PLSC 440 Final Exam

Welfare state

-An ideal model: the state accepts responsibility for the provisions of the comprehensive and universal welfare for its citizens (almost impossible but can be close) -Social protection: in many cases, social protection is not delivered by the state at all, but by a combination of independent, voluntary, and government services -Textbook definition: A system in which the government undertakes the chief responsibility for providing for the social and economic security of its population, usually through unemployment insurance, old age pensions, and other social-security measures What does it do: unemployment benefits, old age pensions, and social-security measures Germany: Sweden: would want to loose your job in Sweden UK: China:

Cameron and the convergence theory

-Big society idea→ less state responsibility, more responsibility on the individual/ civil society responsibility -His justifications to his argument: financial crisis and economic recession, globalization constraints governments (race to the bottom theory), trade competition, and the effects of mobile capitalism

Geoffrey Garrett's ideas

-Cameron is from a right party -governments do have a choice: ---they choose differently as a function of partisan and interest groups politics ---left-right dimension of parties: e.g., social democrats/labor vs. Christian democrats/conservative ---labor union: density and also at which level they organize — local, provincial, or even national level ---Convergence of parties hasn't happened yet

Partisan Hypothesis

-Different political parties have different idea macroeconomic outcomes and once in office use monetary and fiscal policy to try to move the economy towards their most proffered point -on the left side of the table, labor such as labor unions work to keep unemployment rates low -capitalist, or on the right, want to have low inflation to make capitalists happy and high interest rates, make borrowing money more expensive which leads to less businesses and higher unemployment rates

Property rights perspective

-Example of Egyptian v. American homeowners: -----Many people own their homes in both countries→ in America, homeowners can take out a loan with a bank by putting up their home as collateral -----In Egypt→ traditional land rights make it hard for homeowners to prove to the bank that they own a home→ legal system doesn't enforce people to repay loans→ banks don't want to loan money

How to overcome foreign aid problem

-Giving to small communities instead of an entire government -Recipient leaders may be pro-reform -Transfer of ideas, technology, and know-how -HR deployed by international donors

Left Party

-often associated (but not limited to) with the following: -public ownership of key industries: e.g., energy and electricity; -government intervention in the economy: e.g., regulations; -redistribution of wealth: many ways to achieve this, from rich to the poor; -increased rights for workers: e.g., 35 hours work week for the French; -the welfare state: different types of though, see Esping-Andersen: The Three Worlds of Welfare Capitalism ... ; -publicly-funded health care and education; etc.

Policy Convergence

-the tendency of policies to grow more alike, in the form of increasing similarity in structures, processes, and performances; -driving forces of convergence might have nothing to with globalization ⇒ technology (Marxism), demographic changes (e.g., aging population) ... -In the globalization literature: this of a neo-liberal kind: a process wherein distinctive domestic institutions and economic policies fade away over time, giving way to common economic structures whose efficiency and universality produce super strength in the market. the spread of policies from one country to another over time, with the result that policies become similar globally or in a particular region

Reasons behind why countries can't get it right

-Principal-agent problem→ divergence in interests between principal and agent -Taxpayers give money→ lenders don't know how to spend it -Moral hazard→ donor countries want political and economic reform in lender countries, lender countries prefer things as they are because they are receiving aid

Verdier's model

-Winners in a creditor country are savers and center banks -Losers in a creditor country are small/medium sized firms and farms -Winners in debtor country are center banks and large firms -losers in a debtor country are savers and small/medium sized firms and farms

foreign portfolio investment

-a category of investment instruments that are more easily traded, may be less permanent, and do not represent a controlling stake in an enterprise. -include investments via equity instruments (stocks) or debt (bonds) of a foreign enterprise that does not necessarily represent a long-term interest: ------stocks: dividend payment; holder owns a part of the company; possible voting rights; open-ended holding period ------bonds: interest payments; ownership of bond rights only; no voting rights; specific holding period

Implications of De-industrialization theory

-depends on the nature of the domestic structural economic change -depends a lot on whether the skills travel well across different sectors → skill specificity → the more specific skill is, the higher the loss associated with losing jobs in that sector:: a high-skilled auto worker vs. a retail sector worker → specific vs. general skills -----also, it is in the interest of the worker, the employer, and the state to cooperate to make things work ⇒ corporatism ⇒ not power struggle ⇒ varieties of capitalism literature

