Political Science 341-0 International Political Economy

Inflation after joining

Adoption of euro eliminated exchange risk so capital poured in reducing interest rates; public debt still above euro average

Richard Cobden's anti-Corn Law League

Battled for repeal; Peel government proposes real four times between 1842 and 1846

Deindustrialization that resulted from this

China, india, metropole countries, and periphery even share of outputs around 1846; but then metropole countries share of manufacturing output up; for periphery, collapses; result of double standard

Britain and Italy's black wednesday 1992

Currency crisis eloper 1990s - capital movements and difficult managing relationship with capital markets at core of problems; result was both had to abandon EMS in 1992, set aside domestic goals for benefit of all

Result of Argentina crisis

Dismissed as series of problems exacerbated by mistakes in developing country; not touching developed countries

Benefits of competitive devaluation

Dollar devaluation helped US recover in part by giving it competitive edge; but also spillover benefits for trading partners - bu increasing value of gold US had, devaluation gave US government officials room to inject liquidity into banking system and loosen credit (lower interest rates); the resulting rise in prices reversed deflationary psychology and got Americans spending again; global expansion of credit gave world economy boost

Why did South Korea and Indonesia not do the same?

Double standard

What does government do to save financial system from total collapse?

Engage in bailouts (taking on some toxic assets to rescue banks, infusions of credit from Fed into banking system to restart interbank lending, fiscal expansions to reemploy people and restore confidence in economy and raise demand)

EMS

Established 1979; european exchange rate mechanism (ERM) at core

Says that dependence on dollar as basis of trade flows and financial reserves has become

Excessive creating unbalance dysstem

Those who left gold standard earlier

Had more prominent role for socialist or left wing parties; those who stayed on longer more conservative and business power

Mexico currency crisis 1994-1995

Mexican peso to dollar exchange rate management system; had band - not fully fixed but tightly constrained degree of flexibility around clear target to keep it at parity with target; pressure on peso by speculative traders in FOREX markets - as speculative pressure creeps up to upper limit, monetary authorities have to enter markets and buy up excess pesos to have stockpile of US dollars, essentially ran out of dollars and got massive devaluation

Increases in protections now

Minor so far - global supply chains making world more integrated, harder to do this

Do most countries have floating exchange rate?

No

What did Germans do?

Persuaded economy booming and monetary policy should be steered towards avoiding inflation regardless of impact on other countries; preference was for other countries to be devalued against theirs; resulted in overvaluation of their currency and depressed economic growth

Demand for liquidity met through

Primary reserve currency - currency most widely used in international transactions and held as asset; normally responds more to demand for liquidity than non-currency based system like gold standard; based on credit - confidence and trust critical to stability

Excludable, divisible (rivalrousness)

Private goods

IMF

Provided loans to govs in financial trouble - conditionalities to address underlying causes; disbursed loans over time in tranches, after verifying that promised reforms were being implemented on schedule; after asia, became kinder, less obsessed with austerity

Moderate inflation did what

Reduced long-term interest rates and cost of borrowing

3 periods (in the official history) of international trade

Rise of trade (1843-1913); fall and return to protectionism (1919-1939); rise of trade/liberal economic order spearheaded by US (1945-2020?)

Fixed exchange rate v floating

Set firmly by monetary authority with respect to foreign currency (tied to currency of another country or gold price); determined in FX markets according to supply and demand and fluctuates

Public spending

Soared, deficits increasing; GDP growth slowing

State logic

Socially purposive logic of allocation; value-conscious

3 policy goals

Stable exchange rate, free capital flows, control over monetary policy; capital controls had let them have both stable exchange rate and control over monetary policy but with capital controls can only have one or other

Sum up Schweller - maxwell's demon and the golden apply: global discord in the new millennium

Talks about global public goods - only hegemonies can do this; talks about declining hegemon and circumstances where this can happen

Sum up Blustein - misadventures of the most favored nations

Talks about history of GATT and WTO; Zoellick and Lamy; 2003 negotiations and Imboden, G-20

Transnational production chains

Technology especially; china becoming crucial link exporting intermediate goods manufactured from imported inputs; if kept up trade barriers, inputs would be expensive and make china less competitive

