PoliSci 110C final
Goodbye Washington Consensus, Hello Washington Confusion? A Review of the World Bank's Economic Growth in the 1990s: Learning from a Decade of Reform- Dani Rodrik
-1990 Washington consensus: more privatization, deregulation, trade liberalization -In the 90's there were unexpectedly deep/prolonged collapses in output in countries making the transition from communism to market economies. Frequent crises in Latin America, East Asia, Russia, and Turkey -Economic growth in last two decades has resulted in an absolute reduction in the number of people living in extreme poverty -Reform efforts need to be selective and focus on binding constraints on economic growth instead of a long list approach, like the washington consensus -Washington Consensus standard policy reforms did not produce lasting effects if the background institutional conditions were poor -Foreign Aid as an alternate strategy: Increase in public investments, capacity building, domestic resource mobilization, official development assistance while providing a framework for strengthening governance, promoting human rights, engaging civil society, and promoting the private sector -How to think about growth strategies 1. Undertake a diagnostic analysis to figure out where the most significant constraints on economic growth are in a given setting 2. Creative/imaginative policy design to target the identified constraints appropriately 3. Institutionalize the process of diagnosis and policy response to ensure that the economy remains dynamic and growth does not fizzle out
Three Paths to European Disintegration- Philippe Legrain
-Brexit has destabilized the UK and could end up destroying the EU -Federalists: answer to Brexit should be further EU integration but it could be far-fetched and dangerous -Brexit fallout likely to sap eurozone economic performance and further polarize european politics, voters more insecure -German domaniance of EU to increase, as well as anti-german backlash -Resurgence of nationalism --> further disintegration -Extreme end: further exits by member states
The Euro: Who Wins? Who Loses?- Jeffry Frieden
-Challenge for EU: agree on a common monetary policy for disparate countries, regions, and groups & manage the political clashes of the process - 3 factors that made the euro attractive and feasible 1. Quest for anti inflationary credibility 2. Broader links to European integration 3. Support from powerful business interests -European Central Bank internal challenge of making domestic monetary policy that will sustain low inflation and stimulate growth/employment -Optimal Currency Areas (OCA). 2 countries should merge their currencies if they meet two conditions: 1) No need for an independent monetary policy --> economically identical 2) No possibility of effective independent monetary policy -Economists have concluded that the EU is not an OCA and that the EMU cannot be justified on standard economic goals -Scenarios for conflict among europe's competing interests: Recession, Localized financial crisis, Crisis abroad -Central banking institutions with unclear lines of accountability/authority/communication can have 2 disastrous effects: 1. Paralysis in crises because no one has the authority to act forcefully 2. Excessive influence by those with informal ties to the central banks
" Deconstructing the Arguments for Free Trade" - Robert Driskill
-Claim: in light of the apparent settled nature of economists' judgement on the issue of trade liberalization, the profession has stopped thinking critically about the question and, as a consequence, makes poor-quality arguments justifying their consensus. -Consensus on free trade is now an institution that, can best be described as "centuries of tradition, unmarred by progress" -Analyzes the quality of the arguments that economists make in support of "free trade.". Looks at at how arguments are posed in textbooks and other writings aimed at students and other non-professional economists. -Solutions to how free trade is represented/discussed: Be clear about what economic analysis can say about the matter (stipulate at the beginning), Make a distinction between policies and one-offchoices, bring fairness issues into the debate, focus on dangers of protectionism, emphasize trade-offs
"Revenge of the Optimum Currency Area" - Paul Krugman
-Creation of euro supposed to be step in the European project of economic integration used to foster political integration/peace. Instead, euro has become an economic trap, and Europe a nest of squabbling nations -Advantages of a common currency :reduced transaction costs, elimination of currency risk, greater transparency and possibly greater competition because prices are easier to compare. -Disadvantages of a single currency: loss of flexibility. It's not just that a currency area is limited to a one-size-fits-all monetary policy; even more important is the loss of a mechanism for adjustment -High mutual labor mobility one of the most important factors for a region sharing currency -If there is high labor mobility, full employment can instead be restored through emigration, which shrinks the labor force to the jobs available. -Optimum currency area theory suggested two big things to look at - labor mobility and fiscal integration. Europe fell far short on both -Optimum currency area theory was right to assert that creating a single currency would bring significant costs, which in turn meant that Europe's lack of mitigating factors in the form of high labor mobility and/or fiscal integration became a very significant issue -Cost of a euro breakup would be that it would amount to a huge defeat for the broader European project
Citrin, Jack, Donald Green, Christopher Muste, and Cara Wong. (1997) "Public Opinion Toward Immigration Reform: The Role of Economic Motivation." The Journal of Politics 59(3):858-881
Main Idea: Personal economic circumstances play little role in in opinion formation when it comes to restrictionist policies. Rather the important factors are beliefs about the state of the naitonal economy, anxiety over taxes, and generalized feelings about hispanics and asians, the major immigrant groups, are significant determinants of restrictionist sentiments. Anti-immigrant sentiment has followed economic downturns typically. General reasons for anti-immigrant sentiment: 1) Resources → theory that people who are experiencing financial stress will be more likely to fear implications of immigration 2) Pessimism → regardless of one's level of financial resources, the belief that one is on a downward economic trend increases the tendency to view immigration as resulting in tangible costs to oneself (enhances restrictionist sentiment) 3) Labor market competition → immigrants take jobs from native workers and depress wages. The unemployed and those who face the specter of loss of jobs, earnings, and promotions as a result of the influx of immigrant workers should be motivated to favor restrictionist policies. Findings however showed that unemployed people were no more likely to say that the current level of immigration should be reduced than those with steady jobs. 4) Tax burden → immigration imposes an increasingly fiscal burden on state and local governments. Resentment that illegal immigrants and/or refugees are receiving services paid by taxpayers. 5) Specifications → important to consider strength of the relationship between economic motives and negative views of immigration (depends on the mediation of individual and contextual factors)
How to Save the Euro and the EU- Henry Farrell and John Quiggin
-European Financial Stability Facility: can issue bonds and raise money to help eurozone states -Worked with IMF to give loans to struggling governments (Ireland, Greece) -Bailouts are only stop-gap measures -German strategy of heavy government spending cuts -Can hinder growth and not satisfy bondholders that their money is safe and that the measures aren't politically sustainable -Debt brakes: inflexible limits on deficit spending -Institutional austerity can badly damage economies in the short term, long term consequences worse -EU needs a solution that is politically and economically sustainable: create long term institutions that minimize the risk of future economic crises, refrain from adopting politicallyunstable forms of austerity when crises do hit
Eichengreen. Exorbitant Privilege chs. 5-7
"Chapter 5 talks about the dollar's role in the 2008 financial crisis. Eichengreen argues that this blame game after the crisis assigned too large of a role to individuals whereas it was more of a problem with the psychology of the country as a whole. Basel, which attempted to tier out more risky capital to assign different risk weights, and other financial regulations attempted to mitigate the risk but central bank policy accelerated the financial crisis. The very success of the Fed to stabilize the crisis also helped buildup the risk factors before the crisis. The dollar's exorbitant privilege as the reserve/international currency (as many countries pegged their currency to the dollar and had large amount of dollar reserves) meant that the US debt securities were liquid and the cost of buying/selling them was low. Chapter 6 asks the question: given the crisis, will the dollar maintain its power in the int'l market? Eichengreen says not necessarily, pointing to how the dollar still remains to the most prominent currency in the world today. US is currently the largest/incumbent in this market and so it's difficult to overcome. The most serious contender is the euro but is politically unstable and they have to grow the economy of member countries further (but progress has been slow). Europe needs stronger oversight of national budgets (which is unlikely). SDR can be used, but use case is limited. All in all, dollar won't lose its international currency status but will have rivals. Chapter 7 asks the what if's -- what if the dollar crashes? Eichengreen says that this would most likely happen because of out of control budget deficits in countries (like Greece, Portugal, Spain). This is especially worrying since the US budget deficit is unprecedented (debt/GDP ratio will be about 75%). If this happens, US dollar would likely crash and American policy would have to be overhauled/adjusted and dollar would lose its exorbitant privilege. Fate of dollar is in our hands, not the Chinese!"