Culture Perspective

-geography matters -regions like sub-saharan africa were bound to develop slowly, too hot for people to work during the day at certain times a year, temperate regions like europe offer cooler conditions -Weber: the Protestant Ethic and the Spirit of Capitalism; work hard ⇒ save + invest ⇒ work harder -capitalism in Europe evolved when the Protestant ethic influenced numbers of people to engage in work in the secular world, ⇒ the Protestant work ethic was an important force behind the unplanned and uncoordinated mass action that influenced the development of capitalism in Europe ⇒ later in North America

fiscal policies

-government spending and tax policies to influence economic conditions, including demand for goods and services, employment, inflation, and economic growth -Example: what happened in the UK→ increase in the regressive tax: shifting the burden to the poor -Shrinking of public sector due to spending cuts, public sector jobs lost

Foreign Direct Investment

-international investment in which the investor obtains a lasting interest in an enterprise in another country; it may take the form of buying or constructing a factory in a foreign country or adding improvements to such a facility, in the form of property, plants, or equipment. -United Nations Conference on Trade and Development (UNCTAD): the global expansion of FDI is currently being driven by over 64,000 transnational corporations with more than 800,000 foreign affiliates, generating 53 million jobs. -An investor's earnings on FDI take the form of profits such as dividends, retained earnings, management fees, and royalty payments.

Lack of freedom perspective

-lack of freedom- intellectual, political, economical, religious, cultural- responsible for underdevelopment, example the decline of the Muslim world -lack of freedom goes hand in hand with lack of economic development

Conditions for compensation hypothesis

1)Price volatility in international markets is greater than in domestic markets 2)Trade concentrates more than diversifies risk (risk comes within the domestic market) -----this is about risk in the labor market (same as in Garrett and Rodrik) BUT the main sources of risk= the interaction of sector-specific skills and domestic economic processes

overcapacity explanation

Asian economies were catastrophically overinvested in the wrong industries — e.g, cars, shipbuilding, steel, petrochemicals, and semiconductors, light manufacturing, among others

Principal agent theory

Analyses of how policy makers (principals) can control actors who work for them (agents) but have far more information. Shareholders find it difficult to monitor managers; managers have an incentive to make decisions that translate into large end-of-current-year bonuses but not necessarily into the long-term health of the enterprise; they are sometimes risk-taking: big returns today even though this means bankruptcy tomorrow ⇒generous bonuses (today) and in the worst case scenario, severance packages (tomorrow); shareholders end up holding worthless paper. - assumption→ nothing is wrong with the economy, they're not 100% responsible if they lose money

social stratification systems

Commodification (health, unemployment, old age... these can all be purchased at the market place) ----German government: yes. High social expenditure, but also associated with an old-style corporatist economic order ----UK/US/CAN/AUL: no. economic welfare to be liberated from social institutions and become dependent wholly on the market. -------Favor private remedies for social risks, even where that entails considerable -----Sweden: unemployment is job based -----People's home: everyone gets the same welfare... can this be replicated for every country? A: probably no because universal welfare is only for countries with small, homogenous, and wealthy populations

failure of the Asian governance

Crony capitalism (corruption, transparency, lack of regulation) (a) "lack of transparency" in company and bank account: institutional investors could not know the truth about the position of their borrowers; - (b) "weak prudential regulation" by the monetary authorities, which allowed banks to lend to heavily indebted companies; - (c) "poor" exchange rate management: commitment to a fixed exchange rate, which seemed to rule out foreign exchange risk, making foreign borrowing too cheap; - (d ) "moral hazard:" investors expected that the banks and firms they were lending to would be bailed out by Asian governments. Liq crunch and overcapacity.

information asymmetries logic

In contract theory and economics, information asymmetry deals with the study of decisions in transactions where one party has more or better information than the other. This asymmetry creates an imbalance of power in transactions, which can sometimes cause the transactions to go awry, a kind of market failure in the worst case.

How principal agent theory explains why financial crisis can occur even without vulnerable economic fundamentals.

Different models b/c humans aren't that rational

explain why center banks (small/medium size firms and farms) in capital poor countries are now winners (losers)?

