies • With so much uncertainty about prices, & high energy costs eating into profits, firms also cut back on production and investment • This led to slow growth and high unemployment (recession).

WTO dispute settlement mechanism

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

"Pax Americana"

• Parallel to name given to British during their leadership of world economy • demonstrates acceptance of US world leadership after WWII. - describes a period of relative peace in Western world since end of World War II in 1945 - coinciding with dominant military & economic position of U.S. Term modeled on Roman empire. - During this period, no armed conflict has emerged among major Western nations themselves, and no nuclear weapons have been used, although U.S. and its allies have been involved in various regional wars.

Business Cycles

• Periods of economic growth & recession • During Great Depression, Liquidationism believed -> economy always went through stages of boom & bust. • Argued -> business cycles were self- correcting, & GD -> just another "bust" stage. • Believed that GD was so severe -> due to excesses of 1920's • Argued against gov't intervention in business cycle -> economic beliefs (invisible hand) SIGNIFICANCE: • In America, Republican Hoover administration's inaction simply worsened Great Depression. • Never before seen levels of unemployment -> existence of shantytowns dubbed "Hoovervilles" - Those believed in letting business cycles run its course & adhere (remain) to Gold Standard led to rise of Social Democratic (reliant on countercyclical demand management) or Autarkic- Autocratic (protectionist) responses to downturn.

The "Obsolescing Bargain"

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

Pre-1929 Orthodoxy

• Prevailing wisdom -> economy was self-correcting. • Laissez faire opposed gov't regulation beyond minimum necessary for a free enterprise system to operate &business cycles -> considered natural & necessary. • By train of thought, Recession of 1930s was inevitable after Roaring Twenties. • Liquidationism argued that economy had to liquidate all bad investments, loans, and useless products before recovery could happen. SIGNIFICANCE: • It affected response to Great Depression. Orthodoxy believed -> price & wage declines would automatically increase aggregate demand until balance was restored, so gov't should do nothing. Liquid'sm did not work.

"New Deal" for Globalization

• Prevent a protectionist backlash • Link trade & investment liberalization to -> significant income redistribution -> serves to share globalization's gains more widely • Expanding political support for open borders/global'n requires changes in fiscal policy • 1st way: eliminating full payroll tax for all workers earning below the national median • Payroll tax is large & regressive -> reinforces pre-tax inequality • Creating tax cut -> for those working below the national medium (typically low-skill/ unspecialized workers affected by globalization) • Lead to meaningful income redistribution within U.S. SIGNIFICANCE: • In US economy, real income growth -> extremely skewed -> few high earners doing well • While incomes for most workers have stagnated, or fallen • Inequality in US is greater today than 1920s • US policy & American public become more protectionist -> result of stagnant • Public support w/ world economy: strongly linked to labor-market performance, & most workers labor-market performance -> has been poor. • More investment -> education and more trade adjustment -> for dislocated workers -> not adequate (sufficient) • Payoffs from education investment -> take decades & trade adjustment -> too small, too narrowly targeted on specific industries AKA: change fiscal policy in the US.

Factor-Price-Equalization (FPE)

• Process between falling less-skilled wages in U.S. • Increasing imports from developing countries • With globalization (trade, immigration, FDI), less-skilled wages -> determined by the global supply of less-skilled labor -> rather than domestic labor market conditions • Movement towards the law of one price -> (price differences disappear between different goods and services) • FPE: If U.S. imports goods -> produced by low paid Chinese, low-skilled Americans -> produce these goods at wages 10x Chinese -> face a difficult time in the labor market. SIGNIFICANCE: • Globalization "explains" at best about 30% of income inequality in US. • Other 70% is due to tech upgrading of the economy, de-unionization, and very high salaries for CEOs • Gain in wealth share is all about the top 0.01% -> quadrupled its share of country's wealth in 50 years Globalization partly led to falling wages for low-skilled labor in U.S. (and high unemployment in the EU) • Should not be a protectionist backlash -> needs a New Deal for globalization -> redistributes wealth in developed nations.

