POLSCI 369 Final Terms

The consumer vs. producer model of trade politics

A key concept simply stating producers like high prices and consumers don't. Tells us that consumers are in favor of international trade while producers are not in favor at all. In this model, we have 2 scenarios: comparative disadvantage and comparative advantage. In comparative disadvantage industries, producer prices fall after liberalization. Consumers are happy, but producers aren't. In comparative advantage industries, producer prices rise after liberalization. Consumers aren't happy and producers are.

Export-led growth

Also called export-oriented industrialization, this focused on developing export-competitive manufacturing industries. Export-Led Growth is an alternative development strategy which rose to prominence with the success of several East Asian There are many export-led policies to make note of such as a depreciated exchange rate, export credits, subsidies to export orientated industries, and others. A good example of this would be Asia from the 60's-00's. Devaluation and focusing on comparative advantage are also key points to remember when thinking about export-led growth instances as this is one of the prime focuses.

Stolper-Samuelson theorem

Freer trade improves the real incomes of abundant factors and lowers the real incomes of scarce factors. A rise in the price of a good raises the real wage of the factor used intensively in that industry and lowers the real wage of the other factor. Capital intensive good producers will be happy while labor and land intensive good producers will be unhappy. Regarding this theory, the big takeaway is trade politics will pit relatively abundant factors of production against relatively scarce factors of production. Key assumption behind this theory is that factors are mobile.

Institutionalism

Institutionalism is cooperation through repeated, long-run interactions. Institutions establish clear standards and clarify rules and centralize monitoring of violations. Institutions coordinate states on appropriate, but limited, punishments. In international relations, the threat of punishment through institutions is very key to understand. States must carefully design international institutions charged with facilitating cooperation.

Mercantilism

Mercantilism describes the general outline of the global economic system before 1800. Emphasized the importance of a positive trade balance to exporting manufactured goods and sea power. Mercantilist states protected trade and invested heavily in military power and imperialism. In order to get better profits from their goods, they would utilize cheaper commodities available such as tea and cotton among many others.

(Sovereign) debt crisis

Occur when sovereign borrowers are unable to continue servicing their debts. For example, making repayments when they are due either through ordinary repayment or rolling over existing debt into new obligations. Debt crises have been a regular feature of international relations over time, in developed countries as well as developing. As you may assume, there are many ways as to how a debt crisis in one country could effect surrounding countries. Such crises often coincide with financial or currency crises, and so thus we see the devastating economic effects.

Mundell-Fleming trilemma

States that a country can have 2 of 3 things: a fixed exchange rate, independent monetary policy or open capital account. This trilemma creates a tradeoff between international objectives and domestic objectives. A country is only allowed to choose 2 of the 3 because of international capital markets.

Classical orthodoxy and 'the new orthodoxy'

The Classical Orthodoxy had a few implications: 1) Free trade 2) Capital mobility 3) A commitment to the gold standard 4) Government non-interference in the economy except to defend gold. Classical Orthodoxy became completely discredited because it failed major. New Orthodoxy became much more credited and relevant in international relations. This new Orthodoxy consisted of: 1) Restrictions on trade 2) Capital controls to stabilize banking and develop domestic investment 3) Floating exchange rates to permit monetary expansion and devaluation 4) Heavy government involvement in the economy as regulator.

Preferential Trade Agreements (PTAs)

Trading bloc that gives preferential access to certain products from the participating countries. This is done by reducing tariffs and other trade barriers but not by getting rid of them 100%. A PTA can be established through a trade pact and it is the first stage of economic integration. PTA's are very important internationally because they are used all over the board for world trade. PTA's can be multilateral or bilateral, between 2 countries or numerous countries.

Fixed exchange rate systems

A country that does not permit their exchange rate to float freely. They set a target value for their currency and then use interest rate increases or decreases and direct currency market interventions so that the targeted exchange rate is achieved. The exchange rate is set at a particular value and does not move. There are 4 big effects of pegging: No volatility, control of the level, monetary policy mobility and balance of payments adjustment. Changes in fixed exchange rates are intentional devaluations or revaluations — both of which intend to make it weaker or stronger. Countries with fixed exchange rates facilitate international trade and investment with stability, but give up control of monetary policy and must adjust internal prices to resolve trade deficits. Curbs inflation.