Financial Stability Board 2009

Toothless though; wanted create stronger international regulatory institution; but killed by lobbying; essentially makes recommendations but little persuasion power and resources

Australia 1996

.8 US dollar; not trying prop up currency though - let it fall; investors could invest cheaply in solid economy - Australian miracle; despite dependence on asian markets, Australia boomed for year

Second attempt

110 billion - still not debt restructuring; larger safety net and austerity package; 110 bil over 3 years, 46% of GDP in 2009 and 3x larger than first; enough stay out of markets for there years plus added 10 bil for safety of banking system; euro area 80, IMF 30, greece 5% interest rate and repay principal of loan over 5 years; loans disbursed in tranches between may 2010 and 2013, greece able roll over 100% of existing debt in private market by 2013, benign repaying EU-IMF loans in 2013 and finish repaying 2018; reduce fiscal deficit further; lift regulations limiting efficiency

When did turmoil of depression stop?

1936 when France, UK, US concluded pact to halt further devaluations

Last holdouts break legal links to gold standard when

1936-1937; at that point, world economy into deep distress, chaotic; most shifted to currency controls, abandoned adjustment rules; zones or blocks of influence, barriers through tariffs

Populism in 80s

1981 PASOK win - social protection, income redistribution; increased real minimum wage and pensions, large raises to public sector employees, passed laws favored unions, establish universal free national health system; automatic wage indexation - prevent inflation eroding wages; increased weight of pub sector; bank of greece under direct political control

90s and joining EU

1992 Maastricht treaty creating EU and calling for common currency; criteria strict on paper but not in practice (budget deficits less than 3% of GDP and national debt less than 60% of GDP; inflation no more than 1.5% higher and long-term interest rates no more than 2% higher than in the lowest-inflation members; but weighted majority vote of member governments decide which could enter - political criteria overcame); pub debts of italy, belgium twice allowed

To join EU, Greece

1993 PM papandreou and Simitis both of PASOK; cut deficits, controlled money supply, stabilized exchange rate, began liberalizing economy; interest rates first soared but then fell as reforms continued; broadened tax base, new tax authority first computerized tax-collection system; primary budget balance improved; EC declared may 3, 2000 met requirements except total government debt (not unique to greece), joined in 2001

History 1989-1995

3 shortcomings (insignificant since stats wield only real power, weakness of UN - but policies emerging different from what powerful brokers wanted; anarchy - but prefer relative gains only when two major players (arms races, monopolies), most multilateral; cooperation not harmonious and emerges out of discord - but bargaining problems could produce obstacles to achieving joint gains)

Hecksher-Ohlin trade theory

A country will export goods that make intensive use of the factors of production (land, labor, capital) that it has in abundance; countries with abundant land will make farm goods the require lots of land; countries with capital will export capital-intensive products, such as manufactured goods

China now

Able to keep in place some degree of capital control - does not flow freely out of system; but comes at great cost, not democratic and uses coercive pressures to retain capital

Stable orders need rules of adjustment/legitimate rules of game

About how burden of adjustment distributed; on both surplus side and deficit side so brought back in line and closer to balance; management of country's exchange rate key

Britain in 1846 - what had in abundance

Abundant in capital and labor; scarce in land

Why did the US want China to join?

Access to developing Chinese market; cheaper goods, cheaper labor; propel china towards market economy and maybe democracy (idea at time, more FP alignment, cost of fighting higher); IP rights; improve transparency; weakens possibility of NIEO revival

Tension with west that resulted from China's accession

Acquisition of overseas oil - energy needs expanding but supply dwindling; China bought ownership of shares in natural-resource companies in other countries and extracted and refined its own oil (strategic mercantilism - alarmed other countries; also striking deals with Iran, Sudan - makes it difficult for UNSC to step in there); US tried to convince China to purchase oil on market citing high premium it paid to obtain control over oil assets but not buying it - majority of Chinese oil imports had to travel through sea-lanes over which US navy had control, worried US could blockade this if conflict with Taiwan

Britain and catching-up

Activist policies to promote infant industries; 1721 walpole PM, aggressive ITT policies, export subsidies, protection for infant industries; moved to free trade with repeal of corn laws in 1846

