POLISCI 140 WEEK 2

How Does IMF Lending Work?

"Credit union" • All members contribute a portion ("quota") of the IMF's resources • Countries borrow (usually 2-3 years) in proportion to quotas Goals • Short-term "firefighting" (ending a crisis/preventing a default) • Long-term: restore growth/ability to borrow privately IMF lending, 2019 - ~$500 billion in resources; ~$200 billion in loans: Argentina, Ecuador, Egypt, Tunisia, Ukraine, 16 sub-Saharan African countries - 2008-18: 80% of lending to Europe (Greece, Ireland, Iceland, Portugal)

Elements of the International Monetary System

1.Exchange rate "regime": Do most currencies float, or are they fixed ? -Fixed: gold standard, Bretton Woods (1945 -1973) -Float: the "system" today 2.Monetary standard: will there be a common base or standard? •Commodity standard: a good with some intrinsic value: precious metals (gold, silver) •Commodity-backed paper standard: Governments issue paper currency that has a fixed value in terms of a commodity (Gold standard, 1870 -1914) •Hybrid: Bretton Woods (1945-73): U.S. dollar fixed to gold, and all other currencies to the dollar

North American Free Trade Agreement (NAFTA)

A free trade zone encompassing the United States, Canada, and Mexico since 1994.->United States, Canada, and Mexico signed the North American Free Trade Agreement (NAFTA) in 1994, following a U.S.-Canadian free-trade agreement in 1988. In NAFTA's first decade, U.S. imports from both Mexico and Canada more than doubled, then fell back somewhat (after 1999)->Politicians in North and South America have long spoken of creating a single free trade area in the Western Hemisphere, from Alaska to Argentina—the Free Trade Area of the Americas (FTAA)

Generalized System of Preferences (GSP)

A mechanism by which some industrialized states began, in the 1970s, to give tariff concessions to third world states on certain imports; an exception to the most-favored nation (MFN) principle. See also most-favored nation (MFN).->An exception to the MFN system is the Generalized System of Preferences (GSP), dating from the 1970s, by which rich states give trade concessions to poor ones to help their economic development. Preferences amount to a promise by rich states to allow imports from poor ones under lower tariffs than those imposed under MFN. The WTO continues the GATT's role as a negotiating forum for multilateral trade agreements that lower trade barriers on a fair and reciprocal basis. These detailed and complex agreements specify commitments to lower certain trade barriers by certain amounts on fixed schedules. Almost every commitment entails domestic political costs because domestic industries lose protection against foreign competition.

Bretton Woods System

A post-World War II arrangement for managing the world economy, established at a meeting in Bretton Woods, New Hampshire, in 1944. Its main institutional components are the World Bank and the International Monetary Fund (IMF).->As in security affairs, the main international economic institutions were created near the end of World War II.->he Bretton Woods system was adopted at a conference of the winning states in 1944 (at Bretton Woods, New Hampshire). It established the International Bank for Reconstruction and Development (IBRD), more commonly called the World Bank

most-favored nation (MFN)

A principle by which one state, by granting another state MFN status, promises to give it the same treatment given to the first state's most-favored trading partner.->WTO framework rests on the principle of reciprocity—matching states' lowering of trade barriers to one another. It also uses the concept of nondiscrimination, embodied in the most-favored nation (MFN) concept, which says that trade restrictions imposed by a WTO member on its most-favored trading partner must be applied equally to all WTO members. If Australia applies a 20 percent tariff on auto parts imported from France, it must not apply a 40 percent tariff on auto parts imported from the United States. Thus, the WTO does not get rid of barriers to trade altogether but equalizes them in a global framework to create a level playing field for all member states.

Uruguay Round

A series of negotiations under the General Agreement on Tariffs and Trade (GATT) that began in Uruguay in 1986 and concluded in 1994 with agreement to create the World Trade Organization. The Uruguay Round followed earlier GATT negotiations such as the Kennedy Round and the Tokyo Round.->The United States had pressured Europe to reduce agricultural subsidies and states in the global South to protect intellectual property rights. In the end, the United States got some, but not all, of what it wanted.,1947 onward, the GATT encouraged states to use import tariffs rather than nontariff barriers to protect industries and to lower those tariffs over time. The GATT concentrated on manufactured goods and succeeded in substantially reducing the average tariffs,-rates in the global South are much higher, around 15 percent (reflecting the greater protection that industry there apparently needs). Agricultural trade is politically more sensitive than trade in manufactured goods and came into play only in the Uruguay Round. Trade in services, such as banking and insurance, is another current major focus of the WTO.-in expanding into these and other sensitive areas became obvious at a 1999 Seattle WTO conference, where trade ministers had hoped to launch a new, post-Uruguay Round