Floating exchange rate systems

A country that permits their exchange rates to vary freely, determined solely by the actions of market actors — traders, investors, etc. The currency will float up or down. There are 4 effects of floating: volatility, lack of control, monetary policy mobility and balance of payments adjustment. Changes in floating exchange rates are always referred to as depreciations or appreciations. Countries with floating exchange rates face currency instability and control, but do gain control of monetary policy and 'externally adjust' trade deficits through currency depreciation. Floating exchange rates seem to be most popular and most of the time favored.

Currency war

A currency war takes place where two countries both repeatedly devalue their currency for competitive advantage. Because both engage in devaluation, neither ultimately gains any advantage over the other. But both, in the meantime, have rendered their currency volatile and unpredictable which in turn lessens investment from abroad. Currency wars are considered to be a classic corporative dilemma.

Optimal currency areas

A literature emerges on what are the ideal features of a set of states that make a currency union workable. The key point is if there are imbalances in growth then there needs to be an effective mechanism for resolving them. Optimal currency areas are sets of countries with the ideal conditions for a shared currency. There is also supposed to be the greatest amount of economic benefit within that geographic area. This calls for a closer integration of capital markets between multiple parties. Growth cycles are synchronized so a shared monetary policy is workable; if not, free movement of capital and labor compensate for the lack of independent monetary policy.

Factor specificity

A model where factors can't move among industries as freely as they ideally could. In this case, factors cannot move freely because they are specific to particular industries. The reason as to why these factors could be immobile is because they could be technological or skill specificity, barriers to entry, or time, among others. Certain industries may also require specific and untransferable skills.

Sovereign debt

A monetary obligation owed by a government to a creditor from whom it has borrowed. Some of it may be domestic and some may be external. One could also simply call this government debt, national debt, or public debt. Some assume that sovereign debt is alike private debt however that is completely false. There are 3 distinctions between public and private debt: Sovereign governments can't be brought into court after non-payment, there is no collateral, and if debt is to be repaid in the borrowing country's currency then the sovereign power can simply print money for repayment. Considering some sovereign's do not repay their debt, it has raised the question as to well why are they credible then? Because of repeated interactions, reputation, and institutions. Sovereign debt has puzzled political economists because it is often illegal or difficult to bring sovereign states into court, and even harder to force repayment.

Hegemony

Ability of some power or authority in a system to 'lay down the law' about external relations between states in the international system. Hegemons provide public goods and compel actors to not cheat on international agreements. Without hegemons, descent into disorder is likely. To conclude, hegemons are one of the ways we make sure cooperation is achieved.

General Agreement on Tariffs and Trade

After the ITO failed, the GATT was implemented and was a broad set of principles for negotiating trade. Internationally, the GATT aims for steady liberalization, most favored nation, and national treatment. There are certain exceptions within the GATT that grant countries flexibility. Trade remedies have been understood as allowing countries to pursue interests such as reaction to illegal behavior by other countries and to protect politically sensitive industries. The GATT is important for international also because it promotes trade and acts as a regulator.

Foreign Direct Investment

An international investment by a firm or business in a foreign enterprise which involves significant and long-lasting influence over the foreign enterprise. A company takes long-term managerial control of a subsidiary enterprise across an international border. Such companies are sometimes called multinational corporations. FDI has expanded dramatically since 1970. FDI takes place when an investor establishes foreign business operations or acquires foreign business assets. FDI is most common known to happen in open economies. A good international example of foreign direct investment would be a Canadian sporting good manufacturer building a factory in Thailand.

Capital controls

Any restriction imposed by governments on the movement of financial capital across the nation's borders. These restrictions are intended to be very slow or completely eliminate those movements. These may include: restrictions on buying domestic assets, restrictions on trading or holding foreign currency, or taxes on the movement of capital. Capital controls have declined over time and there are a few primary reasons we can say are the cause with 2 of them being the end of the Bretton Woods fixed exchange rate system and governments tending to run a lot of big deficits starting in the 1970s and 80s. In countries with relatively abundant endowments of capital compared to labor, right-wing governments were much more likely to reduce capital controls than left-wing governments. In countries with relatively scarce endowments of capital, left-wing governments were much more likely to reduce capital controls than right-wing governments.

The Great Depression (1929-1941)

Began as a recession in Europe; declining prices on world agriculture markets; and the bursting of a US stock market bubble. The Fed also raised interest rates which eventually led to Europeans raising theirs too. Even after the market collapsed, Fed still held them high which led to capital movements out of Europe. Both continents raising interest rates actually harmed their own economies. Massive drop in demand, leading to deflation and high unemployment.