Losers will use non market options (lobbying to stop the process) What affects chances of wining and looseing= centralization and decentralization of government (questions on lecture slides about this) Adding centralization you move from Feerdiers's table to Verdiers table

Wade says the "failure of the Asian governance" does not explain why the crisis happened

Not Crony Capitalism, rather Relationship-based economy: worked in Asia (not just Thailand) and (counter-factually) would have worked without financial liberalization... why? ----Working together (networking) help to counter the tendency toward financial instability inherent in an economy experiencing high (above-trend) levels of investment and high corporate debt-to-equity ratios. Banks do not call their loans and abandon firms so easily Governments support both firms and banks in the event of external shocks such as sharp rises in interest rates or sharp falls in demand Government support not unconditional: it goes to export champions Government industrial policy that seeks to promote certain investments ahead of others to overcome the "coordination failures" of the market investment (herding) for this model to work, one condition is to prevent foreign short-term capital (capital control)

Why political parties matter

Parities hypothesis: different political parties have different ideal macroeconomic outcomes and once in office use monetary and fiscal policy to try to move the economy toward their most preferred point

How do post industrial pressures challenge the existence of modern welfare states? pt 2 (Population ageing)

Pierson 2001: -In the OECD, the share of the population over 65 rose from 9.4 per cent in 1960 to 13 per cent in 1990 and reached 13.9 per cent by the year 2000 ... -baby boomers and pays-as-you-go system (current payroll taxes pay for current retirees): -the huge baby boom generation moves into retirement and must be supported by a much smaller workforce; the provision of health care: between 2000 and 2030, population ageing alone is expected to add 1.7 % GDP to health care expenditure in the OECD

Trade competition

Social widges (employers pay to the gov to finance employment benefits...) Want to lower social wages to lower money given to gov= can become more competitive in global market But if you give less money, then the gov will have less money for ppl (smaller gov= neo liberal Increase pressure for business to lower production cost= lower wages= firmst lobby gov to lower social wages= lower gov budget to finance welfare state= small gov= neo liberal state

De-industrialization theory

Shifts in sectoral occupation structure → risks and loss of income → popular demand for compensation → government responds → social policies/ welfare states workers can protect themselves from risks of major shifts in economic and occupational structure only through mediation of the state when skills and benefits don't travel well, and yet large numbers of people face the risks of having to make sure travels, we would expect demand for state-sponsored compensation and risk sharing to be high

failure of the international financial market

Inflows of international capital: Where does the surplus money come from? Why the thai government gave ups capital control? The whole thing starts... A rate of increase of productive capacity above trend, amounting to an industrial capacity bubbles High and rising ration of ...

the distributive effects of Financial Liberalization: why wins and who loses?

What decides winners is: resources ability to overcome collective action problem: preference intensity, size, spatial distribution, use of selective incentives the institutional settings within which they play: e.g., malapportionment and gasoline price

What do IMF conditionality's often include

When IMF or another outside lending source comes in due to bankruptcy, you have to do something they want you to do, financial reform aka-increase interest rates, increase transparency, further liberalization of market, privatize financial sector

Why financial crisis diffused

Spillover effect: Assumption from investors that there was something wrong with Thailand and that all Asian countries had something wrong with them, so people pulled out of their investment Diffusion from one country to neighboring countries Reasonable assumption because countries near each other have similar economic systems Inflows of international capital: a rate of increase of productive capacity above trend, amounting to an industrial capacity bubble; - a relatively high and rising ratio of corporate debt to equity; - an asset price bubble; - a smaller cushion of safety held by all economic agents in the grip of extrapolative expectations; - a high and rising current account deficit; a relatively high and rising external debt

Difference between FDI and FPI

The real difference between the two is that while FDI aims to take control of the company in which investment is made, FPI aims to reap profits by investing in shares and bonds of the invested entity without controlling the company. FPI can be much more volatile FPI can bring about rapid development, helping an emerging economy move quickly to take advantage of economic opportunity, creating many new jobs and significant wealth

post-industrial pressures

categorized into exogenous and endogenous factors: exogenous being economic globalization and internationalization, endogenous being changing family and gender relations and demographic shifts such as population aging and declin- ing birthrates.

behavioral economics

focuses on how cognition, emotion, and other psychological and social factors affect economic and financial decision making; move away from the simple assumption that all investors take optimal decisions on the basis of all available information; Decision making is not easy: many decisions are taken using rules of thumb, which are often formed on the basis of social convention ... or what most of the other people are doing; ⇒ everyone follows the crowd ⇒ "herding:" this gives rise to bubbles, panics and crashes