Summers, Lawrence. 2000. "International Financial Crises: Causes, Prevention, and Cures." Richard T. Ely Lecture
(1) what does it mean to have an efficient financial system when it is done correctly, an economy grows as investments earn more returns. scarce capital can be put to use -- these are tangible benefits where even small increases have huge benefits. but this potential is hurt by moral hazard or adverse selection which is why theory doesn't necessarily work in reality. metaphor: jet airplanes, for example, have made air travel more comfortable -- accidents are more spectacular/more numerous after the invention of jets. but with the right policy response (longer runways, etc.) fixes that problem. (2) sources of financial crises while every crisis if different, elements in common include: (a) dramatic swing in the current account, (b) large real depreciation, and (c) significant decline in real output. (3) best ways to design a financial system national: serious banking weaknesses play a role in financial crises, fixed exchange rates without the commitments are antecedents to a crisis, traditional macroeconomic fundamentals (large fiscal deficits, too much inflation) were present in several cases, and national balance sheet weaknesses are important elements to a domestic crisis -- therefore maintaining a strong domestic financial system is key. international: encourage sound national economic policies (4) effectiveness of crisis response best national response to crisis is not to have one. (next best is to have robust set of domestic institutions that contain crisis but does not go to international obligations). International: int'l response is to see a country/creditors out of crisis with consistent and reinforcing actions, to reinforce confidence/normal flow of private capital
"The IMF: Lender of Last Resort or Scapegoat?" - James Raymond Vreeland
-IMF provides countries increased access to foreign exchange during balance of payments crises. Ready access to foreign exchange may lower the incentives of governments to pursue policies which will avoid such crises --> conditions in return for the loan of foreign exchange. -Countries must keep a deposit (quota) with IMF (credit union-like structure). Designed to lower risks of international trade/encourage countries not to engage in beggar-thy-neighbor trade policies/competitive devaluations of currencies -To address moral hazard, IMF attaches conditions to loans -Paper Looks at conditions under which countries enter into IMF agreements with regressions. Findings: -average annual foreign reserves has a positive effect on the size of the loan (more reserves = larger IMF loan) -countries with larger defecits get larger loans -Finds that governments enter agreements because they want conditions to be imposed upon them . The government may enter into an IMF arrangement to tie the budget proposal to the conditions imposed by the IMF -Game theory/model findings: -the lower the ideal deficit of a government, the more likely the government will turn to the IMF -A government is more likely to enter into an IMF agreement when the penalty associated with sacrificing sovereignty is low. -Governments are more likely to enter into IMF agreements if rejection costs are high -The IMF is likely to pursue a tougher negotiation posture when it is close to its budget constraint and to be more flexible when it has more resources available
The Scope of IMF Conditionality- Randall W. Stone
-International organizations governmed by 2 sets of rules: formal rules (consensual procedures), informal rules (exceptional access for powerful countries) - Stone develops an alternative view called informal governance. International organizations operate according to two parallel sets of rules: formal rules, which embody consensual procedures, and informal rules, which allow exceptional access for powerful countries - Points of informal governance argument 1) legitimacy defined in terms of voluntary participation; 2) conditional delegation; 3) common long-term interests and conflicting short-term interests; and 4) formal and informal governance of international organizations -Key Findings: -Countries that enjoy the strong support of the IMF's largest shareholder, the United States, enjoy a substantial bargaining advantage because the IMF cannot credibly threaten to withhold support from them -Conditional delegation: the IMF is autonomous when the borrower is unimportant to the United States or the borrower is unwilling to spend the influence needed to call upon U.S. assistance in dealing with the Fund -Strong states can bargain with the United States on a more nearly equal footing; weak states accept what they must -Abuse of informal governance procedures undermines legitimacy of international institutions. exploitation of asymmetric interdependence tends to lead to its erosion -IMF's legitimacy crisis weakens argument for for open markets, economic reform, and financial stability
"The Controversy over Free Trade: The Gap Between Economists and the General Public" - Cletus Coughlin
-Nearly all economists think free trade is the best policy, but it's controversial among general public -Coughlin uses survey information to highlight gap between economists'/public views on trade politics -Americans: recognize FT benefits (lower prices) and costs (think that trade = fewer jobs/lower wages) -Nations better off with FT. Gains from: specialization based on comparative advantage, increasing returns to scale, exchange of ideas, spread of technology -Hecksher-Ohlin model of inteternational trade based on 1) countries differ based on productive resrouces 2) goods are produced using different proportions of these resources -Model: A country will be able to produce a good at a relatively lower cost if its production requires a relatively larger proportion o f arelatively abundant resource. -Stolper Samuelson theorem: free international trade benefits a country's abundant resource and harms that country's scarce resrouce -The public fails to see any broad-based bains from trade -Low-skilled workers tend to be against trade the most -Main reasons for public opposition to FT: employment/environmental concerns -Solutions to information gap: education, reducing cost to the losers from free trade, attempt to increase political support by expanding issues covered in trade negotiations
Monetary Politics
-OPEC/Latin America Crisis, Asian Financial Crisis, Argentina case studies -Washington Consensus: 10-point economic policy reform recommendation for developing countries in crisis (Made by Washington DC-based organizations (IMF, World Bank, Treasury)) -Points: Fiscal discipline (ie stop running large trade deficits), Control public expenditures, Tax Reform, Financial liberalization, Maintain competitive exchange rate, Trade liberalization, Allow FDI, Privatization, Deregulation, Assure property rights -IMF Problems: Moral Hazard (are countries over-insured?), Is bank too political?, did the bank/member governments subscribe to the wrong analysis? -EU Monetary integration: nations reliquish domestic economic policy for efficiency in elimination of transaction costs, elimination of risk associated with future exchange rate uncertainty.
