International Political Economy

Speculative attacks

large currency sales sparked by anticipation of devaluation

Exchange-rate regimes

the way that a country manages its currency in relation to other currencies and the foreign exchange market floating rate vs fixed rate

Mundell-Flemming theorem

(open economy) Short-run relationship between an economy's fixed exchange rate, capital mobility, and monetary policy autonomy o Argues that an economy cannot maintain a fixed exchange rate, free capital movement, and an independent monetary policy. (unholy trinity) (can only choose a combination of 2).

What are the main proposals for improving aid effectiveness?

- Back to the Basics - Focus on macroeconomic stabilization - Limited structural reforms - Reduce potential for moral hazard. - Reduction of loans - Higher charges for loans - Shifting power to emerging countries - Regionalization

Boom-and-bust cycles

1. Over-borrowing 2. Crisis 3. Adjustment ability to finance economic growth limitations on domestic investment foreign aid usually comes at lower interest rates private investors have incentives to invest: commercial bank transfers purchase of stocks foreign direct investment

Currency depreciation/devaluation

A currency depreciates if it decreases in value relative to other currencies Governments devalue their currency when they reduce the value of the currency in terms of other currencies

Bonds

A debt investment in which an investor loans money to an entity that borrows the funds for a defined period of time at a fixed interest rate.

China's Currency Peg II

2005: China officially gives up peg, but maintains "managed floating exchange rate" 2008: china justifies undervalued renminbi with financial crisis 2010: increasing threat of currency war (see NYT articles) japan, S. Korea, Brazil and others: similar measures US, European states: quantitative easing US congress: trade retaliation measures (09/2010) 10/2010: G- 20 meeting agreement for more cooperation supervising role of IMF no agreement on numerical limit on trade deficit/surplus conflict subsided in 2011

LQ: How are balance-of-payment imbalances related to debt crises?

A balance of payments crisis typically arises when a country can't finance its foreign transactions. A country's balance of payments can be separated into two main parts: the current account (trade balance in goods and services) and the capital account (international financial transactions) Three things are noteworthy about current account deficits. First, they occur when a country's imports exceed its exports. Second, shows that a country is consuming more than producing. In such a situation, a significant share of payments for purchases goes to foreigners Third, because a country running a current account deficit consumes more than it produces, it is forced to borrow.

Currency appreciation

A currency appreciates if it increases in value relative to other currencies.

Gini coefficient

A way of measuring income inequality.Ranges from 0 and 1, 0 meaning everybody has exactly the same income and 1 meaning one person has all of the income. Uses sub-national data to understand inequality within a country and between nations (US 2011 .41, Brazil .53)

Globalization

A world economy which government policies pose few barriers to trade and which technology enables the flow of goods, services, people and capital Rapid growth in trade, rise of MNCs, internationalization of production, growth in capital flows -increase in global income, quality of goods, consumer choice, standards of living General and Partial Equilibrium models show which countries are growing

Bilateral assistance

Aid from a single donor country to a single recipient country

Capital account

All financial transfers (loans, securities, equity, FDI) Current account and capital account have to balance each other

Current account

All nonfinancial transactions (trade, services, income, unilateral okotransfers)

Time-inconsistency problem

Arises when the best course of action at a particular moment in time differs from the best course of action in general o Governments have time-inconsistent monetary policy preferences § By itself, it cannot credibly commit to low inflation- Low inflation leads to higher unemployment which is detrimental to a politicians reelection.

LQ: Explain the balance-of-payments system

BOP = current account + capital account. Current account: all non financial transactions (trade, services, income, unilateral services) Capital account: all financial transfers Theoretically BOP should be zero, current acct & capital acct have to balance each other When imbalance arises, the country must bring its payments back to balance

LQ: What is an optimal currency area?