3 elements of international monetary order to be stable

Adjustment rules; liquidity; confidence; collapse when one or more of these stopped functioning

History of WTO

After Depression - mitigate egg war between US and Canada, reaper damage, multilateral institution to open markets and limit ability to restrict imports in future; tariffs lowered and bound (never raise above certain levels); most favored nation (MFN) treatment, national treatment (treat imported and locally produced goods equally at least after foreign goods entered market); GATT then WTO but GATT no teeth - country found in violation could refuse recognize ruling; WTO came out of Uruguay Round - lower trade barriers, expand into agriculture, services, intellectual property protection, modernize international trade rules

Economic reforms in China since 1978

After Mao died - xiaoping; unprecedented growth rates and improvements in living standards from 1978 to 2002 even though still communist party; household responsibility system (allocated land-use rise to households and allowing them to keep above-quota production for sale in private markets); township-village enterprises (TVEs; local collectively owned firms that recruited farmers into factories; more efficient use of rural labor); SOEs (greater autonomy and profit-retention rights; but dual-track pricing - goods produced above quota mandated for delivery to state could be sold at market prices elsewhere)

Markets

Allocatively efficient but amoral; more efficient at allocating scarce goods and resources than any other form of social organization; but amoral - don't make value or social judgements; this logic conflicts with logic of the state; price signals don't make choices about whether something is socially valuable or not

Policies of adjustment in gold standard order

Allure of automaticity (adjustment rules operate automatically provided accept inviolability of peg to gold); privileged capital-owners' interests over workers (wages have to come down for deficit countries to get back on external balance line, also credit more difficult to get, price of money higher, difficult for working class); capital owners able escape real burden (earn returns on capital they own - put in economy where interest rates higher; capital mobility under gold standard, no capital controls), what undid gold standard

International Trade Organization (ITO)

Ambitious; global in scope, highly detailed rules for what countries should be allowed to do/prevented from doing when negotiating with trade partners, 1949; but failed because Congress did not ratify it in 1950 - midterms brought lots of isolationist republicans into congress (did not want US bind itself to document like this and constrain sovereignty), and business community in US began to mobilize to reject it (though agreement creates too much obligation on part of US to redistribute globally some resources to developing world)

State-market interaction at the international level involves multiple sovereignties in___environment

Anarchical (no world state)

Adjustment rules

Anarchical system - sovereign states as key units in that system, problems associated with large and chronic imbalances, differing social visions and policy preferences manifest in payments imbalances (may pursue policy agenda in support of their social vision that leads them to consume more than sell to rest of world (US as example) manifests as current account deficit (US can do this because can borrow from rest of world), other countries trade surplus because different policy priorities); having this over long period of time create problems and destroy stability of international monetary order

Exchange rate in Mexico

Appreciation due to capital inflows made achieving stable rate more difficult; inflation higher than target; savings fell along with increase in investments - driven by expansion of credit that got out of control in absence of regulation, lack of transparency and regulation

Officially pegged

Argentina (1991-2001), Baltic's (pre-eurozone membership), members of the European Monetary Systems (1973-1993); announced to world

2 arguments for China hurting western economies

Argues yuan (fixed) undervalued giving chinese exports unfair advantage (cite US current account deficit with china and china's buildup of foreign reserves as evidence); chinese imports costing US and EU jobs (overwhelming majority of american states lost 15% o manufacturing jobs as manufacturing imports from china surged across US border)

Breaking point in 2007

Asset prices across board plummeted; lehman brothers almost brought down US banking sector and ushered in global crisis; series of policy mistakes in crisis resolution followed; non-system reset, not reform, losses absorbed by bailing out banks; IMF on front line and stirred popular discontent

Limits as to how much debt can take on

At some point, domestic spending constrained and US current account deficit automatically decline; thought happening with recession - consumers saved more than spent; but with recovery, imbalance emerging

US domestic priorities for growth and employment have resulted in

Attitude of benign neglect vis a vis the dollar; results in weaker dollar - current strength of dollar as key reserve currency undermining this stance