Capital account liberalization

Capital account liberalization occurs where a country opens up its borders to the free movement of international capital. It has potential gains (increase the supply of borrowable funds) and costs (vulnerability to asset bubbles, sudden reversals or currency crises). This has seemingly spread from one country to another over the past 40 years because of 2 mechanisms. There are changed payoffs and governments learn from peer countries about what is optimal. There are many patterns we see with capital account liberalization depending on which kind of government in office. For example, in a left-wing capital-abundant country, we will most probably see no capital account liberalization.

Comparative advantage

Comparative advantage is an economic term that refers to an economy's ability to produce goods and services at a lower opportunity cost than trade partners. This is important because it is the foundation of international trade. A country should export what they are good at and import the things that a country abroad are good at. The big implication to take away is countries always gain from free trade especially if they specialize.

Dispute Settlement Mechanism (DSM)

Considered one of the WTO's most important operations, the DSM is a legally binding mechanism for resolving disagreements about trade barriers and other read related policy questions. Member states who believe another state has violated some agreement or rule can bring a complaint to the WTO and will be evaluated by judges. Important for international economic relations because the once the DSM has been exercised, there can be consequences pushed upon another country who is at fault. These consequences carry the power of law.

Fast-Track/Trade Promotion Authority

Created by the Trade Act of 1974, Fast Track permits the President to submit any negotiated trade agreement to Congress for an up-or- down vote without any possibility of amendment or filibuster. If approved, this will only last 3 years, not forever. Bill Clinton wanted Fast Track renewal to show countries his openness in trade agreements however was declined. Came back later under the name of TPA under Bush and was used to pass many important international agreements such as CAFTA, and with Panama, Australia, etc. Fast Track was viewed as sign that the US Congress is open to a trade liberalization agenda.

Economic and human development

Development is the process of social and economic advancement of peoples and countries. Economic development has often been measured with gross domestic product per capita. There are many factors in human development: Health, Education, standard of living, happiness, meaning, etc. There are 3 explanations for growth: Exchange and specialization, accumulating of capital, technological innovation. Most human development is considered UN rights except for a few.

1970's oil crisis and recession

Egypt & Syria launched an attack on Israel to reclaim lost territory. US decided to resupply Israel with arms and aid and Arab states decided to raise oil prices. During this, oil prices went from $2 to $12. Inflation already high around world then this crisis made it surge much more and into a deeper recession. US GDP growth plummeted for next few years. The 1970s oil crisis triggered a broader economic crisis featuring high inflation and slow growth. States responded with moves to curb inflation, increase competition, and enhance openness.

Export subsidies

Export subsidies are payments to firms continent on exporting their product. They are generally banned under the WTO agreement on subsides and CVD's however some exceptions exist.

The Reciprocal Trade Agreements Act (RTAA)

Gave the president power to negotiate bilateral, reciprocal trade agreements with other countries. Authorized the President to implement new tariffs by proclamation without additional legislation. There were several institutional changes created with the RTAA that all moved towards freer trade. Roosevelt did indeed end up negotiating many agreements and tariffs were reduced with 21 countries. The RTAA also had many of the same purposes as Trade Promotion Authority today.

1980s debt crisis

High involvement of Latin American Governments in the economy. Latin American countries borrowed a lot from international creditors for industrialization in the 1960s and 1970s. The high amount of intervention lead to a big increase in sovereign debt. Latin American countries were running out of foreign reserves without foreign earnings. Many countries needed help and turned to the IMF, another reason why institutions like this are necessary. Investors stopped lending to Latin American countries and this was the beginning of this debt crisis. Affected mostly middle income countries in Latin America. There was a very high demand for borrowing funds, just like other counties like to do as well. This borrowing binge started because of ISI, a lack of export earnings, and and oil price shocks, among others.

The Ricardo-Viner model

Holds that liberalization should pit all factors within comparative advantage industries, who favor trade, against comparative disadvantage industries, who oppose trade. Key to this specific theory also is that trade preferences are driven by your industry rather than by your factor. According to evidence on 20th century, American political behavior is mostly in favor of the RV approach. Comparative Advantage Industries will be in favor of trade. Comparative Disadvantage Industries will be against trade.