Doha Round

A series of negotiations under the WTO that began in Doha, Qatar, in 2001. It followed the Uruguay Round and has focused on agricultural subsidies, intellectual property, and other issues.->In 2001, after the failure in Seattle, trade ministers meeting in Doha, Qatar, agreed to launch a new round of trade negotiations, the Doha Round. The issues under negotiation included agriculture, services, industrial products, intellectual property, WTO rules (including how to handle antidumping cases), dispute settlement, and some trade and environmental questions. At the 2003 meeting in Cancun, Mexico, states from the global South walked out after the industrialized countries would not agree to lift their agricultural subsidies, which were shutting out poor countries' agricultural exports. At the 2005 Hong Kong meeting, wealthy states agreed to end the export subsidies, but tough negotiations continued over tariffs on manufactured goods, protection of intellectual property, and opening financial sectors. The main obstacle remains the resistance of the industrialized West to cut agricultural subsidies as demanded by countries in the global South (see the Seeking the Collective Good box).-<n trade negotiations, both states hold out for their own terms (not swerving) for as long as possible, then come to agreement only when faced with an imminent collision—the expiration of a deadline beyond which there will be no deal at all. In the game of Chicken, there is no incentive to give ground before the last minute

gold standard

A system in international monetary relations, prominent for a century before the 1970s, in which the value of national currencies was pegged to the value of gold or other precious metals.-the international economy is based on national currencies, not a world currency. One of the main powers of a national government is to create its own currency as the sole legal currency in the territory it controls-but has developed an international monetary system divorced from any tangible medium such as precious metals.-The change in the world economy away from bars of gold to purely abstract money makes international economics more efficient; the only drawback is that, without tangible backing in gold, currencies may seem less worthy of people's confidence.

Devaluation

A unilateral move to reduce the value of a currency by changing a fixed or official exchange rate.->A unilateral move to reduce the value of one's own currency by changing a fixed or official exchange rate is called a devaluation. Generally, devaluation is a quick fix for financial problems in the short term, but it can create new problems. It causes losses to foreigners who hold one's currency (which suddenly loses value). Such losses reduce the trust people place in the currency. As a result, demand for the currency drops,-

Special Drawing Right (SDR)

A world currency created by the International Monetary Fund (IMF) to replace gold as a world standard. Valued by a "basket" of national currencies, the SDR has been called "paper gold."->To replace gold as a world standard, the IMF created a new world currency, the Special Drawing Right (SDR). The SDR has been called "paper gold" because it is created in limited amounts by the IMF, is held as a hard-currency reserve by states' central banks, and can be exchanged for various international currencies. The SDR is today the closest thing to a world currency that exists, but it cannot buy goods—only currencies->SDRs are linked in value to a basket of several key international currencies (but one that the IMF periodically adjusts to reflect the dollar's strength or weakness). When one currency rises a bit and another falls, the SDR does not change value much; but if all currencies rise (worldwide inflation), the SDR rises with them.

General Agreement on Tariffs and Trade (GATT)

A world organization established in 1947 to work for freer trade on a multilateral basis; the GATT was more of a negotiating framework than an administrative institution. It became the World Trade Organization (WTO) in 1995.->, which was created in 1947 to facilitate freer trade on a multilateral basis. The GATT was more of a negotiating framework than an administrative institution. It did not actually regulate trade. Before the GATT, proposals for a stronger institutional agency had been rejected because of U.S. fears that overregulation would stifle free trade. The GATT had little institutional infrastructure until the mid-1990s, with just a small secretariat headquartered in Geneva, Switzerland (where the WTO remains). In addition to its main role as a negotiating forum, the GATT helped arbitrate trade disputes, clarifying the rules and helping states observe them., which was created in 1947 to facilitate freer trade on a multilateral basis. The GATT was more of a negotiating framework than an administrative institution. It did not actually regulate trade. Before the GATT, proposals for a stronger institutional agency had been rejected because of U.S. fears that overregulation would stifle free trade. The GATT had little institutional infrastructure until the mid-1990s, with just a small secretariat headquartered in Geneva, Switzerland (where the WTO remains). In addition to its main role as a negotiating forum, the GATT helped arbitrate trade disputes, clarifying the rules and helping states observe them.

Cartel

An association of producers or consumers (or both) of a certain product, formed for the purpose of manipulating its price on the world market.->A cartel is an association of producers or consumers, or both, of a certain product—formed to manipulate its price on the world market. It is an unusual but interesting form of trade regime. Most often producers, and not consumers, form cartels because there are usually fewer producers than consumers, and it seems possible for them to coordinate to keep prices high. Cartels can use a variety of means to affect prices; the most effective is to coordinate limits on production by each member and thus lower the supply of, relative to the demand for, the good.

hyperinflation

An extremely rapid, uncontrolled rise in prices, such as occurred in Germany in the 1920s and in some third world countries more recently., -More recently, Venezuela's inflation rate rose to 4,000 percent in the fall of 2017, leading the government to print new money, including issuing an online currency backed by the country's oil reserves. Even just moderately high inflation causes money to lose value weekly, making it hard to conduct business.

central bank

An institution common in industrialized countries whose major tasks are to maintain the value of the state's currency and to control inflation.->In some states, the politicians or generals who control the government directly control the amounts of money printed. It is not surprising that inflation tends to be high in those states because political problems can often be solved by printing more money. But in most industrialized countries, politicians know they cannot trust themselves with day-to-day decisions about printing money. To enforce self-discipline and enhance public trust in the value of money, these decisions are turned over to a central bank.->United States, the central bank is the Federal Reserve, or the Fed.,affect the economy by releasing or hoarding its money. Internationally, it does this by intervening in currency markets (as described earlier). Multilateral interventions are usually coordinated by the heads of central banks and treasury (finance) ministries in the leading countries-,central bankers makes it easier for states to achieve the collective good of a stable world monetary system.

