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Stolper Samuelson
"Free trade benefits the factor of production that is relatively abundant,and harms the locally scare factor"
endowments
(HOT)Nations vary in terms of their factor endowments (e.g. capital, labor, land) and this shapes their relationship to the world economy
interests
(SST)Citizens vary in terms of their interests toward the world economy; some gain while others lose from globalization
Good Institutions
(egalitarian political regimes, property rights, rule of law, individual liberties) encourage good policies (e.g mass education) which leads to productivity improvements -factor of economic growth -Sokoloff and Engerman: where initial endowments led to greater economic equality (North America), good institutions were established (unrestricted franchise; political equality) that provided the foundations for long-run economic growth
antebellum tariffs
Political parties channeled these preferences into trade policy. Tariffs went up when Republicans (party of capital) were in power and down when Democrats (party of land) were in power;Southern landowners favored free trade while Northern manufactures wanted high tariffs
international commodity cartels
When a group of developing countries cooperates to artificially reduce supply in order to raise the price of a commodity (e.g. oil) it has formed a Cartel; -the goal was to improve the Terms of Trade by way of production limits: to raise export prices of primary products - The rationale came from Raul Prebisch • The Organization of Petroleum ExportingCountries (OPEC) is the prime example
Law of one Price
When there are no costs whatsoever to impede globalization, prices should equalize.
Navigation Acts
effective at increasing British Exports; regulated what the colonies can produce and who they can export from
Cotton Gin
eli Whitney;The gin made it possible to use heavily-seeded "short-staple" cotton, which could be grown in upland areas more readily than long-staple cotton
The big trade off
exchange rate stability vs. domestic economic autonomy
Mercantilism
existed prior to globalization Its aim was to increase a nation's wealth and power by establishing colonies and heavily regulating their trade; was the opposite of free trade based on comparative advantage; defined welfare in terms of maximizing exports, using the surplus for military investment
Free Trade
foreign trade among countries with no protectionism
Williams Jennings Bryan
gave "Cross of Gold" speech that was so popular, making him the democratic nominee for president in the 1896 election at only age 36.You shall not press down upon the brow of labor this crown of thorns, you shall not crucify mankind upon a cross of gold!"
exchange rate
is the currency of another country that is needed to carry out international transactions; the price of one currency measured in terms of another currency
factors of production
land, labor, capital, and goods.
Junkers
large agricultural estate owners of the East Elba, prussia - could no longer produce grain at competitive prices, nobility of prussia
Stagflation
the mix of recession and inflation (sustained rise in prices)
Home Bias
the tendency for there to be more domestic trade than foreign trade, all factors considered, 1. Difference in monetary currency = one must go through the process of exchanging currency to do business which crates risk.2. Language and cultural differences = demands a certain amount of knowledge of foreign culture and environment.3. Legal system differences = since transactions require contracts, one must hire lawyers that understand foreign countries legal codes (adding more expenses).SIGNIFICANCE: We can see in the case of trade between the United States and Canada. Trade between the two countries is virtually unimpeded; there are low transportation costs and low tariffs. Despite this, trade between two Canadian provinces is about 12-20 times higher than trade between the US and Canada. This shows that the home-country bias is a major influence on world markets, and that today's economy is far from complete globalization.
comparative advantage
very country gains from specialization in goods it produces relatively well and trading for goods it produces relatively less well; Heckscher-Ohlin explain that when a country has comparative advantage, it should specialize in that good. They explain that comparative advantage is based on a countries endowments (factors of production and factor intensities), explaining why certain countries have a comparative advantage in certain goods.- Comparative advantage explains why trade is beneficial for all nations, because all nations have a comparative advantage in a certain good.