Based off the Mundell-Flemming Theorem The geographical area that adopts a fixed exchange rate regime or a single currency within its boundaries. Optimum currency area can benefit a region by greatly increasing trade, but must outweigh the costs of giving up the national currency as an instrument to adjust monetary policy to be effective. An optimum currency area theory also maintains a flexible exchange rate system with the rest of the world Eurozone countries followed this theory. Benefited with the introduction to the euro, but experienced problems like the Greek Debt Crisis

Why has the Gini coefficient declined despite the increase in income ratios?

Because this use of national data does not take into account the inequality in countries, which is there is no global measure for.

LQ: Why did China peg its currency to U.S. dollar?

China had a weak domestic economy and wanted to focus on their export industry in order to stimulate economic growth. This peg devalued their currency which increased the demand for Chinese exports and goods at the expense of US goods. This created a widening of trade deficit for the US. But for China the peg stimulated domestic economic and global economic growth. Increasing political pressure was placed on China from the US and Europe. In 2005 China officially gave up this peg but maintains a "managed floating exchange rate." In 2008 they try to justify their "managed floating exchange" and possibly undervalued currency by saying they are on the fence of a financial crisis. Although the peg did stimulate the economy it should be noted that domestically China is now plagued by inflation, which is a predominant side effect of a devalued currency.

What are the main problems of aid conditionality?

Countries are more likely to receive greater loans, better conditions, and less sanctions only when important interests of major lenders (such as the United States) are at stake. - one-program-fits-all approach/no flexibility - focus on macroeconomic policies - delay of response - insufficient liquidity provision

LQ: Why do countries over-borrow?

Countries over borrow to finance economic growth - Limitations on domestic investment - Foreign aid usually comes at lower interest rates - Private investors have incentives to invest: - Commercial bank transfers - Purchase of stocks - Foreign Direct Investment

LQ: What is the danger of having a current account deficit?

Current acct deficit is when a country is importing more goods & services than it is exporting Think: tension between US and China about which country is running a trade imbalance this has broader consequences for the international financial system when countries run large current account deficits Balance of payment crisis result from persistent current acct deficits

Causes of: Latin American debt crisis

Debt problems emerge when foreign debt grows more rapidly than the country's ability to service its debt. A country's debt service capacity- its ability to make the payments of interest and principle required by the terms of the loan is a function of how much it needs to pay relative to its export earnings. Thus, as a country increased its foreign debt, it must also expand its export earnings to service its debt comfortably. There was an increasing demand for and supply of capital in the 1970s. Demand increased because of the 1973 Oil Shock and supply increased due to petridollars. Although there was robust economic growth, the foreign debt grew fast than LA's ability to service it. Exports failed to keep pace with debt service throughout Latin America. Government invested foreign capital in nontraded goods. Governments borrowed to buy military equipment, to pay for more expensive oil, and to subsidized consumers goods. Rising debt service ratios rendered Latin American countries vulnerable to international shocks. Three major shocks hit Latin America in 1979 and the early 1980's. Also oil prices rose sharply during this time imposing the third shock.

EMU

Economic and Monetary Union: an umbrella term for the group of policies aimed at converging the economies of all member states of the European Union.

Causes of: the Greek debt crisis

Excessive public spending, rising unemployment, inefficient bureaucracy, tax evasion, and corruption. Greece tried to cover up its massive debt, decreasing the confidence of investors. Greece was not allowed to use expansionary policies to service debt and Angela Merkel delayed their bailout package due to important regional elections.

Official development assistance

Financial assistance provided to developing countries' governments by the advanced industrialized countries and by multilateral financial institutions such as the World Bank and the regional development banks in order to finance development projects. Foreign aid can be supplied as a grant (requiring no repayment) or a loan (requiring repayment). Loans can be offered on concessional terms (below market rates of interest) or nonconcessional terms (at market rates of interest).

Foreign aid

Financial flows, tech assistance, and commodities that are #1) designed to promote economic development and welfare as their main objective #2) are provided as either grants or subsidized loans. Objectives are to: stimulate economy, strengthen institutions, support subsistence consumption of food and other commodities, but also achieve economic, military, and geopolitical goals of the donor country.