International Monetary Fund (IMF)

An intergovernmental organization (IGO) that coordinates international currency exchange, the balance of international payments, and national accounts. Along with the World Bank, it is a pillar of the international financial system.->An intergovernmental organization (IGO) that coordinates international currency exchange, the balance of international payments, and national accounts. Along with the World Bank, it is a pillar of the international financial system,, Bretton Woods set a regime of stable monetary exchange, based on the U.S. dollar and backed by gold, that lasted from 1944 to 1971.,,,The gold standard was abandoned in 1971—an event sometimes called the "collapse of Bretton Woods.",,The abandonment of the gold standard was good for the United States and bad for Japan and Europe, where leaders expressed shock at the unilateral U.S. actions

8.2.5 Enforcement of Trade Rules

As with international law generally, economic agreements among states depend strongly on the reciprocity principle for enforcement,main resort that other states have is to apply similar measures against the offending state. The use of reciprocity to enforce equal terms of exchange is especially important in international trade,,tates keep close track of the exact terms of trade,Enforcement of equal terms of trade is complicated by differing interpretations of what is "fair." States generally decide which practices of other states they consider unfair (often prodded by affected domestic industries) and then take (or threaten) retaliatory actions to punish those practices,If the other state does not agree that its practices are unfair, however, the retaliatory actions may themselves seem unfair and call for retaliation. One disadvantage of reciprocity is that it can lead to a downward spiral of noncooperation,,To prevent this, states often negotiate agreements regarding what practices they consider unfair. In some cases, third-party arbitration can also be used to resolve trade disputes. Currently, the World Trade Organization hears complaints,,Retaliation for unfair trade practices usually tries to match the violation in type and extent. Under WTO rules, a state may impose retaliatory tariffs equivalent to the losses caused by another state's unfair trade practices,,n cases of dumping, retaliation aims to offset the advantage enjoyed from goods imported at prices below the world market. Retaliatory tariffs raise the price back to market levels.,,Before such tariffs are imposed, a U.S. government agency, the International Trade Commission (ITC), decides whether the low-priced imports have actually hurt the U.S. industry,,By making the cost of tariffs higher than the benefits, the WTO effectively changed U.S. policy—an indication of the WTO's growing power. This example also shows how closely international trade connects with domestic politics. Trade cooperation is easier to achieve under hegemony (see Hegemony in Chapter 2). The efficient operation of markets depends on a stable political framework such as hegemony can provide,,A hegemon can provide a world currency in which value can be universally calculated. It can punish the use of violence and can enforce norms of fair trade. Because its economy is so large and dominating, the hegemon can threaten to break off trade ties even without resorting to military force. For example, to be denied access to U.S. markets today would seriously hurt export industries in many states.

To Fix or To Float? Tradeoffs!

Benefits of fixed rates •Stable exchange rates (good for more trade/financial flows) •Low inflation (stable prices) Costs of fixed rates •Loss of domestic monetary autonomy (é ê interest rates) •Risk of currency crises Most countries choose intermediate regimes •Lots of middle options ("managed" floating, "soft" peg) •"Soft" peg is a peg that is open to change

Bilateral Agreements:

Bilateral agreements covering trade are reciprocal arrangements to lower barriers to trade between two states. Usually they are very specific., As with most agreements based on the reciprocity principle, trade treaties involve great complexity and constant monitoring., Part of the idea behind the GATT/WTO was to strip away the maze of bilateral agreements on trade and simplify the system of tariffs and preferences., bilateral trade agreements continue to play an important role, reducing the collective goods problem, facilitating reciprocity as a means to achieve cooperation, most states do most of their trading with a few partners, a few bilateral agreements can go a long way in structuring a state's trade relations. The number of bilateral agreements has grown substantially in the past decade,

But, What Does the IMF Even Do?

Bretton Woods, 1944: • Two tasks: Monitor dollar/gold exchange rates, coordinate devaluations, some lending • 44 members The IMF today (since 1970s) • "Lender of last resort" loans • Also, surveillance and research • 189 members (non-members: North Korea, Taiwan, Cuba) • ~2,700 staff from ~150 countries

PTAs vs the WTO: Two Views

Building blocks •Smaller numbers = easier cooperation •"Virtuous circle" or "stepping stones" to free trade •Way to move forward as WTO rounds stagnate (Doha, 2001-???) Stumbling blocks •PTAs create trade blocs: free trade within, protection without •Risks: Trade wars between blocs & the "spaghetti bowl"

Sounds Good...What's the Catch? IMF "Conditionality"

Definition • Policy reforms required by the IMF in exchange for money Rationale • Change "bad policies" that cause crises/debt problems • Limit "moral hazard" • Policy reform in place of collateral Types of conditions • Fiscal austerity (budget cuts) • Tight monetary policy (higher interest rates) • "Structural adjustment": privatization, liberalization, etc.