Coalition of Iron and Rye

• Protectionist policies in Germany towards the end of the Golden Age • Supported by those -> held relatively scarce resources. • Germany was breadbasket for Western Europe before Golden Age & globalization • After land-abundant ARS/ New World began to flood market with cheap grains • Germany lost its comparative advantage in grain production in intern'l markets. • And heavy industry (its laborers) pushed for industrial tariffs -> their comparative advantage was also taken away when placed on an international scale. This is a coalition led by Junkers (by president Bismarck) -> kept tariffs high due to malapportionment in the Bundesrat. SIGNIFICANCE:

Developmental Nationalism

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

Offshoring of Services

• Refers to move a company's processes or services overseas • Recently, offshoring involved sending manufacturing jobs overseas ->take advantage of lower labor costs. SIGNIFICANCE: • Now, Infor. 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 be done from abroad. • Entry of 1.5 billion "new" workers -> means 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 -> created a lot of anxiety in relation to globalization • Conversely, most economists would say US economy is enriched by off shoring • But some -> expressed concern about distributional implications • Winners: US capital owners -> substitute cheap foreign labor in the service sector for expensive domestic labor & US consumers gain from decline in prices • Losers: US workers -> experience fall wages & increase 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 higher-level services Highly specialized and require physical proximity should remain immune.

International Commodity Cartels

• Seen as alternative path of development from ISI • Developing countries cooperates -> reduce supply in order to raise price of a commodity (like oil) -> formed a cartel • A cartel: attempt by producers -> cut production in order to obtain higher prices • Goal of these int'l commodity cartels -> improve terms of trade by way of production limits -> raise export prices of primary products • Rationale came from Raul Prebisch -> Organization of Petroleum Exporting Countries (OPEC) is prime example of a successful international commodity cartel. SIGNIFICANCE: • Like ISI, Int'l Commodity Cartels->address terms of trade problem identified by Prebisch • Other than in OPEC, other efforts to cartelize commodity output (bauxite, copper, tin, coffee, bananas) -> not successful • Was due to inherent instability of cartels & tendency to free-ride • Each member has incentive to cheat cartel & cut production to maximize its own production & profits (cheaters enjoy benefits of high cartel prices) • Problem is that when too many people free-ride cartel falls apart => production rises & prices go down.

Reciprocal Trade Agreements Act of 1934

• Switched decision power for trade policies from Congress to president & ended logrolling of votes • Required that reciprocal foreign tariff reductions be offered. • Value of tariff reductions U.S offers to other nations had = value that U.S received in return. • It aided domestic job creation through trade in New Deal programs. SIGNIFICANCE: • First time Congress & a President worked together to enact (pass) trade negotiating authority -> help pass new trade agreements to increase exports & support new job creation. Served as an integral step in America's transition from economic crisis to global leadership.

Logrolling in the U.S. Congress

• The process of voting for tariffs on goods in one congressman's district -> exchange for his vote for tariffs on goods in your district. • In other words, legislators would trade votes -> to protectionists trade policies in the districts & states represented. • Ex: in Smoot-Hawley Tariff Act of 1930 -> amended over 2,000 times. • With RTAA, Congress delegated (assigned) trade policy decisions to executive branch (president) -> made it impossible for Congressman -> influence outcome of trade policies • Trade matters to -> President -> process of unilateral trade agreements shifted > bilateral trade agreements (more efficient). Allowing U.S. to prevent "beggar thy neighbor" policies -> defined destructive trade policies of Interwar period. SIGNIFICANCE:

Collective Action Problems in Agriculture

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

Consumer Durables Revolution

• Things like cars, household appliances (washing machines, etc.) that can last for years. • New consumer durables were being produced in the interwar period due to changes in production processes spurred by 2nd industrial revolution & WW1. • WWI spurred development of electric grids, petroleum refining, & new steel alloys. • Led to development of airplane & automobile industries. • Technological advancements allowed for scale of production to increase (Ford assembly line) • Mass production of consumer durables lowered their prices considerably. • Increased demand for consumer durables -> large-scale operations & 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: • transform auto industry into largest industry in every major developed country. • Revolution also supported countless other industries -> were used as inputs into production of durables like tin, nickel, steel, etc. • Revolution led to development of multi-plant corporations -> effectively vertically integrated (e.g. GM buying Fisher Body -> to move past hold-up problem). • U.S. & Europe -> have widespread access to cars provided unprecedented mobility.