Bretton Woods system (1944-1973)

First effort to establish an international monetary regime main goal: stable exchange rates and domestic economic autonomy Four pillars: fixed-but-adjustable exchange rates (gold standard) capital controls (exchange restrictions) stabilization fund international monetary fund 1960s: foreign claims on American gold grew larger than the amount of gold that the US government held (dollar overhang) decreasing confidence in the dollar US administration unwilling to devalue the dollar (unemployment, power) german government unwilling to devalue the D-Mark (inflation) Speculative attacks Bretton Woods system collapsed in 1973

LQ: What is the trade-off between fixed and floating exchange rates?

Floating exchange rate guarantees monetary policy autonomy (important in recessions b/c govt can lower interest rates or depreciate the local currency) Fixed exchange rates provide stability and predictability, facilitating international trade, investment, finance, migration and travel are more common in developing countries/emerging markets where sharp currency volatility will be costly for them There is evidence that fixed exchange rate regimes have been beneficial to these emerging markets and shown best inflation performance, however there is a trade-off Government has to make the choice of either fixed vs floating regime, and level of exchange rate (undervalued/weak vs overvalued/strong) The Trade-Off: Rigid regimes help developing countries anchor inflation and sustain output growth Constrains the use of macroeconomic policies, increase vulnerability to crisis, impede/prevents external adjustment European emerging market countries. They enjoyed strong growth in years up to the present crisis, but increased their vulnerability to abrupt adjustments

Why are debt crisies most likely found in developing countries?

Foreign debt often grows faster than the countries ability to service the debt. They invest in nongraded goods sector rather than in export sector. They have to default on their debt, causing a crisis.

LQ: What was the Bretton Woods system? What was its goal and why did it fail?

From 1950 to 1974 the US current account fell dramatically (over 5 times initial amount) US Gold Holdings fell from 24.8 bil to 11 bil from '48 to '74, whereas World Gold holdings rose from 7.3 bil to 47 bil during the same time Why did the Bretton Woods System Fail? Requirements to stabilize system went against domestic policy goals Some were concerned about inflation, others about recessions, floats allowed them to conduct independent monetary policies adjustments to economic shocks through exchange-rate movements, rather than changes in domestic output Bottom line: Most countries opted for floating exchange rates Consequences: Gap between lowest and highest inflation rate widened exchange rates became much more volatile (b/c of short-run movements or exchange-rate misalignments) increasing externalities increasing concern about international economic activity

Foreign exchange-market

Global decentralized market for the trading of currencies. (Large international banks)

Fixed exchange-rates

Government commits itself to keep its currency at or around specific value in terms of another currency or a commodity, such as gold o Provide stability and predictability

LQ: Why do governments often fail to cooperate on international monetary policies?

Government fail to cooperate because of short term political incentives. Necessary policy adjustments are complex and increase with the number of countries involved, externalities are too small to warrant cooperation, and there are informational, bargaining, and time-inconsistency problems.

Floating exchange-rates

Government permits its currency to be traded on the open market without direct government control or intervention o Currency value is determined by market o Current predominant system (ex: dollar, euro, yen) o Guarantees monetary policy autonomy

LQ: What are the implications of the Big Max index?

Guide to show whether a currency is undervalued, overvalued, or right where it should be. It calculates this based off of PPP (Purchasing Power Parity), which is the price of Big Mac in country (X) divided by price of Big Mac in US, divide this by Fed's exchange rate (which shows percentage of over/undervalued currency) low price = country X currency is undervalued compared to US high price = country X currency is overvalued compared to US Implications/ what this shows: guide to show under & over valued currencies prices should equal over time. If they don't in the long run, it shows nations undervalue their currency purposefully

Aid conditionality

Specific policies and measures that a country has agreed to implement to resolve its BOP crisis

Big Mac Index

Guide to whether currencies are at their correct level or are overvalued (or undervalued). In the long run exchange rates should move towards the rate that would equalize the price of an identical basket of goods and services in any two countries. This is called Purchasing-Power-Parity (PPP) The name is derived from how much it costs to buy a Big Mac at McDonalds

What are criticisms of the IMF?