The Politics of Exchange Rates: Institutions

Democracy and exchange rate policy •Non-democracies are more likely to adhere to fixed exchange rates •Why? -Fixed rates requires sacrificing domestic monetary autonomy (raising/lowering interest rates to "prime" the economy) -High interest rates may lead to unemployment, economic stagnation -These costs are of less concern to non-democratic governments, since they don't face election (or face only a limited electorate) •Example: gold standard (1870-1914) vs. gold standard (1919-1939) -Extension of suffrage and rising prominence of social democratic/labor parties undermined governments' willingness/ability to maintain pegs in the 1920s and 1930s a) The Wizard of Oz as an Allegory for Gold Standard Politics

Why No Great Depression? Policy Responses

Financial rescues ("bailouts") for banks and countries • Domestic: preventing bank runs/collapses (TARP, etc.) • International: IMF/EU rescue loans for Iceland, Greece, Ireland, etc. Monetary policy: massive responses by central banks • Sharp interest rate cuts • Buying government bonds ("quantitative easing") • Federal Reserve backstops world's major central banks with "swap lines" of credit and reserves Fiscal policy: a little stimulus, a lot of austerity • American Recovery and Reinvestment Act ($787 billion) • But...since 2011, austerity on both sides of the Atlantic

Exchange Rate Regimes

Flexible (floating) exchange rate regime •Driven by market forces; gov't lets currency "float"against others Fixed exchange rate regime •Government chooses & defends a "peg" against another currency How does a government maintain a fixed ER? •Government (central bank) directly trades FX / gov't bonds •Monetary policy: Central bank raises/lowers interest rates or prints currency to affect money supply/demand

world bank

Formally the International Bank for Reconstruction and Development (IBRD), an organization that was established in 1944 as a source of loans to help reconstruct the European economies. Later, the main borrowers were third world countries and, in the 1990s, Eastern European ones.->as a source of loans to reconstruct the Western European economies after the war and to help states through future financial difficulties. (Later, the main borrowers were developing countries and, in the 1990s, Eastern European ones.) Closely linked with the World Bank is the International Monetary Fund (IMF)->As in security affairs, the main international economic institutions were created near the end of World War II.

Key Issue For Developed Countries: Competing for FDI

Governments try and lure FDI with incentives • Countries (as well as states, localities) offer MNCs numerous "goodies" to attract investment and jobs • US states have engaged in bidding wars to court foreign investors Types of incentives • Subsidies, tax breaks • Infrastructure (highways, water/sewage, airports) • Guarantee of non-union labor Concern: a "race to the bottom"?

Regulating FDI in Developed Countries

In general, rich countries are less restrictive of FDI • Not as dependent on it, so fewer sovereignty issues • No "development" concerns • Fear that inward restrictions will hurt domestic MNCs overseas Basic policy stance: neutrality • Regulations should not be biased for/against foreign corporations • Key exception: national security

8.2.4 Industries and Interest Groups

Industries and other domestic political actors often seek to influence a state's foreign economic policies (see Interest Groups in Chapter 4). These pressures do not always favor protectionism. Industries that are advanced and competitive in world markets try to influence their governments to adopt free trade policies. This strategy promotes a global free-trade system in which such industries can prosper. By contrast, industries that lag behind their global competitors tend to seek protection. Means to influence foreign economic policy include lobbying, forming interest groups, paying bribes, and even encouraging coup

9.2.3 Why Currencies Rise or Fall

In the short term, exchange rates depend on speculation about the future value of currencies. But over the long term, the value of a state's currency tends to rise or fall relative to others because of changes in the long-term supply and demand for the currency. Supply is determined by the amount of money a government prints.->Domestically, printing too much money creates inflation because the amount of goods in the economy is unchanged, but more money is circulating to buy the goods with. Demand for a currency depends on the state's economic health and political stability. People do not want to own the currency of an unstable country because political instability leads to the breakdown of economic efficiency and of trust in the currency.->Currency stability is hard to achieve., exchange rates disrupts business in trade-oriented sectors because companies face sudden and unpredictable changes in their plans for income and expenses,States also have a shared interest in currency stability because instability tends to be profitable for speculators at the expense of central banks->Despite these shared interests in currency stability, states also experience conflicts over currency exchange. States often prefer a low value for their own currency relative to others because a low value promotes exports and helps turn trade deficits into surpluses—as mercantilists especially favor->Exchange rates and trade surpluses or deficits tend to adjust automatically toward equilibrium (the preferred outcome for liberals). An overvalued currency, whose exchange rate is too high, creates a chronic trade deficit.