repeal of corn laws
was originally a form of protectionism; were repealed because they were against britain's comparative advantage
depreciation
when the price of a currency becomes less valuable relative to another, we say that it has depreciated
appreciation
when the price of a currency becomes more valuable relative to another currency, we say that it has
Prisoner's dilemma
which two individuals acting in their own self-interests do not produce the optimal outcome; In game theory) a situation in which two players each have two options whose outcome depends crucially on the simultaneous choice made by the other, often formulated in terms of two prisoners separately deciding whether to confess to a crime.- All individuals tend to act in a way that will benefit them and not the other.SIGNIFICANCE: This theory serves to demonstrates how in the early 19th century, trade policies were put in place quite in the manner of the Prisoner's Dilemma. No one wanted to free their market out in fear of being taken advantage of, yet according to comparative advantage, this would have benefited the world economy as a whole.
anti-corn league
whose members were manufacturers,merchants, bankers, and traders
free trade in england
• Capital and urban Labor, as the owners of the locally -abundant factors, wanted free trade • Farmers/landlords, as the owners of the locally -scare factor, wanted trade protection (just as in Germany) Abundant in capital and skilled labor but land-scare, farmers in England also faced intense pressure due to the Grain Invasion • Capital and Labor, however, benefited because cheaper (imported) food meant that wages could be held down Thus, England maintained free trade in both agriculture and industry (in contrast to Germany) • Lacking the outsized political influence of the Junkers in Germany, British farmers had little choice but to exit grain production and specialize in livestock and dairy
high savings and investment
- 10% of GDP in 1960s; up to 30% in other periods - Rapid accumulation of capital (plant & machinery) -because people saved more than they spent, they were able to invest in things like higher education because of EOI
higher education attainment
- All high-performing Asian economies have experienced rapid growth in education, leading to high literacy and numeracy rates => productivity -factor of SK success
divergence
- Consists of perplexing exceptions to why some countries did not converge, but rather diverged and became highly unequal, even though they started off with vast amounts of certain land and natural resources. - Mostly this refers to colonies such as those located in Central and South America that have not caught up to the US. This is due to the economic structures that ensued from their endowments, leading to long-run economic and social outcomes that are strongly rooted and hard to change. The reason for their difference is attributed to endowments and economic structures, poor institutions, barrier to trade/globalization, and impact of colonialism. - Can be explained by short-run reversal of governmental policies, colonial expansion and long-term historical evolution of interest and institutions conditioned by the initial endowments.
2nd Industrial Revolution
- Electrical power, cheaper technologies and communication, and flurry of inventions that brought forth new products or revolutionized the production of old ones (EX: Cotton Gin) - Demand for consumer goods other than food, clothes, and shelter doubled. - The rapidly industrializing nations such as Germany and U.S. had the advantage of lateness and so were well positioned to adopt new patterns of production and consumption, making their factories bigger and better. SIGNIFICANCE: this serves to partially explain why Britain diminished as a global power during the end of the Golden Age.
the gold standard
- Fixed exchange rate regime where nations fixed the values of their currencies to gold. - Instituted in developed and developing countries during the beginning of the Golden Age, when they began to trade freely in the world market. - Important to globalization because it reduced exchange rate risk and so helped lower the costs foreign trade and foreign investment, motivating global business, as well as signaling financial rectitude and improving a countries creditworthiness.- Politically controversial because it was arbitrarily supplied by the world's supply of gold and there was no room for domestic monetary policy, hindering automatic BOP adjustments.
Conditionality of IMF
- IMF supervises borrowers and doles out loans conditioned on meeting policy targets - Conditionality in controversial but provides a "seal of approval" so that private markets will resume lending • Similar to the Dawes Plan, but institutionalized and permanent
Speculative attacks
- If speculators expect that a government will run out of foreign reserves, they will sell the currency and bring about a foreign exchange crisis (a devaluation).- Their goal is to get our of the currency while the fixed regime is still in place, still at high value.- As speculators sell the currency, this depreciates it further, allowing them to make a huge profit off of it.