IMF conditionality has long been a source of controversy. Critics of the practice argue that the economic policy reforms embodied in IMF conditionality agreement force governments to accept harsh austerity measures that reduce economic growth, raise unemployment, and push vulnerable segments of society deeper in poverty. Moreover, the IMF has been accused of adopting a "one size fits all" approach when designing conditionality agreements. Consequently, critics allege, IMF policy reforms are often inappropriate, given a particular country's unique characteristics.

LQ: What is the Unholy Trinity?

Mundell-Flemming theorem unholy trinity = the three major downsides to fixed exchange rate regime fixed regimes constrain a country's use of macroeconomic policies. The "Unholy Trinity" of simultaneously maintaining a fixed exchange rate, capital mobility, and an independent monetary policy

Gold standard

In a fixed exchange rate, countries such as the US pegged their currencies to the price of Gold. Before WWI, all nationals pegged their currency to the price of gold, so all currencies were fixed against each other. This system established exchange rate stability for years. However, as supply and demand dictates, currency flows in and out of countries which creates a domestic price instability.

LQ: How are exchange-rates determined in the long/short run?

In the short run, movements of currency respond to short run differences in real interest rates (and market speculation) so that short run rates of return are equalized across borders Short-term real interest rates are another determinant of exchange rates. With floating exchange rates, a nation that has relatively high real interest rates finds its currency appreciating In the long run, currency moves in response to price differences in real income, inflation, productivity growth so that long run prices for the same goods are the same across borders Long run consideres PPP (Purchasing Power Parity), changes in national price levels determine changes in exchange rates over the long run

Financial integration

Increasing International financial and economic interdependence a phenomenon in which financial markets in neighboring, regional and /or global economies are closely linked together. info sharing among financial institutions; sharing of best practices among financial institutions; sharing of cutting edge technologies among financial institutions, etc...

Latin American financial crisis

Increasing demand for and supply of capital in the 1970s demand increased because: 1973 oil shock capital intense import- substitution strategies supply increases because... petrodollars syndication of commercial banks rapid expansion of foreign debt in latin american countries robust economic growth (avg: 5.6%) problem: foreign debt grew faster than LA countries' ability to service the debt (payment of interest and principal) LA countries invested in nontraded goods sector rather than in export sector shocks in the late 1970s and early 1980s rising interest rates in the US and Europe recession in advanced industrialized world second oil shock in 1979 in 1982 Mexico informed the US that it has to default on its debt spiral in which commercial banks ceased lending in the region, making the debt crisis worse, and spread the crisis across the region LA countries reached a point where their foreign debt exceeded their earning power and they were not able to repay it. LA countries borrowed huge sums of money from international creditors for industrialization. they had soaring economies at the time so the creditors were happy to continue to provide loans. LA debt to commercial banks increased and interest rates went up making it harder for borrowing countries to pay back their debts.

Multilateral assistance

Institutions such as World Bank, UN, EU. The assumption is that multilateral aid is needs based because of differing national interests, however in reality it depends on the politics in these institutions

World Bank

International Bank for Reconstruction and Developments (IBRD): Estd in 1944 at the Bretton Woods conference. Extends long-term loans to developing countries to finance physical and social infrastructure needed to reduce poverty and promote development. -Loans are financed by bonds that the IBRD sells in private bond markets.

IMF

International Monetary Fund: IMF is a multilateral financial institution that steps in during a balance of payment (BOP) crisis in a country. Established in 1944 at the Bretton Woods Conference

Sweatshops

Large scale production facilities that use exploitative practices and sometimes even slave labor to make their products. Most commonly found in LDC's such as Bangladesh, Indonesia; also found in countries like China and India.