How Might Greece/Italy/Portugal/Spain Respond to This Crisis?

Increase the money supply •Print more Euros Increase demand in the economy •Directly: government spends more itself (fiscal policy) •Indirectly: cut interest rates (makes saving less attractive and consumer/firm borrowing and spending today cheaper) Devalue the currency •Let the exchange rate depreciate to stimulate exports and growth 45 PROBLEM: As Euro members, these countries don't have their own currency and can't do any of these things by themselves

The Political Effects of Financial Crises What Do We Know? (Funke, Schularick, and Trebisch 2016)

Look at 800 elections in 20 countries from 1870-2014, after >100 financial crises • Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Japan, the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, United Kingdom, United States. "Hard right turns" • Right-wing parties (esp. extreme right) benefit most from crises Governing becomes more difficult • Crises are associated with shrinking government majorities, greater fractionalization, and increasing street protest The effects are unique to financial crises • No similar effects in either normal recessions or severe economic downturns without financial crises

National Security & FDI: The CFIUS

Omnibus Trade and Competitiveness Act of 1988 • "Exon-Florio amendment" empowers the President to "suspend or prohibit any foreign acquisition, merger, or takeover of a U.S. corporation that is determined to threaten the national security of the United States." The Committee on Foreign Investment in the US (CFIUS) • Inter-agency committee chaired by Secretary of Treasury, est. 1975 • Empowered to carry out investigations of FDI transactions

What's a "PTA"? Why Bother If We Have a WTO?

PTAs •Bilateral or regional trade agreements involving two or more countries •A (legal) violation of the WTO's "most favored nation" principle •A chance for smaller groups to go further/deeper (Mostly) not about liberalizing trade (anymore) •Since trade barriers are already historically low (WTO)! •New liberalization is mostly about removing NTBs, services, etc. •Harmonizing regulations (labor, environment, etc.) •Rules/courts for governing cross-border investment •Often mostly about geopolitics (NAFTA, US - Israel, etc.)

Beyond A "Soft Peg": Why Enter a Monetary Union?

Permanent fixed exchange rate = permanent stability •Markets may always "speculate" about commitment to a fixed ER •Future governments cannot reverse course on peg or monetary policy No currency risk = lots more trade (hopefully!) •Frankel and Rose (2000): countries that share a currency trade 3x more than similarly related countries that do not •Engel and Rogers (1996): US states trade 22x more with each other than neighboring Canadian provinces Broader foreign policy goals •In Europe, monetary union viewed as "capstone" of 50 years of successful European integration

"Host" Countries - Is FDI a Good Thing?

Pros • Savings/capital transfer, like portfolio investment à development • Technology/managerial expertise transfer à industrialization • Less volatile than portfolio capital à fewer crises • Does not raise host countries' external debt à fewer crises Cons • Foreign control over major economic decisions within a country • "Crowds out" domestic investment / puts local firms out of business • "Enclave economies" (esp. in mining/resources)

Free Trade Areas:

Regional free-trade areas also matter in the structure of world trade. In such areas, groups of neighboring states agree to remove most or all trade barriers within their area. Beyond free trade areas, states may reduce trade barriers and adopt a common tariff toward states that are not members of the agreement. This is known as a customs union. If members of a customs union decide to coordinate other policies such as monetary exchange, the customs union becomes a common market. The creation of a regional trade agreement (of any type) allows a group of states to cooperate in increasing their wealth without waiting for the rest of the world. The most important free trade area is in Europe; it is connected with the European Union

discount rate

The interest rate charged by governments when they lend money to private banks. The discount rate is set by countries' central banks., ->Domestically, the Fed exercises its power mainly by setting the discount rate—the interest rate the government charges when it loans money to private banks. (Central banks have only private banks, not individuals and corporations, as their customers.) In effect, this rate controls how fast money is injected into the economy. If the Fed sets too low a discount rate, too much money will enter into circulation and inflation will result. If it sets the rate too high, too little money will circulate and consumers and businesses will find it hard to borrow as much or as cheaply from private banks; economic growth will be depressed.,,If interest rates are higher in one state than in another, foreign capital tends to be attracted to the state with the higher rate. And if economic growth is high in a foreign country, more goods can be exported to it.,,,Although central banks control sizable reserves of currency, they are constrained by the limited share of world money they own. Private banks and corporations control most wealth.