Role of international institutions: Contemporary Monetary System
-United States has a trade defecit (more imports coming in than exports going out) with all of its major trade partners except the UK -Instability as a result of monetary policy is unsurprising: leaders want conflicting things (e.g. financial integration and monetary independence, weak exchange rate so that exports grow and a strong exchange rate to pay back debt) -IMF = major intnl. organization to perform central banking functions (loans, lender of last resort, general agreement to borrow) -Sources of monetary instability: -Gov. Choices: macro-economic policies, insufficient reserves, markets, corruption, political control of government -Private: Speculators, contagion, fixed/portfolio investment -Intnl: Moral Hazard (IMF), Washington Consensus, Secrecy
A Theory of Optimum Currency Areas- Robert A. Mundell
-What is the appropriate domain of a currency area? -Single currency area: single central bank (with note issuing powers), potentially elastic supply of interregional means of payments -In areas with several currencies, means of payment is conditional upon cooperation of many central banks -Common Currency: Regions within a closed economy with a common currency. Demand/balance of payment shifts equal themselves out. pace of inflation set by willingness of central authorities to allow unemployment in deficit region -Essential ingredient of a common currency, or a single currency area, is a high degree of factor mobility -Subject of flexible exchange rates separated into 2 questions 1) Whether a system of flexible exchange rates can work effectively and efficiently in the modern world economy 2) How the world should be divided into currency areas
A Short History of the Washington Consensus- John Williamson
-Williamson coined "Washington Consensus" in 1989 as a list of ten policies he thought more/less everyone in Washington would agree were needed in Latin America -In the paper, Williams essentially defends his positions and explains how the creation of the Washington Consensus came about -Original Washington Consensus List: 1. Fiscal Discipline 2. Reordering Public Expenditure Priorities- switching expenditure in a pro-growth and pro-poor way, 3. Tax Reform. The aim was a tax system that would combine a broad tax base with moderate marginal tax rates. 4. Liberalizing Interest Rates. 5. A Competitive Exchange Rate 6. Trade Liberalization. 7. Liberalization of Inward Foreign Direct Investment. 8. Privatization. 9. Deregulation-easing barriers to entry and exit 10. Property Right- providing the informal sector with the ability to gain property rights at acceptable cost -Some reformers believed Williams undercut their local standing by calling it a "Washington" agenda, suggesting that these were reforms that were being imposed on them rather than being adopted at their own volition -Argues that how others use/interpret his term is different from what he originally meant. To others, it has been interpreted to mean bashing the state, a new imperialism, the creation of a laissez-faire global economy, that the only thing that matters is the growth of GDP - 4 major topics to be included in the future Latin American policy agenda 1. Stabilization Policy: more pro-active policies to keep the economy even. "Crisis-proofing" the economy 2. Continuing liberalizing reforms into areas like the labor market 3. Building/Strengthening institutions 4. Governmental tareting of an improved distribution of income in the same way that they target a higher rate of growth
"Commerce and Coalitions: How Trade Affects Domestic Political Alignments" - Rogowski
A change in transaction costs can have the same effects as raising or lowering tariffs. Assumes that no country can be rich in land and labor. -Says the Stolper-Samuelson model predicts increased trade exposure will increase urban-rural conflict in advanced economies. Will increase class conflict when land and capital is scarce.
"The Free Trade Accord: Nafta: Something to offend everyone" - Keith Bradsher, 1993
Another brief article that basically says economists are on board with NAFTA and believe it would increase the economic prosperity of all three nations while the public is hesitant. Environmentalists and concervatives are weary of the agreement, and without support, the future of the deal seemed uncertain.
The Institutional Roots of American Trade Policy: Politics, Coalitions, and International Trade-- Bailey, Goldstein, & Weingast
Before the RTAA was passed in 1934, U.S. trade policy was protectionist. The RTAA provided the basis for "more than half a centruy of U.S. trade liberalization. Those who lose from trade have a greater incentive to organize than those who lose. Protectionist interests are overrepresented. Before RTAA, protectionist interests successfully pressure Congress into maintaining high barriers to trade. This was changed by the RTAA, which "set the stage for American leadership in efforts to expand international trade. Two rule changes distiguished RTAA from predecessors: 1) it mandated reciprocal, not unilateral, tariff reductions and 2) it authorized trade agreements on the basis of a simple majority vote instead of a supermajority ^^Democrats were trying to build support for free trade and insulate trade policy from a Republican congress These two institutional changes shifted American policy towards a more liberal equilibrium. The RTAA is important because it created a dynamic of support for free trade. Bipartisan support for trade policy Until 1934, trade policy was predictable: democrats lowered tariffs and republicans raised them. After WWII, the parties voted similarly on trade policy. RAPID shift in partisanship. WHY- the RTAA transferred authority for setting tariffs to the president<< this was a democratic initiative Long Term Effects of the RTAA During the tenure of the RTAA, tariffs declined precipitously and trade expanded dramatically Trade with treaty nations increased far more than trade with non-treaty organizations << evidence that RTAA was important in increased trade What explains the depolitization of trade policy after WWII? Export industries blew up after the RTAA was passed, which was great for them, and any losses in prifits in the import industries was offset by the booming export industry. Increases in exports from a congressional district were the cause of Republicans deciding to vote for RTAA for the first time. Exports influence Congressional voting on trade.
"More Wealth, More Jobs, but Not for Everyone: What Fuels the Backlash on Trade" -Goodman
Benefits of globalization are not evenly distributed.
"Competing for Capital: The Diffusion of Bilateral Investment Treaties, 1960-2000" -Elkins, Guzman, and Simmons, 2006
Bilateral investment treaties (BITs) have been growing in number and importance. They argue that the increase is due to international competition amongst host countries - rely on empirical evidence - potential hosts are more likely to sign BITs if their competitors have already done so. - Some coercion may be involved, but by and large, developing countries compete to have a share of foreign investment which provides needed capital.
"The Triad and the Unholy Trinity" - Cohen
Coordinating on monetary policy has its benefits, but it also brings a lot of challenges since states cannot simultaneously have exchange rate stability, capital mobility, and independent monetary policy. -States will abandon monetary cooperation (exchange rate stability) if the costs are too high relative to other goals. -It's difficult to sustain monetary cooperation when monetary goals differ.