Financial crisis

Largely boom and bust cycles -begins with over-borrowing from abroad to pay for domestic programs to stimulate growth (capital surplus means current account deficit) -This is fine, as long as countries are willing to lend to you, but the country becomes more risky for investors if the current account deficit is massive

International financial crisis, 2007-2010

Started in the US with the collapse of the housing bubble in 2007 commodity bubble in 2007 burst of the bubbles created huge loss for banks bank failures, foreclosures, etc liquidity crisis led to economic crisis domino effect throughout the world

Balance-of-payments

Sum of current account and capital account Accounting device that records all international transactions between a country and the rest of the world

Greek debt crisis, 2010-today:

Main problems in Greece until 2010: excessive public spending rising unemployment inefficient bureaucracy tax evasion ($30 bil/year) corruption/shadow economy (25%; US: 8%) Debt problem escalates in 2009: uncontrolled spending before elections consequences of the international financial crisis greece tries to cover up its massive debt, unsuccessfully decreasing confidence of investors further problems greece cannot use expansionary policies to service debt angela merkel delayed bail-out package due to important regional elections greek population started massive protests against austerity measures significant decline of speculator's confidence in the euro

LQ: Why did the U.S. run such a large current account deficit?

Partly because China pegged its currency against the US dollar in 1994, this increased demand for Chinese goods at the expense of US goods

China's currency peg

Pegged its currency (renminbi) to US dollar in 1994 weak domestic economy focus on export industry Increases demand for Chinese goods at the expense of US goods widening of US trade deficit increasing political pressure from US and Europe

Debt crisis

Proliferation of massive public debt relative to tax revenues As mentioned above, it begins with borrowing from abroad to finance domestic programs to grow the economy. Countries may be scarce in capital and abundant in labor, so they naturally import a lot. If they do not grow their export sector, capital account grows, and debt grows (E.G. Latin America). If investors stop lending to the country, or refuse to rollover the loans, this leads to a debt crisis because countries cannot pay back their loans. The IMF attempts to remedy this problem.

Aid effectiveness

Proportion of people living on less than $1.25 a day & Child Mortality rates in 1990 and 2005 have consistently been highest in Sub-Saharan Africa. Aid effectiveness has not been successful despite the amount of resources and effort; as it has seen almost no reduction in poverty rates. Two explanations are: #1 recipient country characteristics and #2 donor country interests and strategies

Phillips curve

Relationship between the rate of inflation and the unemployment rate (top left to bottom right) - In the short-run... o Unexpected increase in the rate of inflation will lower real wage and reduce unemployment o Unexpected reduction in the rate of inflation will raise real wages and increase unemployment o In the long- run these changes are reversed by labor market adjustments

How does the IMF work?

The IMF controls $311 billion that it can lend to member governments facing balance-of-payment deficits. Two ruling bodies-The Board of Governors and the Executive Board make decisions within the IMF. The Board of Governors sits on top of the decision making process but only meet once a year. Each member country appoints one official to the Board of Governors. Typically the finance minister or central bank president. The Executive Board consists of 24 executive director who make the majority of decisions for the IMF. Only 8 countries are have direct representation: U.S., China, France, Great Britain, Russia, Japan, Saudi Arabia and Germany. The rest are composed in a coalition of regional countries that make up the remaining 16. Both board have the same voting scheme; the number of votes each country has reflects the size of its quota in the stabilization fund. The U.S. has the largest quota and has 17% of the total votes, the EU has 16% so jointly have veto power. The IMF lends to its members under a number of different programs and these three are main facilities: → Standby arrangements are used to address short term balance of payments problems. → The Extended Fund Facility helps countries address balance of payments problems caused by structural weaknesses. → The Poverty Reduction and Growth Facility. Also the IMF achieves its goals through surveillance (monitoring assessment) and technical assistance.

What are the goals of the IMF?

The IMF was created as an institution to safeguard the stability of the international financial system. The Fund is the agent of the advanced industrial countries that provide the majority of its resources, and countries have a strong interest in guaranteeing financial stability and encouraging policies that lead to conservative fiscal management, privatization, and trade liberalization in the developing world. Its goals are to ensure cooperation on international monetary policies, facilitate the growth of international trade, promote exchange rate stability, and lend countries foreign exchange on a temporary basis.