GATT history

Backup plan proposed by US and UK in case ITO failed, geneva 1947; meant to be temporary but existed for 50 years until WTO; voluntary arrangement, weak in terms of structure (small administrative body, loose set of guidelines)

British regulation of cross-border loans

Bad for british banks - some realize can get around these controls by setting up deposit accounts denominated in non-british assets; take deposits of US dollars, francs, use those in economic exchanges but non-british denominated currency deposits held by british banks

Depression 1929

Bankers stopped lending to Germany and UK; two countries had to cut back spending; no counteracting force on France and US resulting in increased spending there; this caused contractionary jolt to global economy

Foreign competition in the banking sector

Banking sector most closely watched - critical role in functioning of entire economy; four large state banks 67% of total bank deposits, arm of government during communism; tried to remedy by establishing 4 main commercial banks and relegating policy lending to other institutions - but lack of experience, accumulated bad debts; china didn't want to allow foreign banks too much freedom because thought would prompt financial collapse (chinese customers transferring savings to more reliable foreign banks); thought foreign expertises best - spent billions in cleaning up balance sheets to make more desirable to investors, attracted foreign investors; but worries about banking sector

When do things fall apart with Bretton Woods - US and deficit

Begins develop chronic deficit every year by early 60s - lots of projects; but US can do that because such strong international demand for dollar, doesn't have to raise taxes to slow down economic performance and cause economic pain for people; makes France mad Us has this privilege no one else has and is introducing imbalance so defects and sells all US dollars had for gold

Resemblances between easing in 2010 and dollar's fall 1933

Both to raise inflationary expectations, boost prices, revive spending behavior; both improved competitiveness of US' goods - accusations of currency manipulation

Official history of capitalism

Britain - from 18th switched to free trade, new liberal world economic border; WWI - trade barriers put up, US Smoot-Hawley 1930; but then WWII and GATT talks liberalization made progress, interventionist policies abandoned in 80s with neoliberalism; yet economic growth stagnating and failing in developing countries

Birth of global capital in London 50s

British banks financial force - made lots of money by making sterling available to people transacting outside of the UK, UK and US widely used as international currencies (J might be trading with company in new zealand but in denominating their trade use british pounds, so banks made it available for free); tipping point when sterling falls and dollar rises to supremacy in 60s - british government says we need to hold onto pound sterling not being used as widely and worried about devaluation (people get rid of it as it declines, will regulate and stop british banks from making these cross border loans)

Turning point of 2008

Brought to light problems of global markets, questioning free market doctrine and governance that ensures functioning of global capitalism; raised issue of setting up new system like new bretton woods to underpin functioning of global markets with rules to avoid excessive risk-taking and moral hazard; also undermined credibility of US' suitability to lead a liberal rules-based economic order

Structural challenges

Business climate judged inhospitable; 15 procedures start small business; industrial structure strengths and weaknesses (agricultural declined; industrialization declined; manufacturing concentrated to low skill sectors); hourly productivity below average; greek deficit 10% fo GDP but germany 5% trade surplus; exports falling, german rising; German labor costs rising 16% but greek 40%

Reforms facilitating foreign enterprise in China - implementation

By 2006, China made solid effort toward full implementation of commitments to foreign enterprise; china became world's largest recipient of FDI (foreign direct investment); increased FDI also helped china through spillovers of technology and human capital

FDR's decision devalue dollar

By allowing US to ease credit conditions at home; most important factor bringing US out of depression; when US abandoned pretense of international cooperation; result was backlash against globalization, tariffs, import controls, restrictions on capital flows

Decline of NIEO

By late 70s, movement disintegrating; US always opposed it and sought to undermine it; economic conditions more difficult (ISI not successful - infant industries not profiting, gov had to borrow to compensate those domestic producers; 80s debt crisis - when Fed raised interest rates in 1981 to tamp down on inflation in US, attracted lots of capital to US and took it away from poor countries leaving them with huge sovereign debts and no capital to pay them back); had to get bailouts from IMF and pursue policies against NIEO and integrate; attractiveness of East Asian export model

ERM

Called for EEC members keep currencies within 2.25% or a 6% band of european currency limit (ECU)