Horizontal/Vertical FDI

Horizontal: oriented primarily towards serving the local market. Occurs where shipping costs or trade barriers are high and differences in factor endowments are modest. Horizontal type MNCs might even oppose trade liberalization as they are like local producers. A good example of Horizontal FDI would be Toyota Motor Manufacturing Mississippi announcing it will produce the Toyota Corolla in Michigan. Vertical: oriented primarily towards exporting back to the home market. Occurs primarily where factor endowments differ a lot, and shipping costs and trade barriers are low. Vertical type MNCs are like foreign exporters and they aim for for free access back to the home market. A good example of Vertical FDI would be De Beers operating at the Snap Lake Mine in the Northwest Territories in Canada. In regards to both FDI, there are multiple hypothesis' worth taking a look at with one being industries with vertical FDI should be more likely to feature supporters of trade liberalization at home. Industries with horizontal-type FDI are more likely to be indifferent to trade liberalization.

Institutional development

Institutional development is required to achieve growth. A lot of research has emphasized the fundamental importance of political and social institutions which provide the prerequisites for economic growth. They are the humanly devised constraints that shape human interaction. Over time, societies founded on unequal institutions tended to stagnate, as elites strove to preserve their exalted position. Institutions development also based on potential geography or other factors. Multiple different types of institutional development such as public safety, property rights, social insurance, economic stabilization, etc.

International Monetary Fund

International organization intended to monitor growth and trade deficits, and any abuses of "fixed but adjustable" exchange rates. The IMF is also there to oversee orderly adjustments of exchange rates and stabilize countries having trouble maintaining their exchange rates by lending them foreign currency.

Economic inequality

Is the unequal distribution of either income or wealth among individuals within a society. There are 3 key measure of economic inequality: Gini coefficient, 10%-10%, or the percentage of income that is earned by the top X%. We care about economic inequality because it would be morally wrong to NOT care about it and it is a threat to long term growth. Appears to have grown steadily in both the developed and developing world over the past few decades. There are 2 key facts about economic inequality in the US: wage stagnation for the median worker and a huge growth in income at the very top.

World Trade Organization

It was clear that something was needed to govern trade and enforce regulations; introducing the WTO. WTO was charged with administering international trade law, permanent forum for negotiations & creation of the dispute settlement mechanism. DSP one of most important tasks. Governments can bring disputes to WTO and will face a panel to review and enforce cooperation. Rulings made by WTO have force of law and are backed by member-states. Can place sanctions on other international countries regarding trade.

Cobden-Chevalier Treaty

Landmark treaty between Britain and France agreeing to eliminate many barriers to trade between each other. This particular treaty set in motion trade agreements across Western Europe which liberalized trade. Important to understand this treaty introduced the concept of Most Favored Nation. Impacted many treaties protecting rights of foreign traders and foreign investors.

The Smoot-Hawley Tariff Act

Passed in 1930 by Republicans, it raised tariffs across a wide array of US industries. This Act led to many other countries retaliating to protect their own favored industries. It is also an emblem of the return to trade protectionism and the overall decline in trade during the depression. This Act had the intention to help US farmers and other domestic industries during the Great Depression of the 1930's. In the end, led to trade wars.

'Race to the bottom'

Race to the bottom refers to countries lowering their environmental laws in effort to win the bid for a multinational firm placing a factory in their country. For example, a chemical manufacturing company which is considering investing in two different countries to take advantage of lower labor costs. One of the countries has very high environmental regulations while the other one has very low regulations. The country with very high regulations will then be inclined to potentially lower their regulations to attract the services of the corporations. This regulatory 'race to the bottom' is another instance of a cooperative dilemma among states. If both engage in regulatory weakening, then neither has a particular advantage in attracting foreign investment and both may end up with environmental damage.

Speculative (currency) attacks

Speculative currency attacks occur where international investors suspect that a country's fixed exchange rate isn't sustainable due to trade deficits, low interest rates, or other pressure pushing the currency down. Investors can borrow in the home currency and make a 'one-way-bet' on devaluation, which only increases pressure for devaluation. There are many steps one could take to potentially make profit when a country is forced to devalue their currency including borrowing and then waiting for certain economic situations to play out.

Stabilization and structural adjustment

Stabilization: Governments near default approach IMF, get temporary financing to smooth over immediate problems. IMF demands policy changes to ease problems: cut government spending, depreciate currency, lower inflation, and raise taxes. Designed to cut need for borrowing by cutting spending and increasing foreign earnings. Stabilization programs eventually give way to longer-term structural adjustment Structural: Longer term measures coordinated with IMF and World Bank in exchange for extensive loans and restructuring of debt. Governments must agree to domestic reforms and international reorientation, such as trade liberalization.