"Democracy, Autocracy, and Expropriation of Foreign Direct Investment" - Quan Li, 2009
Democracies and autocracies both expropriate foreign direct investment, but autocracies do so at a higher rate. Why? - Democracies are more likely to expropriate when leaders have little constraints and when their country has frequent leadership turnover. - Autocracies are least likely to expropriate FDI when they are very politically constrained and have been in power for a long time. - The executive's power and political incentives determine whether or not they will expropriate. Evidence: analysis of expropriation in 63 developing countries from 1960-1990.
Joseph Nye, "American and Chinese Power After the Financial Crisis," The Washington Quarterly 33 (October 2010): 143-153.
Does the recent financial crisis where the US economy has floundered and the Chinese economy continued to grow equal the decline of American power in the global economy? Nye argues that it's not the case now, but perhaps in the future. Chinese soft power (attractive popular culture/diplomacy) is powerful, but has its limits largely due to political censorship. The trade imbalance with China has been described as a great shift in power, but the Chinese in dumping dollars would also reduce the value of its reserves/the US willingness to import goods. Moreover, China's political problems are a huge hindrence. -China avoided recession and is tryng to usurp US as global leader. Lacks soft power, though--cultural influence. Chinese and American economies very interdependent. China still very far behind militarily and in terms of GDP per capita
Eichengreen, "Hegemonic Stability Theories of the International Monetary System
Eichengreen examines the classical gold standard, the interwar gold exchange system, and Bretton Woods to determine whether the presence or absence of a hegemon made or broke them. -He found hegemony may contribute to the smooth operation of international monetary regimes, but international cooperation is equally important.
"Democratic Governance and Multinational Corporations: Political Regimes and Inflows of Foreign Direct Investment" - Nathan Jensen, 2003
Foreign direct investment (FDI) plays a key role in development as it provides for technology transfer. Developing nations have made attracting FDI one of their top priorities in order to grow their economy. Critics worry that governments will pursue policies unfavorable to their citizens in order to attract FDI and that this will threaten democracy. The argument: Democratic nations actually attract 70% more FDI as a percentage of GDP than authoritarian nations do. - Uses empirical evidence
"The Political Economy of Trading States" - Alt and Gilligan
Fundamental problem: trade offers cheaper goods, more choices, and more economic output, but it can be very disruptive by becoming internationally tied. -Pareto: it's easier to implement protectionism because it brings a small number of people large gains and costs to the general public are small when dispersed. -It's easier for small, invested groups to organize.
Globalizing Labor/FDI: Good or Bad? (March 9)
Globalization is inevitable and everywhere. It has consequences: Firms are bound to protect stockholders and profits while poiticians are bound to protect citizens, but these two forces come into conflict when it comes to relocating production. Why does a company invest abroad? 1. To have access to a foreign market. 2. to secure foreign sources of supply and reap benefits of lower-cost of production. 3. Learn about markets and technology. Take advantage of technology differences. 4. To benefit from lower taxes 5. Firms facing a decline in its technological advantage in the parent country market decide to export this advantage through foreign subsidiaries. Governments actively try to promote FDI. Positives: provides cheaper and more plentiful goods to consumers. Takes advantage of procutvitiy in advanced markets. Governments see it as bad for some citizens, businesses see it as normal operations in an open market. thinking on FDI has shifted from thinking about countries to thinking about firms since most of trade goes through multilateral corporations. Workers' pay as a share of economic output has been shrinking. Positives: economic efficiency, lower risk of trade for firms. increased productivity for firms, positive externalities for firms, opportunity to get new technology, create jobs and increasing exports for host countries. Negatives: Host countries incur costs, technological dependence, reduced competition and threaten existing industries, changes nature of traded porducts, firms seek services within country, tend to import from parent country and can retard exports, also negative balance of payments impact for host country. Outsourcing a political issue: loss of jobs, both manufacturing and white collar to places like India where labor is much cheaper. China more of an issue because manufacturing jobs are lost to China because of high export numbers while Indian jobs are service based. US China trade is getting increasingly asymmetric with Chinese imports increasing a lot. China is catching up for sure. Exports as share of world and GDP as share of world both increasing. Wages are increasing in China but from a very low base. China holds a lot of U.S. Treasury Securities. Rising Chinese wages mean that US jobs might start leaving to other places like Brazil, Argentina and Mexico.
Lecture 4: US Economic Dominance and Why it Matters
Gold Standard was a fixed exchange system—there are many nations today that are also have a fixed exchange system • What do countries fix to today? - Rarely fix to a metal--gold - Mostly fixed to another countries currency: (no control at all over value of your money): eg. 27 countries fix to the dollar or other currency - Some fix to a 'made up currency' euro (19)What Was the Problem? • During and after WWI US remained on gold standard • During the war, vast new supplies of printed money had been created which were not backed by existing gold supplies • What gold existed was not evenly distributed • At end of WWI not enough gold in reserves to keep the gold standard working smoothly • Since the US had most of the world's gold we should have issued more currency but US did not want to import European inflation.What did the US Do? • Instead, of printing money, US "sterilized" gold inflows and kept the money supply and prices well below the level that new gold stock would require under gold standard "rules" • Price levels remained higher in Europe than in the US • Supported a policy of German war reparations and failed to head the words of Keynes, in The Economic Consequences of the Peace • By 1924, we had begun to lend Germany the money for reparations; US was the most important source of public and private money • Depression begins and US stops flow of money • High tariffs make it impossible to pay back what was owed What does Europe Do? • Try to maintain the value of their currency and they do not devalue - No one even pushed for devaluation -- European countries had kept rates fixed, some for over 100 years (only revolutionary countries in Latin America did things such as devalue). • Why didn't this 'easy' policy fix occur? - Thought that the US would support European exchange rates - Thought that capital would not return to Europe unless they retained parity - Believed that they were on verge of surplus - Believed that German reparations would restore prewar parityWhat went wrong? • Too much emphasis on fixed exchange rates - Unwillingness to hurt holders of capital with devaluation • But that was not what central decision makers thought was the problem. They thought the problem was: 1. Lack of gold in the system 2. Exchange rates were too flexible 3. There was a lack of exchange rate controls • (These lessons explain Bretton Woods agreement) • Alternative explanation - Gold standard never worked as envisioned, that is, as a market driven system out of the hands of politicians. - For most of the time, it worked because of the actions of the British Central Bank which acted to assure that gold did not leave the country. - Worked because there was a powerful nation as an anchor for the system • What did the British do? Stabilized the system through their central bank • What did the bank do? - 1. Kept interest rates on pound high so there was no incentive to trade the pound in for gold - Pounds would return to England but they just remained as paper in banks and didn't lead to a real movement of gold - kept gold points high so gold didn't flow out - Lender of last resort
Lecture: Will the US Stay Dominant?