"Good" Political Institutions

• Thought that gov't policies & institutions impact economic growth • Countries with good policies & endowments but "bad" institutions have lower growth rates & diverges • Endowments have a large historical influence on institutions • Engerman & Sokoloff argue -> initial endowments led to extreme inequalities (e.g. plantation & conquest economies) • Where elites established "bad" institutions -> were characterized by vote restrictions, restricted access to education, -> maintained their positions but were harmful to growth • Contrast -> initial endowments led to greater equality like settlement economies, "good" institutions were established, characterized by unrestricted franchise & public education -> provided the foundations for long-run economic growth. SIGNIFICANCE: • Have secure property rights allows for protection of envir. services (e.g. biodiversity/ prevention of pollution) • With good institutions, there're secure property rights, strong rule of law, and political/economic freedom -> allows people push for envir. policies to be put in place • Relation -> Kuznets Curve (inverted U-shaped curve related pollution with increased GDP per capita), countries with better institutions have a lower curve compared to countries with bad institutions • In other words, costs of pollution & abating pollution in countries with better institutions are less than costs of countries with bad institutions • When ordinary people have both political power & civil/economic rights, economic growth is more environmentally friendly and "sustainable".

The Debt Crises of the 1980's

• Tied to the 1973, Oil Crisis fueled by OPEC's 4-fold increase in oil prices • Causes of the Debt Crisis: stagflation, higher interest rates, & appreciation of US$. • Stagflation caused by the Oil Crisis in the U.S.-> reduced demand for developing country exports (therefore they're unable to pay off loans) • Rise in interest rates to combat U.S. inflation increased developing countries' debt burden because loans were contracted on variable interest rate terms • Furthermore, appreciation of US$ increased debt burden of developing countries ->> because loans were repayable in US$ • Fed Chairman Volcker's high interest rate policy strengthened US$, & appreciation of dollar led to an increase in how much they owed. SIGNIFICANCE: • There were two phases of resolution of the Debt Crisis Phase 1: o . Maintain loans to prevent int'l financial collapse -> put all burden on debtors. o IMF-sanctioned austerity (strict) programs (raise taxes & cut govt. spending). o Resulted in a "Lost Decade" of growth for developing countries. Phase 2: o Debt reduction as seen in the Brady Plan of 1989 BP reduced debt & lowered interest rates -> led return to growth beginning1990.

Hyperinflation in Germany

• To pay massive reparations after WWI (Versailles Treaty), Germany printed money. • Broke from gold standard -> wanted greater autonomy> relation to their monetary policy. • Germany devalued, this massive.... was result (> 50% per month). • In 1923, Germany prices were 1.3 trillion times higher than in 1914. • Economic recovery required stabilization -> since US did not take a leadership position, US finance took the lead. • In Dawes Plan of 1924, US bankers took over German central bank & fiscal policy. • Dawes Plan stabilized German & brought increased loans/investment from US banks. • Created a flow of money from US to Germany -> made reparations to victor nations -> turn pay off war debts to US (aka reparations-war debt triangle). SIGNIFICANCE: • had long term effects on politics of Germany • Led to massive unemployment, widespread fear, and anger at intern'l community for forcing Germany to pay reparations of WW1. This became -> fascist dictators in Europe > used to bolster (strengthen)> turn to autarkic-authoritarian regimes (Mussolini in Italy, Hitler in Germany).

Grain Invasion

• Transportation revolution (steam and rail) allowed farm products from 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 & Eastern Europe had been breadbasket of Europe (aka: producing grain for Europe). • Imported grain from ARS threatened farmers in Europe because of their abundance & low prices. • Technological changes in agriculture in ARS allowed for dramatic improvements in farm productivity -> greatly benefitted land-abundant countries (hurt European agriculture). SIGNIFICANCE: • Germany -> lost its comparative advantage in grain in intern'l markets. • An adoption of protectionism for agriculture in central Europe -> seen in Germany • Coalition of Iron & Rye led by Bismarck helped protect interests of Junkers (landholding elite) & heavy industry in Germany. • Resulted in high tariffs, & protected industries that Germany did not have a comparative advantage in. • In England, grain .... pushed farmers > move away from its production into livestock & dairy production. • It also pushed the repeal of the Corn Laws (english seeing destruction due to potato famine, seeing harm of protectionist tariffs).