Democrats (Party of Southern Cotton)
- Supported free trade because they owned vast Southern plantations that benefits from the world prices and the accessibility of imports for cheap. - After the war of 1812, manufacturers appealed for protection from British imports. The government needed revenue for national defense and debts, so agreed to protectionism. - As the demand for cotton exploded, the South's commitment intensified. - The cotton gin increased productivity, giving the South more incentive to reduce trade barriers. This led to a stalemate in Congress with fluctuating tariffs and limitations depending on who was in office.
Nathan Mayer Rothschild
- The Rothschilds were successful noble bankers with global connections and diplomatic influence. - Member of the City of London. - Reinforced international finance, the gold standard, and free trade. - Used his fortune and influence to support global economic integration and derived enormous financial benefits from the worldwide triumph of this commitment to economic openness. - He fought to keep global financial markets accessible and stable and bankrolled ambitious ventures in southern Africa to bring new investments to new markets. - Was able to bring 98% of South African diamond production under their control.
Meiji Revolution
- Until 1854, Japan was closed to the outside world (closed trade) until Commodore Perry forced them to open its ports to US trade with 4 steam-powered ships.- Tokugawa Shogunate, the last feudal warlord lost face and was deposed in the Meiji Revolution of 1868 which consisted of the restoration of the old emperor, leading to political changes such as a program of modernization by combine western advances and traditional eastern values. Meiji = enlightenment rule - led to the production of goods that could be sold in international markets. This led to Japan's industrialization and rapid growth and economic convergence with the West
Chinese Exclusion Act
1886 suspended immigration by Chinese laborers for 10 years and ultimately led to a permanent ban • In 1921, a national quota system capped immigration at 3% of pop. and allocated quotas by country of origin. Britain got 50% of the slots; Asian immigration was effectively banned
North American Free Trade Agreement (NAFTA)
Agreement that created a free-trade area among the United States, Canada, and Mexico. -in 1994 helped 'lock-in' this EOI strategy -Less than a year after NAFTA took effect, Mexico faced economic disaster • On December 20, 1994, the Mexican government devalued the peso by over 50% • The financial crisis that followed, sent inflation soaring and set off a severe recession in Mexico
Labor-intensive industry
An industry for which labor costs comprise a high percentage of total expenses. used in SK as a way to compete while using their comparative advantage which eventually leads to more people being able to produce things with higher skill
Plantation Economies
A plantation economy is an economy based on agricultural mass production, usually of a few commodity crops grown on large farms called plantations. Plantation economies rely on the export of cash crops as a source of income.
Secure property rights
A secure property right is the exclusive authority to determine how a resource is used, whether that resource is owned by gov't or by individuals. Society approves the uses selected by the holder of the property right with governmental administered force and with social ostracism. - SIGNIFICANCE: Having secure property rights allows for protection of environmental services like biodiversity/ prevention of public bads (like pollution) being produced. In relation to pollution, we see that institutions play a vital role. With good institutions, there are secure property rights, strong rule of law, and political/economic freedom that allows for people to push for environmental policies to be put in place. In relation to the Kuznets Curve (the inverted U-shaped curve relating pollution with increasing GDP per capita), countries with better institutions have a lower curve compared to countries with bad institutions. In other words, the costs of pollution and abating pollution in countries with better institutions are less than the costs of countries with bad institutions. When ordinary people have both political power and civil/economic rights, economic growth is more environmentally friendly and "sustainable".