Monetary authorities

Can act as buyers or sellers of assets for exchange rate purposes but interventions expensive and risky

Declining hegemon - 3 reasons

Can no longer deliver goods by own efforts alone; no longer wants to do it as competitors rise; some or all rising powers no longer view what hegemon supplies as public goods/legit; becomes more narrowly self-interested

Free capital flows example with Canada

Canadian government wants free capital flows, a stable currency (vis a vis the US dollar, more certainty in business), and the ability to raise and lower interest rates as it sees fit; Canada's economy starts to sputter so central bank lowers interest rates (increases demand, cheap to borrow, stimulate spending, help pull out of recession) -> investors observe interest rate difference between Canada and US so shift out of Canadian dollars and into US dollars (paying us more, higher interest rates US) -> as more and more investors sell Canadian dollars and CAD-denominated bonds (to buy US $), value of currency falls (American up, flood market with Canada so currency price down, buying up american currency make it scarcer and price up, problem of exchange rate volatility) -> Canadian central bank forced to intervene in FOREX by selling foreign exchange (reserves of US dollars) and buying CAD to maintain peg (but if investors lots of resources, lots engaged in selling activity, canadian central bank might run out of reserves) -> to avoid running out of money, central bank decides to raise interest rates to attract capital from abroad to stop outflow of investment to US

Gov deciding increase domestic credit and reduce enters rates to support domestic economy

Caused investors to flee; international reserves dropped

Greenspan

Chairman of Fed; reversed view that central bankers' responsibility is enforcement of regulations necessary protect core of financial system from recurrent bouts of speculative excesses and contractions; advocated idea that financial markets can be self-stabilizing so bankers should never act to burst financial bubble; belief in globalization turbo-charged by large capital flows

Systemic reforms

Changes to country's legal framework designed to remedy some of main obstacles to foreign enterprise and trade

Result

Chaos - believed no bank safe; liquidity crisis caused by subprime mortgage crisis turned into global credit crunch and stock market crash; spread to europe, global interbank market stopped; all pumped billions into banks to provide liquidity and insurance

Summary of Vietor and Galef - China and WTO case study

China had to do series of things to join WTO (economic reforms, opening economy to foreigners, phasing out of import quotas; MFN - treating foreign companies the same); issues (banking sector fragile - SOEs safety net, no other social services; competition hurt domestic businesses; IPR violations continuing); questions as to whether its accession hurt west - overblown and exaggerated

International monetary system after end of the gold-dollar link best described as

Choose your own adventure in exchange rate management; unstable, experimentation

Excludable, indivisible

Club goods

Non-excludable, indivisible

Collective goods; prone to free riding problems because can't stop others from having it

Capital controls allowed advanced countries to

Combine fixed exchange rates with Keynes out of fashion; fundamental problem - distinction between good and bad international transactions hard to make; either attempts to control speculation easily evaded or government can limit speculation only by imposing restrictions on regular transactions

Non-excludable, divisible

Common goods

Democratic deficit

Composed of elites, not directly responsible to individuals; says NGOs could help fix this, make it less closed door; transnational society and incorporate into decision making

1971 - US closes the gold window

Confidence completely eroded - gold holdings can no longer support speculative activity, demand to sell US dollars and get gold; violates IMF's articles; US imposes 10% import surcharge (tariff) on countries engaging in this speculation

Where imported savings went to

Construction of securitized assets; how financial system pumps out assets taken up by investors from around world in which ultimately confidence in value of those assets crumbles (how get crisis, asset bubble that bursts when confidence fails)

How membership in euro narrowed options

Consumer price index rose more than average for euro area; unit labor costs rose more than germany; real exchange rate overvalued by 20-30%; devaluation may have fixed this if retained own currency but with euro could only fix this with deflation (comparable to great depression, lower GDP)

IMF's persistent epistemic authority problem

Continues to haunt institution; societal backlash against government who do IMF agreements; tried to fix with redistribution of voting rights (unequal; make it more reflective of distribution of power worldwide - so more to china and emerging markets and less to EU and US); not to extent preferred, US blocked 2009 until 2015, only agreed when said get veto, have congress approve programs going to other countries; alienated some members

What did China have to do to get into WTO? Why did it want to join?