Intellectual property rights

The legal protection of the original works of inventors, authors, creators, and performers under patent, copyright, and trademark law. Such rights became a contentious area of trade negotiations in the 1990s.->are a third contentious area of trade negotiations. Intellectual property rights are the rights of creators of books, films, computer software, and similar products to receive royalties when their products are sold.,United States has a strong comparative advantage globally. It is technically easy and cheap to copy such works and sell them in violation of copyright, patent, or trademark laws

Organization of the Petroleum Exporting Countries (OPEC)

The most prominent cartel in the international economy; its members control about half the world's total oil exports, enough to affect the world price of oil significantly.->The most prominent cartel in the international economy is the Organization of the Petroleum Exporting Countries (OPEC). Its member states together control hundreds of billions of dollars in oil exports annually—about 43 percent of the world total and enough to affect the price significantly. (A cartel need not hold a monopoly on production of a good to affect its price.) At OPEC's peak of strength in the 1970s, the proportion was even higher. OPEC maintains a headquarters in Vienna, Austria, and holds negotiations several times a year to set quotas for each country's production of oil in order to keep world oil prices in a target range.->OPEC illustrates the potential that a cartel creates for collective goods problems. Individual members of OPEC can cheat by exceeding their production quotas while still enjoying the collective good of high oil prices. The collective good breaks down when too many members exceed their quotas, as has happened repeatedly to OPEC. Then world oil prices drop., OPEC may work as well as it does only because one member, Saudi Arabia, has enough oil unilaterally to manipulate supply enough to drive prices up or down—a form of hegemonic stability (see Chapter 2) within the cartel

fixed exchange rate

The official rates of exchange for currencies set by governments; not a dominant mechanism in the international monetary system since 1973.->One form of currency exchange uses fixed exchange rates. Here, governments decide, individually or jointly, to establish official rates of exchange for their currencies. For example, the Canadian and U.S. dollars were equal in value for many years;

service sector

The part of an economy that concerns services (as opposed to the production of tangible goods); the key focus in international trade negotiations is on banking, insurance, and related financial services.->of the economy. This sector includes many services, especially those concerning information, but the key focus in international trade negotiations is on banking, insurance, and related financial services. U.S. companies, and some in Asia, enjoy a comparative advantage in these areas because of their information-processing technologies and experience in financial management->Another especially important industry in international trade is the arms trade, which operates largely outside the framework of normal commercial transactions because of its national security implications. Governments in industrialized countries want to protect their domestic arms industries rather than rely on imports to meet their weapons needs. And those domestic arms industries become stronger and more economically viable by exporting their products (as well as supplying their own governments)

Monetary Policy: The Why, What, and How of Central Banks and Interest Rates

The rate banks can borrow from the government (for short-term lending/cash needs; credit is the "blood supply" of an industrialized economy) (Flexible) exchange rate rises (falls) as interest rate rises (falls) Changes in exchange rates and interest rates affect prices of exports/imports and decisions about consumption, investment, borrowing --> overall (aggregate) demand in the economy Central bank also thinks about whether economy is "running at full speed" or not Interest rate choices affect inflation (how fast prices are increasing) today and expectations (firms, households) about inflation tomorrow

What Causes Financial Crises?

Theory 1: "Bad" government policies • Unsustainable (but politically expedient?) economic policies - Monetary: high inflation, printing too much money - Fiscal: too much borrowing (debt), too much spending (deficits) - Regulation: too little, none at all (of banks, capital flows, etc.) Theory 2: Market/investor "panics" • Lots of money moving across borders quickly changes direction • "Easy come, easy go" • Problems in one country can spill over into others ("contagion")

Why Are Money and Exchange Rates Important?

Three functions of money •Medium of exchange •Unit of account •Store of value The role of the international monetary "system" •The "oil" that keeps the world economy operating

The Politics of IMF Lending: Evidence

US & allies have substantial influence... • Borrowers with close financial and geopolitical ties to the US/EU/Japan receive favored treatment (larger loans, fewer conditions) • Tensions between US/EU/Japan also affect lending decisions (Mexico 1995) ...but IMF bureaucrats also have power • More autonomy in "less important" cases • Staff strongly influences content of conditionality (e.g., capital controls)

The Politics of Exchange Rates (Frieden): Interests

Who wants exchange rate stability (and why)? •Internationally -oriented actors (financial sector, exporters) prefer to minimize currency movements and risk •Domestically -oriented actors ("non-tradable" sectors) prefer flexibility /monetary policy autonomy Who cares about the level of the exchange rate (and why)? •A more appreciated currency is good for consumers (travel, imports), but bad for exporters •A more depreciated currency is good for exporters, but bad for consumers...and can lead to higher inflation

The IMF as International "Lender of Last Resort"

Why borrow from the IMF? • Short answer: because no one else will lend to you! • Countries prefer to borrow on private global markets (bonds, bank loans), but sometimes can't in sufficient quantity or at a reasonable price (interest rate) • This is especially true when a country already has high levels of debt and deficits, or is experiencing a financial crisis • This is particularly true of developing countries, most of which must borrow in foreign currency

MNCs: Why Engage in FDI? Why Not?

Why invest? • Access to local markets • Access to local resources (esp. natural resources) • Reduce transportation costs • Evade trade barriers (e.g., Japanese auto companies in US South; Harley Davidson moving production to Asia): "tariff jumping" Why not? • Barriers: language, (political/economic) risk, culture • Expropriation!