LQ: Why is the Phillips curve important for domestic politics?

The Phillips Curve is the relationship between inflation and unemployment rates. The more inflation, the lower unemployment If you print a lot of money, you can lower unemployment If you print money it causes inflation You can also lower interest rates which increases money supply IT IS IMPORTANT because politicians can lower unemployment by printing money, causing inflation, and lowering unemployment in the short term The problem is this is only in the short term, and it will lower real wages For producers, the prices for their goods increased, so they make more profit and higher more workers In the long run, higher inflation erodes purchasing power of individuals, it devalues your currency because their is a high supply of dollars, it lowers investment overall because of low interest rates

LQ: How do you define financial integration?

The increase of international financial and economic interdependence, for example, monetary policy in one country would affect the economic welfare of another.

LQ: What are exchange-rates?

The price at which one currency is exchanged for another which is determined in the foreign exchange market by supply and demand for that currency There are two types of exchange rates (though some fall in between) Fixed exchange rates- pegged to another currency or standard such as gold Government maintain this fixed price by using and buying other currencies in the market Government holds a foreign exchange reserve, which is a stock of other currencies and buys and sells using this stock to maintain the fixed rate (determined by supply and demand) Floating exchange rates- currency value is completely dependent on supply and demand. This means that the value of the dollar against the RMB is established by the supply of US dollars vs how many people are trading them for RMB. If there is a high demand for dollars-more people are trading RMB for dollars-than the dollar appreciates against the RMB and the RMB depreciates against the dollar. Fixed but adjustable exchange rates- similar to fixed, but governments can change the fixed price under certain circumstances Managed float (most current)- similar to floating exchange rates, but governments intervene in the market to influence the value of their currency against another currency

U.S. financial crisis, 2007

Threatened the total collapse of the financial market -Began as a result of the repeal of the Glass-Steagall act, which removed separation of investment banks and depository banks -Investors now would make money off of the loans provided, which led to more risky loans -Collateralized Dept Obligations were essentially packages of risky loans sold to investors -Investors were often hedge funds or pension funds looking to make a profit, but were limited by regulations, which looked at the rating system to see how safe the investment was -Investors then sought insurance if the loans went bad from Insurance firms such as AIG, which often insured more capital then they had -This is a perfect example of a boom-bust cycle because the price of US housing market was always rising, so people would borrow against their homes, at least until it burst

Securities

Tradable financial assets of any kind

IMF conditionality

When a country borrows from the IMF, its government agrees to adjust its economic policies to overcome the problems that led it to seek financial aid from the international community. These loan conditions also serve to ensure that the country will be able to repay the Fund so that the resources can be made available to other members in need.

BOP adjustment

When an imbalance arises, the country must bring its payments back into balance

BOP imbalance

When current account and capital account do not balance each other (sum to zero)

Exchange-rate equilibrium

When the demand for a currency is equal to the supply of the currency. This means, for example, the price of exchanging dollars for RMB is stable (though it's not, it fluxuates, especially since the RMB is now appreciating against the dollar)

LQ: What is the effect of the time-inconsistency problem for floating exchange rates?

With a floating exchange rate, governments are given more flexibility in domestic monetary policy such as interest rates to increase money supply, and are often more beholden to domestic pressures from interest groups from sectors. (E.G. Import sector wants floating and weak currency because of competing producers. If floating, they can change currency value to become stronger than their competition such as China)

What are different types of foreign aid?

World Bank European Union Non-government Organizations IMF loans

Has globalization led to more child labor/sweatshops?

Yes, globalization pressures countries to use child labor and sweatshops to exploit a competitive advantage in the production of labor-intense goods at very low costs. However, globalization also leads to greater growth and higher income generally reduces child labor. Countries that have low GDP tend to on average have more child labor

Has globalization increased inequality?

Yes, the richest have become richer, and the poorest countries have become poorer No, some poor countries have grown at a faster rate in the last 25yrs than rich countries which is why inequality has not risen (Africa still have 50% of population below poverty line at $1.25/day). Between 1980-2000, the number of people in poverty has fallen 375 million people.