Development and foreign aid 4 perspectives

geography, culture, property rights, lack of freedom

Power Resource

anything that enables individuals to move toward their own goals or interfere with another's actions This is about political struggle. -Workers desire greater welfare benefits (lobbying and other things rather than the explenations above happen with out this) -Owners of capital prefer lower welfare spending: a preference for paying lower taxes, receiving higher investment returns, and encountering less overall government interference -Political parties matter= partisan hypothesis: -The generosity of the welfare state is a function of the struggle/bargain between the labor (and their political paties) and the capital (and their political parties) -Strength of labor mattes: union density and level of collective wage bargaining

liquidity crunch explanation

having too little cash and other current assets to be able to pay current liabilities as the liabilities mature ... asian countries borrowed too much, too fast, and invested the funds in a foolhardy manner ⇒ either in speculative projects (e.g., luxury condominium projects) or even in overly competitive export industries;

What caused the East Asia financial crisis?

crony capitalism, asian economic crisis. Thailand was lucky, it had the best economy during the crisis

How information asymmetries logic explains why financial crisis can occur even without vulnerable economic fundamentals.

lenders never know exactly who the borrower is. Problem has to do when interest rates are high, only the risk taking types will be willing to borrow (instead of risk overse). Borrowers have an incentive to take on more risk when using other people's money or if they expect to be bailed out when things go wrong which is a moral hazard. So if one can only lend money to the risk overse, then that is a risk in itself. High investment risk= high returns= BUT could lead to crisis if there are too many happening at once. Example: person who buys car has little information on it, seller has information but no incentive to relay it

Economic collapse began in Thailand, reasons why:

liquidity crunch explanation and overcapacity explanation

Policy Divergence

persistent diversity of national policies and institutions. Linking economic forces of globalization to domestic policy outcomes: trade and capital. a difference in monetary policies adopted by the world's most systemically important central banks (i.e. the Federal Reserve System, the European Central Bank and the Bank of Japan)

compensation hypothesis

trade and capital market integration is said to expose domestic economies to greater real economic volatility, implies higher incomes and employment risks for workers. This could lead to a welfare state

Asa Briggs welfare state definition

welfare state is a state whose organization power is deliberately used (through politics and administration) in an effort to modify the play of market forces in at least three directions: -minimum income guarantee -workplace injury, old age pension -social services/public services

De-commodification

when a service is rendered as a matter of right, and when a person can maintain ------Entitlement rather than commodity that must be paid or traded for (I am a ... citizen so... I am a labor union member, so I am entitled to) (ex. Education is decomodfication)

Frieden's simple table; Verdier adds another dimension: center vs. periphery- how does this change Frieden's simple model

you move to groups of people into capital (due to concentration in bigger cities... there is a flip and make table more complicated than Frieden)

How insights from behavioral economics explain why financial crisis can occur even without vulnerable economic fundamentals.

Adverse selection: select those that aren't good= select risk taking borrowers (morally irresponsible type that will invest in high risk projects because they think that if someonthing goes wrong they think the gov will bail them out (moral hazard))

geography perspective

-West was lucky to develop first, Eurasia had spread of cultivation due to its similar climate -same techniques used in Africa, however climate not the same- hot tropical climate -Eurasian societies could more easily trade ideas ⇒ they gained a huge developmental head start; -agricultural success created food surpluses that led to the establishment of soldier classes and advanced weapons -civilizations developed near the Nile, Tigris, Yellow, China, and South Asia: proximity to water, the growth of foods near the water, and more temperate climates ⇒ cities and food surpluses ⇒ social structures; flood ⇒ centralized leadership to plan and control ⇒ state institutions

How do post industrial pressures challenge the existence of modern welfare states?

--Slow productivity growth, the rise of the service sector, and welfare state strain --Service industries, especially labor-intensive one- education, child care, and heath care—are unable to match the productivity increases typical of manufacturing (how to increase child care productivity (easier to increase productivity is through industrialization) divergence between productivity increase of manufacturing and services: - ⇒ a massive shift in the employment structures away from manufacturing and towards stagnant service provision; - ⇒ slower overall economic growth because of slow productivity, hard to increase productivity in service sector→ leads to slower payroll growth, less money for taxes, which finance welfare states - slower overall economic growth impedes the growth of wages and salaries ⇒ the revenues of the welfare state depend on wages and salaries, especially in systems heavily dependent on payroll contributions --Population ageing: ---------The younger your population the more people are working and the higher the economic growth ---------India is a country with strong economic development prospects