Leads to a Dollar Glut 1960-1971 •After 1958 US no longer sought a payments deficit •1959: European and Japanese reserves equaled those of US and thereafter, gold reserves began to decline - Dollars abroad rose from $7.3 billion in 1948 to 19.4 billion in 1959 - Excess of gold over foreign dollar holding went from $18.1 billion to .5 billion in 1959 - 1960 US gold reserves were less than dollars in circulation - Deficit is now out of control •Nov. 1960 there is a run on the dollar - US now turn to international institutions for help, esp. with the Eurodollar market - IMF starts meeting; - US sends head of Fed of NY to BIS meetings which stabilizes gold prices; - group of 10 is created; - creation of SDRs •Period of Benign Neglect •Vietnam War and the US doesn't raise taxes •August 15, 1971-Nixon closed the Gold Window Why Did BW fail? Many reasons 1. US economy ran too fast for a key currency country 2. System was unstable because of the inflexible mechanism for adjustment and exchange rate changes 3. Rise of capital markets outside the US due to MNCs and euro-dollar markets made it impossible to control dollars; system based on nations being able to maintain capital controls 4. End of Cheap oil Politicians wanted the impossible • Set up to allow politicians to break the tie between their domestic economic policy and market retribution ie grow w/out worrying about exchange rate • This required capital controls • But, such controls were not viable in a world based on trade • Mounting strains on the system of pegged but adjustable rates; government had the worst of both worlds
Hainmueller, Jens and Dominik Hangartner. Forthcoming. "Does Direct Democracy Hurt Immigrant Minorities? Evidence from Naturalization Decisions in Switzerland."
Main Idea: Representative democracies are better for minority groups than direct democracies. Direct democracies enable voters' racist beliefs and fears to be recorded in a pure form (voting). Study of Switzerland shows that switch to representative democracy had a large pro-minority effect. There is an increase in accountability under a representative democracy and thus institutions matter within states. Representative democracy lends itself to more immigration.
Richard Freeman, "Are Your Wages Set in Beijing?," in Frieden, Lake and Broz
Main Idea: The economic troubles of less-skilled workers in the United States. and OECD-Europe during a period of rising manufacturing imports from third world countries has created a debate about whether, in a global economy, wages or employment are determined by the global rather than domestic labor-market conditions. One side argues that trade is all that matters; another side, that trade does not matter at all. The author rejects these polar views; empirical analysis has found modest but real trade effects in displacement of less-skilled labor and declines in the price of goods produced by low-skilled workers.
Peters, Margaret. 2015. "Open Trade, Closed Borders." World Politics 67(1): 114-54.
Main Idea: Trade policy and immigration policy should not be considered without the other in mind. They act as substitutes for each other in labor scarce countries (like the US). Closure to trade increases the average level of firm demand for immigration labor which leads to immigration openness. Free trade decreases the average firm demand for immigration labor which leads to restricted immigration. She looked at a dataset of immigration policy vs trade policy to discover this correlation.
Drezner," The Outsourcing Bogeyman" Foreign Affairs, May/June 2004
Main Ideas: Huge alarmism about outsourcing, but outsourcing is super beneficial and if there is a new wave of protectionism then will hurt American workers. Further Notes: Job loss due to offshoring minimal compared to the rest of the economy. Outsourcing is comparative advantage at work. Structural change happening in job market with old jobs being loss and new forms of jobs being added. Around 90% of US jobs require close proximity. Creation of jobs overseas will lead to more job creatin within the US and higher incomes.
Blinder, "Offshoring: The Next Industrial Revolution?" Foreign Affairs, March/April 2006.
Main Question: Is offshoring a good thing or is the job loss enough to outweigh the benefits Main Point: Offshoring is necessary, inevitable and good for the world if national data systems, trade policies, educational systems, social welfare programs and politics can adapt to this reality, which they currently are not. Less than a million jobs have been lost total from offshoring. This is very little in the grand scheme of the US labor market. Economists all agree that offshoring is good, but politicians on all sides aggressively fight the american job loss. Comparative advantage is unavoidable and occurs naturally Kaleidoscopic comparative advantage: man-made changes in comparative advantage. Textile industry from England to America to China throughout history. Technology improving what is tradable First industrial revolution: Adam Smith Wealth of Nations - farm to factory, whole societies changed Second industrial revolution: shift from manufacturing to service jobs Ongoing third industrial revolution - information age - change needed? During the first two revolutions things did not become awful as farming and then manufacturing jobs were lost, rather people adapted and took the growing new jobs and that will be the case once again when jobs decrease due to offshoring Both low-end and high-end jobs can be hurt by offshoring Matter of whether face to face interaction is necessary or not for what jobs can be subject to offshoring Increased technology will continue to increase offshoring Baumol's disease: personal services are condemned to grow ever more expensive Real wages for personal service industries are likely to decline except for luxury personal services like plastic surgery Cannot stop service offshoring because the government cannot manage exchange of information through the internet "People skills will become more valuable than computer skills". Imagination will be critical rather than routine America should be more afraid of the threat from India taking service industries than China taking manufacturing jobs Positive end note: Higher jobs satisfaction in the US with personal service jobs
"The World Trade Organization: Theory and Practice."--Bagwell & Staiger
Main argument: Bagwell and Staiger review recent attempts to understand the design and practices of the GATT and WTO. The WTO and other trade agreements solve terms-of-trade problems, helping governments avoid beggar-my-neighbor policies. Terms-of-trade refers to the amount of import goods an economy can purchase per unit of export goods. Large markets are able to affect world prices through their consumption/high demand, which can lead to retaliation or a trade war with other countries. The WTO, however, can minimize the terms-of-trade dilemma through 1) reciprocity (concessions are of equal value) or 2) MFN (tariffs are at the same rate across WTO members). Methodology: Bagwell and Staiger create a model of two countries, one domestic and one foreign, that trade two goods that are normal in consumption and produced in perfectly competitive markets. They use this model to analyze terms-of-trade externalities. Bagwell and Staiger also use historical analyses to look at the GATT infrastructure and how it addresses terms-of-trade manipulation. Argument: States are tempted to use protectionism to improve their terms of trade. The WTO solves beggar-thy-neighbor problems through most favored nation status (MFN), reciprocity, and dispute settlement. Some definitions: terms of trade - some countries are big enough that their actions affect world prices. MFN: have to extend all the trade agreement benefits that you gave to one country to countries with which you hold MFN.