Should we improve labor conditions in developing countries by introducing international labor standards?

Yes. If we regulate labor conditions this can drive up costs within a country, which affects that countries competitiveness. However, there have been success stories of international pressure towards MNCs and the factories that supply their products which have led to better working conditions.

Why is there no clear relationship between foreign aid and economic growth?

a country might not use the financial aid at hand effectively, conditional aid might not be well-directed/impose on sovereignty

Optimal currency area

a geographical region in which it would maximize economic efficiency to have the entire region share a single currency.

Stocks

a type of security that signifies ownership in a corporation and represents a claim on part of the corporation's assets and earnings.

Austerity measures

attempts to reduce government spending in an effort to control public- sector debt, particularly when a nation is in jeopardy of defaulting on its bonds. Such as an increase in retirement age, a hiring freeze in public sector, or a 10% increase in tobacco tax

Nonconcessional lending

any other funds provided by a donor, which are subject to IMF's market- related interest rate, known as the "rate of change," and large loans carry a surcharge

Why do states give foreign aid?

as an investment/ soft power - to stimulate economic growth through building infrastructure and supporting productive members of society Additionally, there are political pressures to invest in countries such as Israel, Iraq and Afghanistan that have little to do with need-based aid

Private voluntary assistance

delivering federally funded foreign assistance Active in humanitarian assistance and development work overseas

European debt crisis, 2010 - today

fear of default in Greece, Spain, and Portugal -fear that government spending is unsustainable (even in U.S., U.K., and Germany) -$1 trillion rescue package will increase European debt/inflation -stronger dollar against euro weakens export in the U.S. (Eurozone buys 14% of U.S. exports) -indirect fear of bank failure through connections with German banks -decrease in demand for risky assets (stocks) -increase in demand for gold

Concessional lending

financing that offers flexible or lenient terms for repayment, usually at lower than market interest rates provided by gov. agencies and not by financial institutions

Hot money

flow between financial markets as investors attempt to ensure they get the highest short-term interest rates possible. financial capital held in short term instruments that can be quickly liquidated at the first sign of financial trouble

Exchange-rates

price at which one currency is exchanged for another Determined in the foreign exchange- market by supply and demand

Asian financial crisis

problem: liberalization of financial markets in the 1990s relative importance of traditional bank loans declined relative importance of securities - stocks and bonds- increased securities can be withdrawn very easily decreases investor risk increases volatility of capital flows! 'hot money' causes: weak banking sector: asian banking sector as intermediate between domestic and international markets foreign loans were used to provide loans at higher interests at home short-term foreign loans (denominated in US dollars) used to finance long-term loans at home Why did they pursue such risky strategies? profits as intermediaries belief that government would bail them out (moral hazard) currency devaluations in 1997 market failure started in Thailand as a result of the government's decision to no longer peg the local currency to the US dollar currency declines spread rapidly causing stock market declines, reduced import revenues and even gov upheaval

Causes of: the Asian financial crisis

the problem was rooted in a liberalization of financial markets in late 1990's. The causes came from a weak banking sector. The Asian banking sector was an intermediate between domestic and international markets. Foreign loans were used to provide loans at higher interests at home! So short term foreign loans denominated in US dollars were used to finance long term loans at home. This is of course risky but they had the belief that the government would bail them out (moral hazard). Then in 1996 and 1997 there was an appreciation of Asian currencies against the Yen, an increase in US interest rates, and a decline of real estate prices... Foreign banks LOST confidence and refused to roll over debt. Pulled out from Asian stock markets this crisis then spread like a domino effect. SIMILARITIES BETWEEN Asian and Latin American crisis' → both countries attracted capital inflow, positive short term effects led to over-borrowing, no incentives to invest the money and crisis induced by loss of trust in ability to service debt... DOMINO effect.

Why do many donors prefer to give aid conditionally instead of in form of budget support?

to prevent misuse of aid/misallocation of funds