Convince people its markets were developed enough to merit membership in WTO; economy booming but WTO would be new level of global integration it could not do without in long run; MFN status, transnational production chains, get status before Taiwan

Australia v Indonesia

Convinced sound country which can be counted on to be politically and economically stable - market response to decline is to say lets buy australian, and get economic benefits, market's good opinion confirmed; despite 20 years of progress, still not convinced so when rupiah falls, may say reverting to bad habits, then resulting capital flight which leads to crisis and market's bad opinion seemingly confirmed

IB curve - how resole disequilibrium with decreased domestic demand, underemployment

Cooled off too much; use international competitiveness to devalue currency or lower wages; put people back to work and create more output sold to rest of world; zone of unemployment

Gold standard

Countries agreed to convert paper money into fixed amount of gold; sets fixed price for gold and buys and sells gold at that price; value of money directly linked to gold

Capital controls and why allowed under bretton woods

Countries could ring fence financial systems with controls that made it too costly or illegal for financial market actors to save money from national banking system to another banking system; widespread -sometimes impossible for foreign investors to move in or you to invest in foreign assets; no integration of countries' financial systems - globalization of finance forestalled by capital controls; Keynes worried if have trade openness + international monetary rules + financial market openness (no capital controls), money and financial assets would move freely, worried speculative pressures unleashed by those capital flows would mean countries not have ability to raise and lower interest rates as saw fit without worrying about what other countries doing; context of depression - countries need to respond to slumps in business cycle, freedom to re-engineer economic growth by increasing demand by adjusting interest rate (price of credit in economy - lower it, banks make credit available to people on easier terms, raise it money tighter and tougher get access to credit)

Sources of liquidity

Countries need reliable, liquid stores of value to deploy as needed (reserves), form of widely accepted money with lots of confidence (people believe will hold its value); hold reserves composed of currencies think will be liquid so in panic can stabilize market, stabilize people's expectations (no fear someone won't accept US dollar; inject that currency and can recapitalize with US dollars); stockpiled one top currency rather than portfolio of currencies - people use top currency for cross-border transactions because of confidence (British pound with gold standard; bretton woods dollar, some people now think Chinese currency yuan will replace dollar)

4 key Bretton Woods adjustment rules

Countries peg their currencies to US dollar (par values - legal obligation of IMF membership; each member has to announce certain amount of currency (like Deutschmarks) to 1 US dollar - that is exchange rate); currencies can move within a 1% band on either side of the par value - but larger moves (up to 10%, though sometimes much bigger) require pre-approval by the IMF's Executive Board members; IMF provides short-term financing for deficit countries (sometimes augmented by US lending) to smooth the adjustment process (for countries struggling to adjust, can't import as many goods as need - can get loan or line of credit to help make payments, also conditions); capital controls are ok

3 lessons from mexico

Countries that rely on foreign capital instead of domestic savings at own peril (easier to do it that way though due to financial globalization); policy measures to deter speculative capital flows should be applied even if that implies reducing flows in short term; exchange rate policies need to be flexible - if can't make adjustments without losing credibility, damaging capital flight certain to occur

Liquidity under gold standard

Country experiencing trade deficit would raise interest rate to speed along adjustment and attract investment capital from abroad to provide something of a cushion for the internal adjustment process (compensate for higher interest rate by attracting foreign capital who want to take advantage of that and invest, keep some money in domestic banking system - problem if banking system starts to collapse or adjustment not smooth); adjustment sometimes coordinated with some coercion (bank of england as hegemon provide loan/liquidity if adjustment too severe and british navy intervene if dont go along with it)

Illustration of problems caused by large and chronic imbalances

Country running big trade deficit that year - investors lending to that country may lose confidence, decide stop lending and giving credit; that country cannot roll over big accumulated debt and may stop paying rather than tighten belt (may not be politically feasible); default - disorderly at international level because all of those pieces of paper creditors own suddenly mean nothing and lots of economic chaos