"Is Trade Policy For Sale?" --Baldwin & Magee
Main argument: Campaign contributions influenced U.S. Representatives' votes on NAFTA and GATT Uruguay Round bills Contributions from labor groups were associated with votes against free trade Contributions from business groups were associated with votes for free trade Models of political behavior Politicians "supply" policies to interest groups that "demand" certain policies Mainstream view of political scientists: Contributions affect policy outcomes only through increased access to a legislator Constituent interests are important determinants of a legislator's vote NAFTA, GATT Uruguay, MFN for China NAFTA: was contentious, and organized labor groups decided to oppose strongly because they thought job losses would be worse than economists were predicting Business community, editorial writers, academics supported GATT: Organized labor opposed, but less strongly than NAFTA MFN for China: Business community strongly in favor, pressured President Carter into continuing MFN for China despite his grave human rights concerns Political Economy Framework Members of Congress assumed to behave in ways that increase chances of reelection Under Hecksher-Ohlin, Representatives in the U.S. should oppose trade when workforce is poorly-educated and when per-capita income is low (in their districts) More unionized workers in a districs=less support for free trade (unions usually represent blue-collar workers) Under Ricardo-Viner, reaction to trade is industry specific (no inter-industry mobility is assumed) Empirical Results A $1000 increase in contributions from labor reduced probability of voting for NAFTA by .52% A $1000 increase in contributions for business PAC's increased probability of voting for NAFTA by .12% For GATT, those numbers are .27 and .05 respectively For MFN for China, contributions were not statistically significant Increased unionism & less-skilled labor reduced likelihood of votes for NAFTA. ^^had no effect on GATT Type (i.e. textiles or lumber or computers) of industry in a Representative's home district is probably relevant and should not be omitted from studies like these According to their very boring math, in the absence of contributions from labor, 67 more representatives would have voted for NAFTA In the absence of contributions from business groups, 41 fewer would have voted for NAFTA Absence of labor contributions= plus 57 for NAFTA Absence of business contributions = minus 35 for GATT Had there not been campaign contributions from business groups, NAFTA would not have passed Conclusions Political contributions significantly altered votes on NAFTA and GATT, but not MFN for China
"Commerce, Coalitions, and Factor Mobility: Evidence from Congressional Votes on Trade Legislation." --Hiscox
Main argument: Class distinctions between voters are more politically salient when interindustry mobility is high When interindustry mobility is low, industry distinctions become more critical Evidence of Trends in Factor Mobility in U.S. Economy Levels of interindustry factor mobility have varied significantly over time Rising interindustry mobility during most of the nineteenth century, falling mobility in recent decades Coalition Politics in Trade Politics, Congressional Votes, 1824-1994 The formation of broad factor-owning class coalitions should have been most likely during periods when interindustry factor mobility was relatively high (between the 1880s and the 1920s) Narrow industry-based coalitions should have been most likely in periods when interindustry mobility was relatively low (earlier in the nineteenth and later in the twentieth centuries) Beginning of 19th century: trade politics was localized After Civil War, trade was the partisan issue, split the country in half. Class based coalitions during this time. Conclusions: Mobility levels in the United States have varied remarkably over time When mobility is high, votes in Congress (both houses) reflect class-based pressures, and when mobility is low, votes in Congress reflect industry-based pressures. Methodology: He made this super complicated mechanism to code for the level of interindustry factor mobility and then ran a regression (?) on Congressional votes for and against freer trade.
"State Power and the Structure of International Trade"--Krasner
Main argument: In this article, Krasner argues for a "theory of hegemonic stability" which purports that a leading power is essential for the creation and maintenance of free trade. He contends that hegemonic states prefer an open structure, as it increases their power. Openness is likely to occur when a hegemonic power is in its ascendancy. Openness enhances economic growth for developing states, but will only help large states as long as they maintain their technological edge. After Krasner analyzes his evidence--various periods from 1820-the present--he finds that the structure of international trade does not move with the distribution of power, but rather policies are pursued until some crisis reveals that they are no longer feasible ("institutional stickiness"). This means that the open system after 1945 will probably not change, until the US faces a deeply challenging situation. Methodology: Krasner identifies four principal goals of state action: 1) political power, 2) aggregate national income, 3) economic growth and 4) social stability. He then applies this model to six different time periods: increasing openness from 1820-1879 , modest closure in 1879-1900, greater openess in 1900-1913, closure from 1918-1939, and great openess 1945-1970. The 'dependent variable' is the structure of the international trading system, while the 'independent variable' is the distribution of economic power. Krasner's argument, however, does not fully explain some of the periods during the 20th century. Neoclassical trade theory says that states act to maximize aggregate economic utility. Larger, developed economies will gain more power from free trade because closure costs of out competed industries will be small. A hegemonic state should lead to greater openness overall.
"The Impact of NAFTA on the United States" - Burfisher, Robinson, and Thierfelder, 2001
Main argument: NAFTA was not bad for the US economy. It was actually good! Main conclusions: - Economists can do a reasonably good job of predicting gains from trade liberalization if we exclude mercantilist arguments. - Aggregate trade balance is hardly affected by bilateral balances. - Benefits from trade require adjustment costs which are felt most strongly in labor. - Regional agreements force countries to eliminate distortions. Data: - Examined US labor markets before and after NAFTA and found that jobs lost were negligible to those created. - The Peso Crisis was caused by preexisting conditions, and it would have been a lot worse without NAFTA. - Integration has made the economy more efficient, particularly the auto industry
"The New Wave of Regionalism" - Edward D. Mansfield and Helen V. Milner, 1999
Main argument: Regionalism is on the rise. The occurrence of regionalism is not new as it happened during the nineteenth century and again between the World Wars. The question is whether or not regionalism will be beneficial this time around, and the authors believe it will be due to today's political conditions. Research is centered around the following questions: - What constitutes a region and how should regionalism be defined? - Why has the pervasiveness of regional trade arrangements waxed and waned over time? - Why do countries pursue regional trade strategies, instead of relying solely on unilateral or multilateral ones, and what determines their choices of partners? - What are the political and economic consequences?
"The Future of Trade" - Joshua Meltzer, 2011
Main argument: US-China relations and the WTO's perceived legitimacy will play a huge role in whether o not the Doha Round can close. - The US has been accusing China of cheating which creates tension and limits cooperation. - The growing number of FTAs creates a "spaghetti effect" whereby companies have to navigate through a multitude of agreements and regulations. - FTAs can also serve to set new norms in the WTO if multiple FTAs lean the same way. Additionally, this can create competition as FTAs vie for their rules to be adopted. Legitimacy concerns - States' citizens never formally consent to rules - concern over right to make rules. If the WTO is to survive, it needs members' support and cooperation.
"Donald Trump Trashes Nafta. But unwinding it would come at a huge cost." - Neil Irwin, 2016
Mainstream economists believe that NAFTA has raised US incomes, and it has also left supply chains highly integrated. Destroying it would come at a very high domestic cost. Major industries would face disruption, and generations of work would be destroyed. Parts produced for a lower cost in Mexico allow US manufacturers to create more products and US consumers to pay less. Note: This is a New York Times article.