Destabilizing U.S. policies after World War I

• U.S refused to forgive war debts -> would've fixed issue of reparations (liberty loans). • U.S raised tariffs instead of lowering them -> intensified (Smoot-Hawley). • US refused join League of Nations -> undermined global efforts to prevent another war. SIGNIFICANCE: • America's domestic policies -> not developed as far as its economy had • U.S. did not take up leadership position that was left by England.

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. • WTO struck down U.S law -> U.S discriminated between WTO members when it applied its law. • U.S. had provided some Caribbean countries with technical & financial assistance, as well as longer transition periods to start using TEDs. • Complaining nations in Asia did not get this special treatment. • US adjusted its policy-> shows necessity of non-discrimination in trade laws. SIGNIFICANCE: • Some environmentalists think WTO undermines national sovereignty by preventing countries from setting their own envir. policies due to dispute settlement mechanism.

Marshall Plan

• US gov't -> provided $13 billion -> assist European economies recovered WWII. • Aid was very effective & facilitated European economic integration • Since it erased trade barriers & set up institutions to coordinate European economies. • By accepting, European had to establish a commitment to free trade & stable exchange rates (pegged to US $). • And Marshall Plan recipients had to establish cooperative institutions in Europe. • Gave the geopolitical rationale for European Community (EC). SIGNIFICANCE: • Threat of communism -> push isolationist tendencies of Republican party post WWII. • President Truman exploited Republican's fears of Soviet expansion to convince -> US -> implement Marshall Plan. • Truman warned a post-war economic crisis in Europe would fuel support for Soviet communism. • US could contain Soviet empire -> encouraging European economic prosperity. • By giving US aid to Europe -> would prevent a repeat of interwar hyperinflation & depression that fueled Hitler's rise to power. • Truman conjoined Marshall Plan with anti-Soviet "containment" via NATO.

"Golden Fetters"

• Under Gold Standard, gov't couldn't lower interest rates to stimulate demand. • Keynes argued -> use monetary policy for countercyclical demand management, countries had to break from Gold Standard. • Nations that broke from Gold Standard earlier did better during Great Depression than those who held on to it. SIGNIFICANCE: • Demonstrates Unholy Trinity; Gold Standard had fixed exchange rates & intern'l capital mobility -> did not allow for gov't to pursue countercyclical monetary policy. • To begin economic recovery from Great Depression, there had to be an increase in aggregate demand. • devaluations in currencies, lower interest rates, and new fiscal policies.

Post-war European economic stabilization

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

Raul Prebisch and the Declining Terms of Trade

• Was 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: • Terms of Trade are price of a nation's exports divided by price of imports • 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 & became economic rationale for ISI.

Fernando Henrique Cardoso

• Was the 1st Brazilian President started a program ->address inequality issue in Brazil—enormous gap between rich & poor • Ex. Programs: Bolsa Escola, Auxílio Gás, Bolsa Alimentação, & Cartão Alimentação. SIGNIFICANCE: • Key Feature: deepening of privatization program • During first term, several gov't-owned enterprises in areas (e.g. steel milling), telecommunications & mining -> sold to private sector, marking deepest process of de-nationalisation in Brazilian history amidst a polarized political debate between "neoliberals" & "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 companies sold by gov't achieved better profitability as a result of their disengagement from the State.

Intangible Assets

• a case of "Market Imperfection", one of conditions for horizontal FDI • considered firm "knowledge", assets -> difficult to price and protect (like secret formulas, managerial skills, prestige, etc.) • Once ... are out in the open, any competitor can use assets at no cost, and they become worthless • Horizontal FDI exists to control & protect these intangible assets to maintain 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) & 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 .... and locational advantages

Specific assets

• a case of "Market Imperfection", one of conditions for vertical FDI • Both physical & human investments -> specialized & unique to a certain task • Ex: production of certain components may require specialized equipment • Dedicated to particular use & cannot easily be adapted to another purpose • Give rise to "hold-up" problems if MNCs are dependent on a single supplier for an input -> seller could demand more money • Avoid this, firm buys supplier & "internalizes" transaction within the firm. SIGNIFICANCE: • Vertical FDI occurs when specific assets combine with efficiency-oriented locational advantages When Ford wants to lower its costs by sourcing production of an input to a country with cheap labor -> sets up a Ford-owned factory there to make sure it is not held.