Crony Capitalism
A system in which close friends of a political leader are either legally or illegally given business advantages in return for their political support. -poor institution in east asia
colonial exploitation
After 1870, Great Power rivalry caused a new rush for new colonies - Virtually all of Africa, and major parts of Asia, was carved up - Great Britain established the largest empire in history. Literally true that the "sun never set" on the British Empire
Bretton Woods System
After WWII, delegates met to design a new international system (promised by England to the US in the Atlantic Charter during WWII). -It established a new form of international governance to manage the financial interactions of nations. -It is the landmark system for monetary and exchange rate management established in 1944. It was developed at the United Nations Monetary and Financial Conference held in Bretton Woods, New Hampshire. -Under the agreement, currencies were pegged to the price of gold, and the U.S. dollar ($35/ounce) was seen as a reserve currency linked to the price of gold. -The system also established the IMF and to provide BOP loans and the World Bank to provide loans for economic development and reconstruction. - SIGNIFICANCE: A compromise was made with regards to the Trilemma; US had to give up capital mobility to get a fixed exchange rate and monetary policy. The Bretton Woods exchange-rate system prioritized the need for full employment & social insurance policies at the national level over complete international capital mobility. In the 1960s, high inflation caused by the need to finance the Vietnam War led to the collapse of the Bretton Woods system. The "Nixon shock" suddenly ended gold convertibility of US dollar in 1971. The currencies of industrialized countries' exchange rates were allowed to float. -prioritized the need for full employment and social insurance policies at the national level over complete international economic integration
Coalition of Iron and Rye
After the Cobden- Chevalier Treaty (1860), there was trade liberalization in Europe • Then, in 1879, Germany changed course and adopted the "Iron and Rye" tariff. From this point until the outbreak of WWI, there was a gradual return to trade protectionism in Europe - "Iron and rye" tariff was the first in a series of European tariffs resulting from demands for protection -that brought high tariffs on both grains and manufactured goods • This is an early example of a trade backlash
long depression 1873-1878
U.S. economy contracted for 65 consecutive months-Longer than the Great Depression of the 1930s (43months) or the Great Recession 2008-09 (18 months) Without monetary policy, the government had to let this long and painful depression run its Course
ARS
Areas of recent settlement
Paul Volcker
August 6, 1979 president Jimmy Carter installed Paul Volker at the head of the Federal Reserve. Volker committed the American central bank to do whatever was necessary to bring inflation down, high-interest, low-inflation, policy. He pushed real interest rates up from near or below zero to 10%. This forced companies to economize on other costs, such as labor.
collective action theory and OPEC
Cartels are inherently unstable due to the Free-Rider Problem - Each member wants to maximize it own production and profits - Free-riding occurs when a member enjoys benefits of the high cartel prices without reducing its own production - Free-riding increases individual profits but decreases cartel profits - When too many producers cheat free- ride,the cartel is unsuccessful (production increases and prices fall)
Convergence (catching-up)
Catching up: when countries have no impediments to the flow of technology and capital are behind in productivity, they should have higher productivity growth and catch up with rich countries .- Globalization should spread technology and capital to poor nations through trade, etc. allowing them the opportunity to improve their productivity and catch up with rich countries. - This process of convergence is characteristic of globalization. - This leads to a greater equality. Yet controversial because we see increasing inequality in ARS and decreasing inequality in Old world.
European grain invasion
Cheaper grain meant lower rents throughout Europe, and protection boosted rents, but the magnitudes involved differed between countries. Similarly, cheap grain increased real wages in Britain, but lowered them elsewhere. The grain invasion implied different shocks across countries, and this partly explains the varying trade policies pursued in Europe during this period.
Settlement Economies
Climate suitable to small family farms in North America. Consisted of more equal treatment of labor and income, leading to more equal political structures that were maintained in the long run. Usually grew coffee, rice or wheat because it was a more ideal small-holder crop. This led to more broad-based and equitable pattens of political growth.
Progressive crops
Crops such as corn and wheat were considered low value crops and usually grown on smaller type farms like in settlement economies. These economies usually created an equal distribution of wealth, with little exploitation, creating nations who focused more on political and socio-economic equality, notably in the long-run, eventually creating public schools for the good of the nation's labor. This explains why such nations were able to catch up and converge with globalized, rich and free trading nations.