"Back to Basics: What is Monetary Policy" - Mathai, Koshy
Monetary policy: adjusting supply of money in the economy to achieve some combination of inflation and output stabilization. -Central banks form policy. -Different from fiscal policy, which is taxes and spending. Two channels of monetary policy: exchange rate and interest rate channel. They adjust the money supply. Central banks are independent from democratic governance
"What Determines Individual Trade-Policy Preferences?" - Scheve and Slaughter
Most people save and invest, so although industry is the primary determinant of preferences, preferences, assets as well as income pay a large role. -In the US, skill level is the biggest determinant
"Dominant and Dangerous." Oct. 3 2015. The Economist
Nothing comes close to US dollar's supremacy -60% of global economy uses currency pegged to dollar -whole world subject to US rate changes(few alternatives to a bad system) -But supremacy of dollar has outpaces US economic dominance, leading to problems: 1) the prospect of even a tiny rate rise in America has sucked capital from emerging markets. Decisions of the Federal Reserve affect offshore dollar debts and deposits worth about $9 trillion. America increasingly uses its financial clout as a political tool. The dollar's rule over the international economic system has brittle foundations, and transitioning to a more secure system will be difficult. (1) Other economies must endure wild gyrations -- countries who link their currencies to the dollar must react to the actions of the Fed. (2) there isn't a backstop for the offshore dollar crisis if there is a crisis. In 2008, the Fed reluctantly fixed this by acting as a lender of last resort to other foreign central banks. (3) America uses this as a political tool over other countries. Domestic economic security must first be strengthened (external financial liberalization can magnify the effects of inadequate domestic policies)
Lecture: After Gold: How we Got From Here to Monetary Policy
Origins of the Gold Standard • Why is a particular metal chosen? • Availability • Economic interests • Physical attribute • Happenstance • Why not many metals, ie, bi-metalism? - For a long time, we did have trade in multiple metals - Multiple metals are good because there is more specie in the system - Multiples are bad because of Gresham's Law - Gresham's law "bad money drives out the good" money is problem Governments did not re-issue money when gold came in to their nation; they didn't pull coins out of circulation when gold left • The basic rule of the gold standard, ie. That the money in circulation was equal to the gold in the treasury was ignored • Further, governments actively cut the tie between currency increases (decreases) and price changesWhy didn't they follow the rules? • Governments had an irrational desire for gold and positive currency inflows • Did not want the disruptive economic changes brought by changes in money supply - Inflow of gold and an increase in money supply led to inflation - Outflow of gold and a decrease in money supply led to less growth and unemployment • Instead, governments controlled flow of capital through loans and/or capital controls • Britain was willing to act as a lender of last resort In retrospect • Gold standard probably only worked between 1900 and 1914 • Why then? Period of a rapid increase in world gold production which meant that no one suffered from the ill effects of a gold outflow • The universal inflow of gold allowed virtually all nations to gain gold and to grow by feeding off the new supply rather than off each other. - New gold kept the world economy moving, even with a fixed exchange rate system because it minimized national competition - More gold meant raised incomes and lowered interest rates - Low interest rates encouraged investment which raised per capita output and real income - Higher incomes encouraged imports - Everyone was happy and then came WWI
Trending Towards Regionalism/Are regional trade agreements good for the US?
PTA Proponents: PTAs help nations gradually work towards global free trade by allowing countries to increase the level of competition slowly, giving domestic industries time to adjust • PTAs are valuable arenas for tackling volatile trade issues such as agricultural subsidies and trade in services and foreign direct investment concerns • Political pressures and regional diplomacy can resolve issues that cause deadlock in multilateral negotiations such as labor and environmental standards; may be easier to solve with less parties • Many see them as 'circles of free trade'that expand until they finally converge to form multilateral agreements PTA Opponents: Instead of facilitating trade, they maycreate interests at odds with multilateral agreements • PTAs create preference system that transcend regional boundaries - could economic tensions lead to hostility? - Esp. true in areas such as anti-dumping and other areas where the dispute settlement process in the WTO cannot mediate between regional regulations. • PTAs could reduce global trade by making location of production or source of raw materials the driving incentive for trade • PTAs could prevent complete liberalization in the WTO because those that benefit from PTAs may be reluctant to expose themselves to the further risks • PTAs have managed to recreate the preferences-ridden world of the 1930s as surely as protectionism did at the time in an ironic turn of events • May be longer and harder to negotiate and can't solve the problem of needing universal trading rules PTAs have been rising steadily, and PTAs like NAFTA are not the source of the US trade deficit
"Invested interests: The politics of national economic policies in a world of global finance" - Frieden
Sector specific investment are not very mobile, but capital is the most mobile it's ever been. -capital flows freely in industrialized nations. -in the long run, international finance integration favors capital over labor -only financial capital is easily mobile--not human or tech. capital -capital mobility impedes independent monetary policy -w/ mobile capital, universal interest rates -In the long run, capital owners have gained while owners and workers in specific sectors have lost in the short run. -Mundell-Fleming Conditions: Can have 2 of the 3: fixed exchange rates, capital mobility, or monetary policy autonomy.
Eichengreen, "Exorbitant Privilege" Ch 1-4
The US gets seignorage: money/benefit a country gets from minting a currency, off of the world market. -Conducting international business in dollars favors the US.
Global Capitalism (pp.127-154, 173-194, 253-263, 339-346) - Frieden
The end of WWI saw the US as a dominant manufacturer and Europe as ruined. Mass hyperinflation in Germany. London couldn't hold up the gold standard anymore. -Mass protectionism; US wouldn't step up. -Gold standard was an inflexible system--no monetary policy to stimulate economy and could not inflate. -GS exacerbated the great depression and led to inadequate response at first. It also helped the Depression spread from country to country. Post WWII: opening of markets, Bretton Woods 1944-1971 -World rebuilds; US could not sustain the gold standard.
Globalizing Capital (Ch. 1 & 2)- Eichengreen
These chapters give an overview of the gold standard from its inception at 1870 through bimetallism struggles to WWI. -Stability of the System: Prone to panics; relied on cooperation and gold discovery and was destabilized by WWI.
Eichengreen, Barry, et. al. 1999 "Liberalizing Capital Movements: Some Analytical Issues." International Monetary Fund
This paper addresses the gains/risks of open capital markets. As International capital flows have rapidly grown thanks to the trend of industrial/developing countries gravitating towards economic liberalization, the classical case argues that int'l capital mobility allows countries to attract financing for domestic investment projects and enables investors to diversify their portfolios. But - the controversy over the benefits of financial liberalization reflects diverging views on whether free capital movements can actually deliver an efficent allocation fo resources. Governments need strong policies - then capital mobility is good.