9.1 Globalization and Finance

Yet globalization has had its most profound influence in the way states, businesses, and individuals deal with financial markets. Today, global financial markets are as integrated as they have ever been->This financial integration has tremendous advantages. It offers investors and businesses access to overseas markets to spur economic growth. It allows for the possibility of better returns on investment for individuals investing for college tuition or retirement. But financial integration also carries risks. An economic crisis in one state can quickly spread to another, then another. The spread of economic difficulties can quickly lead to a global economic crisis affecting small and large economies alike. Such was the case in 2008. As an economic downturn began in the United States, many Americans who had taken out loans on their homes found themselves unable to pay back these loans. At the same time, the value of their homes began to fall, so that even if banks were to reclaim them, the banks could not recover the money they had loaned. Moreover, these loans had been resold by the banks to other businesses as investments, often in other countries. Several large U.S. banks then announced that they were on the verge of failing because they had too much money tied up in these bad home loans. This was a problem not only for the banks and the individuals who could not pay for their homes but also for those businesses who had purchased these loans as investments. Given the global integration of financial markets, this housing crisis led quickly to a global banking crisis. Several British banks then announced they were near bankruptcy.->The world economy recovered in the years after 2008 but soon faced the ripple effects of a debt crisis in Europe. The financial problems there, which began in Greece and spread to Spain, Portugal, and even Italy, threatened the European Union (EU) as a whole while holding back growth in the United States

managed float

a system of occasional multinational government interventions in currency markets to manage otherwise free-floating currency rates->National governments periodically intervene in financial markets, buying and selling currencies in order to manipulate their value.->Such government intervention to manage the otherwise free-floating currency rates is called a managed float system. The leading industrialized states often, but not always, work together in such interventions.->governments step into the currency markets, side by side with private investors, and buy dollars. With this higher demand for dollars, the price may then stabilize and perhaps rise again.->Liberals point to such cooperation as evidence that states recognize their long-term interest in a mutually beneficial international economy->A successful intervention can make money for governments at the expense of private speculators.,Thus governments must be realistic about the limited effects they can have on currency prices.->More recently, pressures built up in a vastly more important case—China's currency. As in Argentina in 2001, the current policy of pegging China's currency to the dollar did not adjust to different economic conditions in China and the United States->

World Trade Organization (WTO)

an organization that begun in 1995 that replaced the GATT and expanded its traditional focus on manufactured goods. The WTO created monitoring and enforcement mechanism. ->is a global, multilateral intergovernmental organization (IGO) that promotes, monitors, and adjudicates international trade. Together with the regional and bilateral arrangements described shortly, the WTO shapes the overall expectations and practices of states regarding international trade. The WTO is the successor organization to the

Global Finance - Consequences for National Governments

benefits • Efficiency • Risk sharing • Consumption smoothing • Main source of capital for poor/developing countries costs • Greater volatility • Loss of policy autonomy? • Greater inequality? • Crises

hard currency

hard currency is money that can be readily converted to leading world currencies (which now have relatively low inflation). For example, a Chinese computer producer can export its products and receive payment in dollars, euros, or another hard, In a few countries, such as Cuba, two versions of currency circulate

Reserves

hard-currency stockpiles kept by states-States maintain reserves of hard currency. These reserves are the equivalent of the stockpiles of gold in centuries past. National currencies are now backed by hard-currency reserves, not gold, The industrialized countries have financial reserves roughly in proportion to the size of their economies.

convertible currencies

the guarantee that the holder of a particular currency can exchange it for another currency. somes states' currencies are nonconvertible ->The holder of such money has no guarantee of being able to trade it for another currency. Such is the case in states cut off from the world capitalist economy, such as the former Soviet Union., often be sold, in black markets, they are inflating so rapidly, nflation reduces a currency's value, The industrialized West has kept inflation relatively low—mostly below 5 percent annually—since 1980.

exchange rate

the rate at which one state's currency can be exchanged for the currency of another state. since 1973, the international monetary system has depended mainly on floating rather than fixed exchange rates ->Today, national currencies are valued against each other, not against gold or silver. Each state's currency can be exchanged for a different state's currency according to an exchange rate—defining, for instance, how many Canadian dollars are equivalent to one U.S. dollar.->Most exchange rates are expressed in terms of the world's most important currencies—the U.S. dollar, the Japanese yen, and the EU's euro. Thus, the rate for exchanging Danish kroner for Brazilian reals depends on the value of each relative to these world currencies. Exchange rates that most affect the world economy are those within the largest economies—U.S. dollars, euros, yen, British pounds, and Canadian dollars.->only the changes in values over time are meaningful,However, when the value of the euro rises (or falls) relative to the dollar, because euros are considered more (or less) valuable than before, the euro is said to be strong (or weak). A strong currency makes imports more affordable, while a weak currency makes exports more competitive.