Reactionary crops
Crops such as sugar and tobacco were considered high value crops and usually grown on plantations. Plantation economies usually created unequal distribution of income, leading to the introduction of political and legal institutions guaranteeing inequality and in the long-run, became part of the political structural order. This explains the reason why some nations, though they began like the US and Canada with abundant land, diverged from their enriching path, and became a poor nation.
pax britannica
Defeat of the French in 1815 left Britain dominant;mercantilism was no longer essential for national security- Britain's navel power meant sea lanes were safe and world markets were open for business
Mexican Peso Crisis (1994)
During the early 1990s, Mexico's inflation rate was consistently higher than the sum of U.S. inflation and the "crawling" peso depreciation • By consequence, prices of Mexican goods were rising relative to US goods, thus encouraging Mexicans to buy more imported US goods and discouraging Mexican exports • As a result, Mexico's current account deficit exploded (next slide) • Nevertheless, the Mexican government seemed unconcerned about inflation and the current account deficit -political pressure (assassination and uprisings because of NAFTA) put downward pressure on the peso -the government did nothing because of election year politics to fix the crisis and let the peso collapse in december of 1994 becoming a floating currency
Wizard of Oz Allegory
Emerald City [D.C.; Green is the color of money], Oz [Ounces of silver and gold], Dorothy + Toto [Women's suffrage], Scarecrow [Grange], Tinman [Union], Cowardly Lion [Reform politicians], "Silver Slippers" [Silver vs. gold], Munchkin ["little people" Unionists], Wicked Witches [Capitalists], Flying Monkeys [Blacks', Wizard of Oz [Ordinary man], Poppies [Drugs]. South does not exist to C.W.
Within country inequality
Falling low-skilled wages increased inequality in land- abundant, labor-scarce New World countries like Australia, Canada, and the U.S.
fixed exchange rate
Fixed regimes require constant government involvement to counteract the effects of market forces Because market forces constantly impinge on the exchange rate, the government has to intervene in the FOREX market with purchases and sales of foreign and domestic currency in order to keep the exchange rate stable ("fixed")
export-oriented industrialization (EOI)
In the 1960s, East Asian countries adopted policies that promoted exports. These nations experienced rapid growth in exports of manufactured goods and rapid economic growth and convergence. The high export volumes followed comparative advantage; countries took advantage of their heavy endowments in unskilled labor. Government policies focused on promoting export industries rather than protecting import-competing industries. South Korea went from one of the least developed countries in the world to a leading industrial nation. (labor intensive) - SIGNIFICANCE: It's hard to say whether EOI caused rapid economic growth, but helped it along with other factors such as mass education, government policies, & high savings/investment. EOI shows the benefits of following comparative advantage.
Gold Standard
Gold standard was a fixed exchange-rate regime where nations fixed the value of their currencies to gold as opposed to another currency
Heckscher Ohlin
HO Theorem is based on two suppositions: -1.Countries differ in their Factor Endowments The U.S. has a large share of the world's capital; China has a big chunk of world's labor -2. Goods differ in their Factor Intensity It takes more capital relative to labor to make computers; it takes more labor relative to capital to make shirts "A country will export those goods whose production requires the intensive use of the factor of production that it has in abundance relative to the rest of the world."
George Soros
Hungarian-American George Soros was one of the world's most prominent financiers/philanthropists. - He was the target of the Malaysian prime minister who accused him of obtaining his wealth by impoverishing others, arguing that investors like him had too much money and power. -was a strong proponent of global capitalism and currency trading. He started of by working for an international banking firm. His reputation grew as he bet billions of dollars against the British government and he won (England devalued its currency). -To many, his speculation against the Sterling made it seem like wealthy speculators had single-handedly pushed a major government to reverse its economic course. His actions showed that governments were under massive pressures to satisfy international investors, even if the domestic political costs were high. The Malaysian prime minister's attack on Soros represented a broadly held view that global capital markets had gone too far in constraining government policies. - SIGNIFICANCE: Soros' financial and philanthropic activities put him in a unique position to encourage the development of capitalism and democracy in the former Communist countries. He was also a strong supporter of open societies on both principled and pragmatic bounds, believing that the new international economic order necessitated a commitment to social justice. He argued that global capitalism would be safe only if attention were paid to national and social confers. Soros represented both the achievements and the anxieties of international finance. Global financial system moved trillions of dollar around the world with extraordinary speed and efficiency.