Ricardo-Viner Model

-If factors of production are specific to each sector ⇒ low labor and capital mobility -the returns to "specific" factors are tied closely to the fortunes of the industry in which they are employed -Political coalitions form along industry lines, not class lines -----labor and capital (employees and employers) of the same industry are tied together to their specific industry; -----export vs. import-competing; -----We also have a political economy model of trade liberalization: with different interest groups but similar story --------the distributive effects of free trade: exporting sectors will be better off vs. import-competing sectors worse off -these two groups will have different interests therefore form different political coalitions -who wins at the end (one side wants free trade and other side protection) depends on a lot of factors: the power of each group; their ability to overcome collective action problem (i.e., to coordinate); and the institutional settings within which they play Sector based Import vs. import

Frieden's simple model

-In a capital rich country owners of financial assets want capital mobility because they can charge higher interest rates -In a capital poor country owners of financial assets want capital immobility because of the lower interest rates -In a capital rich country owners of sector specific assets want capital immobility -In a capital poor country owners of sector specific assets want capital mobility

Varieties of Capitalism

-Owners of capital, a preference for receiving higher investment returns, but not necessarily prefer lower welfare spending and less government interference: it depends on the skill specificity of the work force -Example of the US: ⇒ general skills by formal education + switching jobs incur lower costs ⇒ owners of capital have lower incentives to work with labor and the government ⇒ modest social policies ⇒ liberal market economies -Has to do with risk because you are entering the global market AND/OR shifts in the sectoral occupational structure (to service based economy) Dependent on the transferability of skills ---When skills are easily transferable: loss of income LOW=popular demand for compensation LOW= government responds LESS= social policies/welfare state MINIMUM ---When skills are HARD TO transfer: loss of income HIGH= popular demand for compensation HIGH= government + employers BOTH respond and collaborate= social

Reasons behind providing foreign aid

-Political strategy→ The US and Soviet Union vied for support from other countries by giving foreign aid→ at the end of the Cold War, the Soviet Union was broken up and the United States had little incentive to give aid because they had already won -Fighting poverty→ Countries provide aid to fight poverty, small countries like Denmark have little political incentive to give aid and want to help fight poverty instead -Domestic markets→ countries provide aid as a way for the donor countries to spread their businesses and economic interests, donor countries "tie" portions of their aid by requiring certain goods and services be purchased from that country, thus dominating the lender country's domestic markets

Why factor mobility matters and how to measure it empirically

-The ease with which owners of factors of production (land, labor, and capital) can move between industries in the domestic economy — inter-industry factor mobility — is important: ---if factors are mobile between industries, the income effects of trade divide individuals along class lines, setting owners of different factors (such as labor and capital) at odds with each other regardless of the industry in which they are employed; if factors are immobile between industries, the effects of trade divide individuals along industry lines, setting owners of the same factor in different industries (labor in the steel and aircraft industries, for example) at odds with each other over policy. When high (freely move different sectors) you use one model When it's low, you use another model When cross sector wage variations are high, (significant different between sectors of the economy) low mobility= use model that assumes mobility (RV- about different sectors import vs. competing)

Reasons behind why foreign aid doesn't help lender countries

-The more money received→ slower economic growth -Foreign aid could be wasted→ not used to help the poor populations, stolen by government -Foreign aid can help keep bad governments in power→ when economies are really bad and receives foreign aid, this is free money- a government can distribute foreign aid to buy support→ example: African leaders tend to give money to their birth region, foreign aid is a non-taxed revenue -Foreign aid may prolong a civil war→ is a government is out of money, it's more likely to sit down with the other side and come up with a plan. When a government receives aid, they now have the money to continue fighting the war

Stolper-Samuelson Theorem

Factors of production, while immobile internationally, are perfectly mobile within the domestic economy. Trade increases real returns for those who have more ownership over the factors of production when compared to those who have scarce levels of ownership of the factors of production having decreased real returns (this is the distributive effects of free trade). Lower levels of skill specificity will result in higher labor mobility Three factors of production—capital (bourgeoisie), labor, land—more precise those who own these factors of production these two groups will have different interests therefore form different political coalitions (interest groups) and fight to get their favorite policies; but who wins at the end (one side wants free trade and other side protectionism) depends on a lot of factors: the power of each group; their ability to overcome collective action problem (i.e., to coordinate); and the institutional settings within which they play Factor mobility move freely between econ Factor based about labor capital

Capital market liberalization

Financial market competition: if you decide to lower taxes= get more investments Smaller gov

social stratification

a system by which a society ranks categories of people in a hierarchy