Industrial Revolution

Steady accumulation of innovations in manufacturing & transportation from 1760-1840. The Industrial Revolution lead to sustained and significant economic growth after 1850 internationally. Before the IR, intercontinental trade was mostly in low-weight and high-value goods but growth in railroads, ships, and ports improved the potential for trade. Industrialization increased the potential for global commerce from 1800-1850.

Tax competition

Tax competition occurs where states lower their taxes on capital in order to track capital inflows. Despite the very clear argument for why such competition might occur, the evidence for it is quite mixed. Governments are competing to retain or attract productive assets, especially mobile international capital.

Asian financial crisis

The Asian financial crisis was a series of currency crises that struck various countries in 1998. The countries shared overvalued exchange rate pegs, burst- ing asset bubbles, and growing trade uncompetitiveness. Investors launched speculative attacks and forced many countries to abandon their exchange rate pegs. There were many financial sector problems like big debts denominated in dollars and bad lending to firms. Trade deficits were too big and currencies were too overvalued. Extent of trade and financial sector problems dawn on investors which then led to capital flight (where important resources leave).

The Corn Laws

The Corn Laws were tariffs and other trade restrictions on imported food and grain enforced in Great Britain. These tended to raise the relative price of food and agriculture. Land owners in Britain liked these laws however ordinary workers were livid. Not until political reforms in the 1840's were these laws abolished. Important to IER because these laws meant to keep grain prices high to favor domestic producers and this represented British mercantilism.

The Phillips Curve

The Phillips curve plots the hypothesized negative correlation between inflation and unemployment. This relationship emerges as a key part of the Keynesian critique of classical monetary policy. The fact that higher inflation could lower unemployment came to be enshrined in economic theory as this curve. Higher inflation will decrease unemployment, at least in the short run. Lower inflation will increase unemployment. There are 2 reasons for this: making borrowing cheap to juice economic growth and making prices relatively higher than 'sticky' wages. The Phillips curve seems to have very big political implications.

Human capital flight

The exit of skilled professionals from the developing world to the developed world. Skilled labor is moving from where it is scarce to where it abundant, due to productivity differences. When this happens, this has great consequences for the developing world as they lose on valuable resources. This is also sometimes referred to as "brain drain". When this happens, this causes a large developmental challenge. A prime example would be a doctor leaving a developing country for a more rich and better future in the US.

Factor price insensitivity

The factor price insensitivity result holds that when trade is completely free, factor movements across borders have no impact on the real returns to factors of production. In particular, immigration ought to have no effect on wages where if trade is already very free. In this model, there are 2 main ideas: an old idea and a new idea. the old idea states that goods prices are determined by international markets in an economy open to trade. The new idea is telling us factor prices are determined by international markets in an economy open to trade. All in all, we get a final result that tells us a change in the quantities of factors of production therefore has no effect on factor prices if trade is already completely free. Goods are sort of like packages of factors of production and we could use a t-shirt as an example.

'Fiscal exposure' model

The fiscal exposure model of immigration preferences emphasizes that some immigrants may need to make use of public benefits. This might impact the preferences of existing users of those benefits who would be concerned about competition for scarce government resources. It also might impact the preferences of taxpayers. It impacts tax payers who would be concerned about increases in tax rates.

Political business cycles

The political business cycle is election-timed upswings in the economy or in consumer's purchasing power driven by the politicized usage of economic policies. Policies include appreciating exchange rates or loose monetary policy. By appreciating their currency, this makes citizens feel much more wealthier than they really are. This seems to happen because voters seem to be 'pocketbook' voters at times. Under this theory, politicians try to fend off any devaluation until after elections. Politicians seem to do this as they would be fighting for reelection.

Factors of production

These are what firms use to produce their goods. Usually we think of factors as broadly defined things like land, capital or labor. Most goods require a mix of many factors.

Portfolio investments flows

This is a part of the capital account and covers shorter-term investments or investments without a controlling stake. Most of the time, portfolio investments are usually stocks and bonds. A lot of the action in portfolio flows is in secondary markets for bonds and stocks, not at the site of initial issuance. There are many benefits of portfolio investments, 1 being capital can move to where it is scarce, and also many negatives, 1 being the pain of repayment and conflict surrounding repayment. To conclude, portfolio investment flows are short-term investments or investments without a controlling stake which cross an international border. They have increased enormously since 1980.