floating exchange rate regime
If they let market forces determine the exchange rate, they have chosen a;FOREX prices are determined by the market and can change rapidly due to demand and supply changes Once the choice to float is made, the government does nothing
steamships and railroads
Iron hulls, steam power, and refrigeration lowered costs of overseas trade; lowered the costs of internal transportation
Chiapas Uprising
January 1, 1994 - State of Chiapas erupted in political upheaval the day NAFTA went into effect - Corn imports from the U.S. under NAFTA threatened to destroy labor -intensive farming in Chiapas • Zapatistas: NAFTA a "death certificate" for peasant farmers -one of the two triggers in currency crisis besides the assassination of Luis Donaldo Colosio
King Leopold
King Leopold II of Belgium is chiefly remembered for the founding and exploitation of the Congo Free State. Disguised under a the narrative of improving the lives of the native inhabitants, Leopold ran the country using military force, exploiting the Congo's resources such as ivory and rubber. It became a national scandal and Leopold was forced to secede the territory. This is significant because as Frieden claims, this caused the destruction of much of the region's social structure. Colonialism devastate local societies, exacerbated conflicts among the inhabitants and gave the Congolese no opportunity to adopt and adapt to innovations and the world market.
Hawks and Doves
Members of OPEC are internally divided into "Hawks" and "Doves". - "Hawks" are those countries like Iran and Iraq that have large populations and relatively small oil reserves. Hawks prefer high oil prices in the short run. -"Doves" are those countries such as Saudi Arabia, Kuwait and UAE, which have small populations and large oil reserves. Preference is for moderate oil prices to prevent consumers from reducing dependence on oil by finding substitutes. -The Yom Kippur War united OPEC in 1973, when they overcame differences and achieved a four-fold increase in oil prices by cutting production. The key to success was Saudi Arabia, who absorbed the largest burden of production cuts and punished free riders by flooding the market with oil, driving prices very low. - SIGNIFICANCE: OPEC has been unsuccessful since 1973. In addition to this, when the hawks and doves came together to form OPEC, they pursued policies that led to the 1973 Oil Crisis. OPEC triggered a "wage-price inflationary spiral" where producers raised prices to compensate for higher energy costs; workers then demanded higher wages to compensate for rising costs of everything; producers then raised prices to deal with higher labor costs...repeat. "Stagflation" defines the mix of recession and inflation (sustained rise in prices) in response to OPEC policies. With so much uncertainty about prices, and with high energy costs eating into profits, firms also cut back on production and investment. This led to slow growth and high unemployment (recession).
Trade protection
Placing tariffs on foreign trade to protect domestic production, Usually entertained by the scarce factor of production because as Heckscher-Ohlin describes, they do not have comparative advantage in the world market, so much protect themselves from world prices by putting limitations on the imports of their products.SIGNIFICANCE: For example, protectionist policies in Germany towards the end of the Golden Age were supported by those who held relatively scarce resources. Germany was the breadbasket for western Europe before the Golden Age and globalization. After the land- abundant ARS/ New World began to flood the market with cheap grains Germany lost its comparative advantage in grain production in international markets. In addition heavy industry (and its laborers) pushed for industrial tariffs because they're comparative advantage was also taken away when placed on an international scale. A coalition led by Junkers (and by the president Bismarck) called the Iron and Rye Coalition.