"North American Free Trade Agreement: Free for Whom?" - Helen Shapiro
This paper outlines the US, Canada, and Mexico's incentives for joining NAFTA and outlines who recieved benefits. THE US and Canada: - A 1989 agreement made 80% of goods between the countries duty-free. - Canadians blamed the FTA for a recession and the ensuing lay-offs. They were not interested in further trade. - Conservatives won a majority in Congress and pushed to be a part of NAFTA so as not to be left behind. Mexico and the US - Maquiladoras, unregulated factories just south of the border, caused outsourcing from the US - US wanted it to stop, and human rights groups wanted labor and environmental regulations. - 70-80% of Mexico was pro-NAFTA - thought it would benefit the economy. Clinton - Clinton wanted better conditions for workers and the environment. Conclusion: NAFTA had its critics but did lead to improved conditions in the maquiladoras.
The International Dimensions of Free Trade
Trade "distortions"are part of world trade 1. Whether or not they undermine efficiency, distortions, created by government policy, exist because trade redistributes jobs, income and wealth in ways that governments fear will reduce their chances of remaining in power 2. Why? Because changes in product prices that result from trade liberalization change the prices constituents receive for their services. Even though the aggregate income and wealth of a nation can grow, when these trade distortions are reduced, not everyone gains and social safety nets, where they exist, typically provide only partial compensation for such losses. 3. Further, it is often the case that the loses in jobs, incomes and wealth are concentrated in the hands of a few who are prepared to support politicians who resist further reductions of these protections, while the gains are sufficiently small per consumer and export firm and are distributed sufficiently widely as to make it not worthwhile for those potential gainers to get together to lobby for reform, given their free-rider problem in acting collectively. 4. Result is that open borders are hard to attain. In the US, only occurred because of institutional innovation and today, being threatened by a Baptist-bootlegger coalition at home and regionalism abroad Goes onto outline roadmap to open trade in US and draws attention to continuing non-tariff barriers. Continuing conflict: national treatment vs. harmonization (dolphin tuna example). Will the WTO be able to solve this?
Foregin Direct Investment
Trade and Investment are two sides of the same coin. The TPP: - was a bridge between investment and trade regulations. - Was a wonderful thing but had something to anger opponents of all sides: Democrats - organized labor upset; Republicans - feared the US would be punished, didn't want US to be tried under dispute settlement. Why let corporations sue foreign governments in special courts? - Doing so helps developing countries with weak judicial systems. Companies are hesitant to invest in authoritarian state where their money could be seized. - Special courts assure them their investment will remain in their hands. - The system helps developing countries in need of capital attract foreign investment. US Companies are worried about a world without international rules - Areas with less regulation can make more for less. Example: Solar panels. Globalization of production is everywhere, so ownership of a product has become extremely mixed up! Product cycle: - Product develops in a Northern market because of innovative tech. - It grows and exports, and as production and transportation costs increase, manufacturing is moved overseas to be closer to markets. - These new manufacturing facilities begin to import back to the original market, and the original manufacturing plant closes. Is this good or bad? - Economic theory says the movement is good because it provides cheaper, more plentiful goods. - Others say it's bad because it has caused a decline in US economic power; also, what is rational for a private company may not be rational for a nation or its citizens.
Currency Politics (Ch.1) - Jeffry Frieden
Trilemma is that only two of the three are possible: financial integration, fixed exchange rates, and monetary independence -pegged currencies good for trade and investment, but painful if not suited to current economic situation -two main choices for governments: allow currency to fix or float, and whether to keep currency strong or weak. If strong, purchasing power is better.
Eichengreen. 2012. "When Currencies Collapse." Foreign Affairs
US/Euro are most powerful currencies today -- which is why the problems that they face today are so alarming. The system in the 1930s was a disastrous collaps - as global trade boomed and int'l capital flows expanded rapidly, global imbalances occurred. Today's int'l system has similar concerns, but gold played an important role in the 1930s (unlike today). In 1970s, the advent o a two-tier gold market hightened doubts about the stability of the dollar, and it took more than 5 years for the IMF to reach an agreement about Special Drawing Rights. The imbalance grew and the failure of the interwar system played a role in the Great Depression, whereas the collapse of the Bretton Woods system did little to slow economic growth. The difference, Eichengreen argues, is that in 1970, there was no catrasophic loss of confidence in the dollar. So what about today? Depends on the actions of policymakers to ensure confidence in the currency.
Lecture: Currency Crises and Contagion
What determines the value of your currency today? 1. Perceptions of the strength of the economy 2. Lots of psychology 3. Mostly, we look at capital flows and not trade flows to predict value of currency 4. Markets are not always correct about where to invest 3. Role of the government - Intervene to manage their exchange rates -Worry about inflation and problems with competitiveness -Ask other nations to help by buying and selling currenciesHave things changed over time? Less than it appears • Leaders who worry about retaining popular support, worry about growth but are stymied by private behavior - Always been markets out of the control of governments - Participants in markets want to make money and that behavior may be at odds with the goals of leaders • Plays out differently but the underlying logic is the same - Bi-metalism ( suffered from Gresham's Law) - Gold Standard (govt. refused to align money in circulation with gold in reserves) - Bretton Woods (failed because capital controls failed) • Private actors moved money across borders - Contemporary (market driven) • Unholy Trinity (describes the constraints on governments with capital mobility) • Problems of imbalances: oil and debt in the 1980s, developing nations who peg currency and market reaction (1990s); Euro crisis and sovereign debt
"The Multinational Enterprise as an Economic Unit" -Caves
Why do MNEs exist? There are 3 types: 1) Horizontal: identical firms in multiple countries 2) Vertical: all of the production processes steps are owned by one company 3) Diversification Uses empirical data
Kaminsky, Graciela, Carmen Reinhart, and Carlos Vegh. 2003. "The Unholy Trinity of Financial Contagion." Journal of Economic Perspectives 17(4): 51-74
Why does financial contagion happen across borders in some cases but not others? This paper argues that a surge in capital inflows, unexpectedness (investors will be brought down), and financial linkages. -looks at example in Latin America in particular to prove this Contagion is: an episode in which there are significant immediate effects in a number of countries following an event. (more gradual financial crises are referred to as spillovers).
Monetary Policy Basics and The Gold Standard
• Shifts in the US economy began before the Great Recession • But, the effects of the recession may explain the salience of blaming globalization for a host of job related problems, especially in manufacturing • Paradox: the more integrated the country, the greater the benefits of market integration but also, the bigger the shock from economic decline anywhere around the globe. - US, least integrated of the large nations, has done RELATIVELY better in recovering from the recession - US dollar, which was on a cyclical decline because of trade imbalance, became a safe haven, further complicating trade policy • Data on globalization appears to show that it is good in the aggregate but not good for everyone. - Globalization in the aggregate is not associated with a lot of bad things but it makes countries and groups more vulnerable. - Globalization is based on political choices, not only economic nor technological necessity. - But, the benefits of globalization come with costs, that is, the inability to deter shocks - Lesson of trade-offs • Are other nations taking advantage of the US? - China and the Yuan?