Floating exchange rates

the rates determined by global currency markets in which private investors and governments alike buy and sell currencies->are now more commonly used for the world's major currencies. Rates are determined by global currency markets in which private investors and governments alike buy and sell currencies. There is a supply and demand for each state's currency, with prices constantly adjusting in response to market conditions. Just as investors might buy shares of Apple or Walmart stock if they expected its value to rise, so they would buy a pile of Japanese yen if they expected that currency's value to rise in the future. Through short-term speculative trading in international currencies, exchange rates adjust to changes in the longer-term supply and demand for currencies.->Major international currency markets operate in a handful of cities, linked together by instantaneous computerized communications, What will a state's currency be worth in the future relative to what it is worth today?

industrial policy

the strategies by which a government works actively with industries to promote their growth and tailor trade policy to their needs->In many countries, government not only responds to industry influence but also works actively with industries to promote their growth and tailor trade policy to their needs. Such industrial policy is especially common in states where one or two industries are crucial to the entire economy (and, of course, where states own industries directly). Interest groups not organized along industry lines also have particular interests in state trade policies. U.S. environmentalists, for example, do not want U.S. companies to use NAFTA to avoid pollution controls by relocating to Mexico (where environmental laws are less strict). U.S. labor unions do not want companies to use NAFTA to avoid paying high wages. However, Mexican American citizens' groups in the United States tend to support NAFTA because it strengthens ties to relatives in Mexico., Several industries are particularly important in trade negotiations currently. Atop the list is the agricultural sector->A second important focus in recent years has been the textile and garment sector. As of 2005, textile quotas worldwide were dropped as part of previously negotiated WTO deals. At the same time, China began dominating world clothing exports, with whole cities specializing in one type of garment produced for mass export to giant retailers

Currency Movements: Why Do We Care?

• Exchange rate movements have distributional consequences, like trade: Appreciation: -Bad for exporters: more expensive for foreigners to buy your goods -Good for consumers: cheaper to import foreign goods / travel abroad(and buy stuff at Target and Amazon) Depreciation :-Good for exporters: cheaper for foreigners to buy your goods -Bad for consumers: more expensive to import from abroad

The Politics of IMF Lending: Two Popular Views

• "The IMF...is a set of 'silk-suited dilettantes' given to 'champagne and caviar at the expense of the American taxpayer.'" - Sen. Lauch Faircloth (R-NC), The Wall Street Journal, 3/27/98 • "Everywhere else in the world...politicians and businessmen insist that one of the biggest problems with the IMF is that...it acts as the United States Treasury's lap dog." - David Sanger, New York Times, 10/2/98

Criticisms of the IMF

• Critique 1: "One size fits all" - Same conditionality, but different crisis causes - Yes, but: crises DO share many things in common ("It's Mostly Fiscal") • Critique 2: IMF increases poverty/inequality/austerity - Yes, but: likely would be even worse if default/ongoing crisis - "Blaming the ER doc"... - Short-run vs. long run: in long run, alternative to global finance/liberalization as development / anti-poverty path is... ___________ ? (more Wednesday) • Critique 3: IMF is politically biased - Friends of US/EU get more money w/ fewer "strings" - Yes, but: as w/ UN/WTO, this might be even worse w/ no IMF

Financial Crises: A Familiar Pattern...Boom & Bust, 1980-2019

• Financial globalization leads to massive (over)borrowing & (over)lending • Countries (and banks) accumulate large debt burdens & have trouble repaying • Threat of default scares lenders/investors, who stop lending/investing • Banks fail, & countries are pushed into severe debt/economic crises • Governments turn to the International Monetary Fund for assistance • IMF lends (often w/ others such as the EU or US), in exchange for painful and politically unpopular economic policy reform

Multinational Corporations (MNCs) and Foreign Direct Investment (FDI)

• Foreign direct investment - "Investment that is made to acquire a lasting interest in an enterprise operating in an economy other than that of the investor, the investor's purpose being to have an effective voice in the management of the enterprise." - Contrast with portfolio investment (stocks, bonds, bank loans) or foreign exchange trading • Multinational corporation - A firm that owns or manages productive facilities in 2 or more countries - International trade/investment alone ≠ FDI/MNCs

The IMF's Tradeoff: Bailouts vs. Moral Hazard

• IMF loans ("bailouts") help a borrower country pay its debts • But, they create "moral hazard" for borrowers and creditors How to choose? • Short-term cash flow (liquidity) problem or "bankruptcy" (solvency)? • No clear economic answer à ultimately, a political question

What Causes Movements in Exchange Rates?

•Changes in interest rates •Changes in consumers' tastes •Changes in relative national incomes •Changes in market sentiments

Exchange Rates

•Definition:price of one currency in terms of another •Movements :appreciation vs depreciation •When a currency goes up in terms of another currency, it strengthens or appreciates :(e.g.,if $ 1 were to buy € 1 instead of 0 .9046);When a currency goes down, it weakens or depreciates (e .g .,if $ 1 were to buy €0.50)

Monetary standards, continued

•National paper currency standard: -National currencies backed only by government commitments to maintain their value ("fiat currency") -A few major ("reserve") currencies are used as the basis for international exchange -This has been the system since 1973, with the $ and € as key currencies (also yen, pound, Swiss franc)