Conquest Economies
Mines and large-estates; Native populations for labor in Mexico, Central and South America. Also very prone to unequal institutions because of large agricultural lands and hard working, low-skilled labor was in abundance, so easily exploited.
institutions
Nations vary in terms of their political institutions,and this determines which Interests are represented
Production Possibilities Frontier (PPF)
PPFshows combinations of the two goods that can be produced when the U.S. fully uses its resources Slope is negative due to opportunity costs
lender of last resort
Part of IMF - IMF loans relieve pressure to devalue - IMF loans provide time for nations to adopt policies to stabilize the currency (e.g., raise interest rates and taxes; lower government spending) -when no one else would lend to these countries -come with conditional loans
Arbitrage
People profit by exploiting price differences across markets until price differences are gone (aka "buy low, sell high") SIGNIFICANCE: Though complete equality has not been achieved today, we use this to show how close international economies have been in achieving complete globalization/ "perfect" global integration. This remains a measure in order to compare globalization today to the hypothetical case of "complete" globalization.
productivity
Productivity is output (Y) per hour of work (L), or Y/L; the explanation of why some countries are rich
capital controls
Restrictions on cross-border capital flows that segment different stock markets; limit amount of a firm's stock a foreigner can own; and limit a citizen's ability to invest outside the country. bretton woods made these restrictions -to give states more breathing room for countercyclical demand management
Consumption indifference curves
Shows different combinations of consumer goods that leave people equally happy ("indifferent"). Anything that permits movement to a higher curve (from U0 to U1) is a good thing because consumption of both goods increases Hint: free trade permits such movements
Scramble for Africa
Sudden wave of conquests in Africa by European powers in the 1880s and 1890s. Britain obtained most of eastern Africa, France most of northwestern Africa. Other countries (Germany, Belgium, Portugal, Italy, and Spain) acquired lesser amounts.
Technological change and globalization
Technology is one of the reasons that are responsible for globalization because it made shipping more efficient; The communications revolution made the costs of computing and communication fall, so that the natural barriers of distance that separated national markets grew smaller as well - in terms of time and space.- The transportation revolution contributed to the accessibility of foreign markets. With containerization, steam boat, railroads and other such innovations.- Made trade with foreign markets much cheaper in terms of the displacement of goods and shipping costs. SIGNIFICANCE: Made free trade much more profitable, leading to globalization. Connected more nations together.
Debt Crisis of the 1980s
The Debt Crises of the 1980's is tied to the 1973 Oil Crisis fueled by OPEC's four-fold increase in oil prices. The proximate causes of the Debt Crisis are: stagflation, higher interest rates, and appreciation of the US$. Stagflation caused by the Oil Crisis in the U.S. reduced the demand for developing country exports (therefore they're unable to pay off loans). The rise in interest rates to combat U.S. inflation increased developing countries' debt burden because loans were contracted on variable interest rate terms. Furthermore, the appreciation of US dollar increased the debt burden of developing countries because loans were repayable in US$. Fed Chairman Volcker's high interest rate policy strengthened the US$, and the appreciation of the dollar led to an increase in how much they owed - SIGNIFICANCE: There were two phases of resolution of the Debt Crisis. Phase 1: Maintain loans to prevent int'l financial collapse; this put all the burden on the debtors. There were IMF-sanctioned austerity programs (raising taxes and cutting govt. spending). This resulted in a "Lost Decade" of growth for developing countries. Phase 2: Debt reduction as seen in the Brady Plan of 1989. The Brady Plan reduced debt and lowered interest rates, which led to a return to growth beginning by about 1990.