Kleptocracy

• a form of political & gov't corruption • gov't exists to increase personal wealth & political power of its official & the ruling class at the expense of wider population -> a pretense of honest service • Associated with corrupt forms of authoritarian governments • Developing countries -> economies based on export of natural resources • Effects -> adverse to state's economy. Ex: King Leopold in Republic in Congo SIGNIFICANCE:

Smoot-Hawley Tariff Act of 1930

• added to extent of Fordney-McCumber Tariff. • Endowments & interests from farmers along Canadian border & Eastern seaboard • who faced competition from cheap Canadian goods & light manufacturing industries -> were labor-intensive & 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 & Congress were controlled by Republican party (Protectionist). SIGNIFICANCE: • As world's net creditor, U.S. needed to open its markets so that deficit countries could earn foreign exchange & 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.

Successes of the GATT

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

The Truman Doctrine

• committed U.S. to global effort against Soviet Union and allies. • In 1947, launched Economic Recovery Plan = Marshal Plan. • MP sent $13.5 billion to Europe -> rebuild economies of Western Europe. SIGNIFICANCE: • led to creation of NATO (North Atlantic Treaty Organization), an American military bloc to accompany its sphere of economic influence established by Marshall Plan. Was a way of countering the "Soviet" treat and containing communism.

Rules of the GATT

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

Atlantic Charter

• negotiated by Churchill & Roosevelt aboard a warship in 1941. • was plan for post-WWII world economic order • US required UK's acceptance before help with 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: • U.S planned postwar before enter war -> influenced the world economy shaped WWII (e.g. Bretton Woods, decolonization, WTO, IMF, World Bank). Allow for unprecedented growth, stable exchange rates, ISI/ EOI in decolonized countries, cartelization, etc.

Vertical Integration

• refers to MNCs with vertical FDI • MNC owns & controls different stages of a worldwide production process • Also exists due to market imperfection of specific assets (e.g. specialized/ unique human or physical inputs). SIGNIFICANCE: • Ex: Exxon owns & controls everything from oil wells, to transportation pipelines, to refining firms, to storage & distribution facilities, to retail gasoline stations. • Demonstrates importance & reach of MNCs within world economy & international trade. Vertical Integration, along with Horizontal integration -> allows for MNCs to participate in intern'l/ "Intra Firm" trade -> makes about 1/3 of all international trade.

Jean Monnet and European Integration

• was a French brandy salesman -> believed in "economic internationalism" • believed "that new industrial capitalism would look American & Europe's economic & political fragmentation crippled its ability to take advantage of new mass production & mass consumption" • Argued that "American-style industrialism required a market size of American market, corporations as big as American corporations, financial markets as deep as Wall Street • European businesses could not compete with American businesses w/o a home base like that of US, and if they could not compete, they could not tap potential of Continent. • Worked during WWII in Washington/New York to "channel supplies to the French and British". SIGNIFICANCE: • European unification embraced Bretton Woods compromises • On the one hand, it was 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 region's generous welfare states" • In 1955, Monnet founded Action Committee for U.S. of Europe to revive European construction followed the failure of EDC. • It brought political parties & European trade unions together to become a driving force behind initiatives -> which laid foundation for EU as it eventually emerged: • First, European Economic Community (1958), established by Treaty of Rome of 1957 • Later, European Community (1967) with its corresponding bodies • European Commission & European Council of Ministers, British membership in Community (1973), European Council (1974), European Monetary System (1979), & European Parliament (1979). Process reflected Monnet's belief in a gradualist approach for construct European unity.


Ensembles d'études connexes

Business Law: Ch. 12- Consideration

View Set

Adult Health Test 3: mix of chp 50, 16,17

View Set

Unit 1 & 2 Review- Microeconomics

View Set

Chapter 31/32 Hygiene, Integrity, Skin/Wound care

View Set

Nutrition in Health and Disease-Chapter 6

View Set

Advantages/Disadvantages of Credit Cards

View Set

Chapter 6: Communication in the Nurse-Patient Relationship

View Set

Comptia Security Exam Practice Questions

View Set