Contagion

This is where the effect in one country creates effect in others in the region. A prime example would be like the Great Depression or the Asian financial crisis. This happens because countries trade with another and devaluation by one threatens export competitiveness of all. Once investors realize one currency peg is unstable, they reevaluate all. Contagion increases the pain associated with such crises because many nations get hurt at once. Contagion can be prevented by coordination among countries on policies and multilateral agreements

Bretton Woods monetary order

This was the postwar monetary order that came about from 730 delegates from all allied nations meeting in New Hampshire. Had 3 main goals: ensure foreign exchange rates, prevent competitive devaluations, achieve economic growth. Many key international institutions formed: IMF, IBRD, and establishment of Bretton Woods System. The system also put special burdens on the US that ultimately it was unwilling to bear.

European Monetary Union

This was thought to be needed after the fall of the Bretton Woods System as something with more stability would be needed. Was created by the Maastricht Treaty. Among other things, it created the European Monetary Union which led to the introduction of the Euro in 1999. The European Monetary Union includes both the before mentioned Euro but also the European Central Bank. Misaligned exchange rates, trade deficits, and unequal growth rates have plagued the currency associated with the EMU since 2007. The EMU is also distributing economic policy responsibilities between member states and other EU institutions.

Protectionism

Use of trade policy to protect domestic industry from foreign competition through tariffs, quotas, or other trade barriers. Protectionism has 2 main goals: protecting infant industries so manufacturing can flourish. The next goal was Rentseeking: protectionism also raises domestic prices of protected goods. Important to understand because if states did not implement protectionism domestic industries would not develop, including today.

Import-Substitution Industrialization (ISI)

Was a strategy pursued across much of the developing world from 1960-1980 to industrialize and develop the economy. Replace manufactured goods previously imported with domestic production. It concentrated on replacing imported manufactures with locally made versions by using trade barriers and often state planning. High governmental intervention to keep domestic industries "in business" was needed at all times. The main problems with ISI are high taxation on primary industries and high prices for the final consumer, among others.

'The Great Depression' (1873-1896)

Worldwide recession which lasted for over 20 years, beginning in the early 1870s. Was characterized by slow and steady deflation. Cause: collapse of the Vienna stock exchange and a series of bank failures in the United States. Many countries turned away from freer trade and resorted back to protection for agriculture and manufactures. Gold Standard also contributed to this Depression because it contributed to steady deflation because the gold was becoming less valuable.

The Gold Standard

a commitment to redeem any currency presented at the Central Bank for a fixed amount of gold. Also a commitment to let gold freely enter and exit the country. Important for international commerce because it gave all countries the same currency. With the Gold Standard doing that, this increased predictability and smoothed payments. Also important because it encouraged foreign trade and investment and kept inflation stable.

Cooperative dilemma

arise with a particular set of payoffs associated with choices. If both countries cheat and do not obey to agreements, then they are both worse off. It would be better if both countries agreed to not cheat but then I cheated and you were a sucker and cooperated. This then triggers a want for both countries to cheat. This concept is important for international relations because it talks about incentives to cheat for countries and potential outcomes when one does cheat vs the other doesn't.

Credible commitment (in relation to monetary policy and/or inward FDI)

dunno

Public goods

dunno

Trade-related policies

dunno

Offshoring

moving production that was formerly conducted domestically to a location abroad, whether through FDI or outsourcing. Offshoring has proven to be politically potent in the United States. In the US, districts within states where many workers are highly offshorable will be more sensitive about trade liberalization then districts where very few workers are offshorable. When someone benefits negatively from offshoring, there are a few specific programs designed to help with assistance such as TAA. There are numerous effects of offspring with some being potentially losing control of IP or it could result in low quality. Countries all over the world do indeed, however, participate in offshoring activities.

Central bank independence (CBI)

occurs where authority to make monetary policy is delegated to the central bank. There are a few key questions for the CBI that must be answered that are associated with who is appointed, who formulates the policy and are there limits. The idea behind CBI is that you appoint some inflation-averse economist to run monetary policy. That person has a preference for low inflation, and also has authority under law to see that policy out. Central bank independence can be hard to measure and monitor, especially for outsiders like foreign investors. Thus, countries opt for a fixed exchange rate instead. CBI will be more likely to be chosen in democracies, while exchange rate pegs will be more likely to be chosen in autocracies. To conclude, central bank inflation (CBI) is one major institutional solution to the credibility problem in monetary policy.