East Asian Currency Crisis
The collapse began on July 2, 1997 with the devaluation of the Thai baht • The sharp drop in the Thai currency was followed by attacks against the currencies of Malaysia, Indonesia, and South Korea • All of the afflicted countries except Hong Kong devalued • All of the afflicted countries except Malaysia turned to the IMF for assistance -ignited debate on which exchange- rate regime is viable for small developing countries that are open to international capital flows • Consensus is that intermediate exchange regimes (like crawling pegs) are not viable when foreign capital flows are highly volatile -created a moral hazard that domestic banks and corporations exploited to make risky investments that collapsed when capital flows reversed
Factor endowments
The factor that each country has an abundance of
Containerization
a 20th century globalizing technology, they were uniform dimensional shipping containers that drastically increased free trade because it shortened ship time and the cost -revolutionized free trade because it allowed countries to trade food items because of the shorter time and insulation
boom and bust capital flow cycle
a period of strong economic growth followed by a period of sharp decline -consequence of latin american and asian currency crisises
Autarky
a situation in which a country does not trade with other countries
urban/rural
difference in factors of production causing conflict within countries
Cartel
an attempt by producers to cut production so as to obtain higher prices for their products •Small groups are easier to organize: -Few members makes it easier to collude -Cheating is more obvious; enforcement is relatively easy in small group settings •Groups with unequal members -One dominant producer⇒easier to collude -If a very large member wants to keep the cartel together, it can manipulate prices even if others free ride (Saudi Arabia in OPEC)
International Monetary Fund (IMF)
an international organization that acts as a lender of last resort, providing loans to troubled nations, and also works to promote trade through financial cooperation, created as part of bretton woods to deal with BOP problems
land reform
as a means to counter communist inroads - The U.S. was worried that poor peasant farmers would be vulnerable to Chinese communist ideology -in Korea and Taiwan in the late 1940s and early 1950s dissolved the landed elite and produced a very equal distribution of land and income -US and South Korean authorities confiscated and redistributed all land held by the Japanese government, Japanese companies, and individual Japanese colonists • Korean government also carried out a reform whereby elite Koreans landlords were forced to divest most of their land
soft fixed exchange rate regime
common feature of latin american currency crisis, -applied to a currency to keep its value stable against a reserve currency or a basket of currencies. Currencies with a soft peg are half way between those with a fixed or hard pegged exchange rate and those with a floating exchange rate. The main difference between soft and hard pegged currencies is that the soft peg systems provide a limited degree of monetary policy flexibility to allow governments and central banks to deal with economic shock -when currencies are reliant or pegged to international currencies
opportunity costs
cost of increasing production of one good measured in terms of foregone production of the other
short staple
dense, hard-to -remove seeds, but grows in wider range of climates (all over the "upland" South)
egalitarian institution
large numbers of European settlers working on family farms meant that the initial distribution of wealth was egalitarian • In the Caribbean and Latin America,wealth was highly concentrated in the hands of a small number of colonial elites while the mass of the population (slaves in the Caribbean; indigenous people in Latin America) had virtually nothing; In North America, the economic equality of small farmers led to political equality - Small farmers obtained political rights and democratic institutions • In the Caribbean and Latin America, the economic elite had no interest in democratic institutions since these could only threaten their continued dominance - The elite thus obtained restrictions on political participation (property and literacy restrictions) that limited the rights of the masses
long staple
long, soft fibers and easier to remove seeds, but grows only in specialized climates(Sea Island, Georgia)
factor intensity
more resources to make one specific product; the intensity of these factors dictates what kind of production will be cheapest as well, from manufacturing to agriculture. Therefore, the goods in which a country has comparative advantage illustrates the factors that they have in abundance, and what there intensity is.
convergence
narrowing the gap between rich and poor
cobden chevalier treaty
occurs when there is a mismatch between the number of voters in a district and the number of seats in the legislature
malapportionment
occurs when there is a mismatch between the number of voters in a district and the number of seats in the legislature
Organization of Petroleum Exporting Countries (OPEC)
only cartel to survive that advocates for higher prices
Globalizing technologies
telegraphs, telephones, railroads, and steamships
Francis Cabot Lowell
the Boston Manufacturing Co. in Waltham, MA (1812) Lowell toured English mills and memorized technologies (illegal to export blueprints) Lowell, MA - first planned industrial city Located on the Merrimack River, northwest of Boston (needed for water power) Drew in labor from farms, mostly young women: "Mill Girls" held 80-90% of jobs