Gold pool 1961

Created to stabilize market price of gold; accelerates in 1965-1968 to combat speculation; people increasingly concerned US break that peg and devalue dollar - more speculation going on, sense something in the system breaking down; gold pool only work if everyone cooperates and France defects in 1968, encouraging Tunisia and Algeria to do the same, speculation intensifies 1968-1971

Hegemonic wars and 3 essential political tasks that restore international order

Creation and crowning of new hegemons - usher in periods of peace; concentrate power in hands of one dominant state (hegemon alone can create international order, legitimacy, willingness); destroy old order; make it clear who has power and who does not (bargaining)

Zoellick and Lamy

Critical relationship; lamy wanted limited opening of european agricultural markets, push singapore issues (expand jurisdiction into areas of investment, competition policy, government procurement and trade facilitation), wanted to include environment issues; US did not want that - wanted barriers in agriculture to come down

3 complicates with international part of IPE

Cross-border spillovers (pursue different social purposes - not contained in borders (COVID as example); chinese government using unsubsidized exchange rate affects similar industries in US; real reasons for cooperation and coordination at international level, creates conflicts); enforcement problems (creates distrust; how ensure international agreements adhered to); threats to survival in self-help system (may not have another ally; ultimately depend on themselves and ability to mobilize resources)

Gov of 50s conservative fiscal and monetary policies

Currency Committee regulated banks, allocated credit, constituted de facto planning agency; banks required hold 18% of deposits in treasury bills used by government to finance infrastructure; private loans directed to financing trade and high value industries; shipping capacity grew a lot

Original sin

Currency mismatch, vicious cycles of financial crises, eichengreen; developing and emerging countries have differences (historical legacy) meaning they cannot borrow and enter into those markets in own currency, need another currency to account for this legacy; prejudice in which rich northern countries can borrow in own currency and everyone else usually in US dollar

Adjustment rules under post-bretton woods order

Currency speculation in FOREX causes overshooting, making adjustments far more drastic and painful (for many but not all countries); discretionary force IMF conditional serves as substitute for common international rules (lower middle classes bearing burden of austerity); chronic and huge payments imbalances emerge among countries not subject to IMF discipline, dont face speculation, not subjected to repeated crises (run chronic surpluses - K, G, J, China; run chronic deficits - US and UK); imbalances deepen over time - countries begin saying should always have surplus, build up foreign exchange reserves so never threaten by foreign currency speculators again, precondition for 2008

Current IMS is

Currency-based

3 deficit-reduction packages in 2010

Cutting deficit by 5% of GDP; higher value added tax, higher taxes on fuel.tobacco/alcohol, crisis lev on profitable firms; reductions - freeze on pub sector wages, cuts in bonuses and pensions; make labor relations system more flexible, lift regulations on many products, reform pensions and tax system, encourage investment in long term

Currency appreciation does what to international price competitiveness of country that implements it

Damages it relative to that of neighboring countries - agree on collective currency appreciation vis a vis dollar which does not differentially affect individual countries' price competitiveness

Crisis triggered by

Danish voters rejecting the treaty of maastricht in june 1992; lira already under pressure from budget deficit and political turmoil, political elite decimated; sterling weakened; dollar also appreciating against deutsche mark escalating exchange rate tensions in Nordic countries

Poet-Bretton Woods monetary system

Deal with new, disruptive element of large ventures of speculative cross-border capital flows; efforts resuscitate new order at devalued rate fail because of these flows; money managers who have access to huge amounts of capital in offshore space and which can be moved form one jurisdiction to another with low costs, large volumes of speculative capital begins to emerge; every time try, speculators trade with each in offshore FOREX markets so price of currency set by market forces and not by announcements/commitments of government, rules at bretton woods far less impact; increased systemic power of financial community

Von Hayek - market v states

Decentralized price mechanisms bring solution and ensures knowledge of the particular circumstances of time and place will be promptly used; price signal operating freely as coordinating device and as mechanism through which information coordinated in decentralized fashion

Conference in middle of WWII - Bretton Woods, MA

Decide what happens after the war; rules for IMS designed there; commitment to multilateral organization, basis for post-WWII international monetary organizations

2 other factors leading to expansion of capital that then gets traded in offshore space

Decolonization (colonialists leave, liquidate assets; but put resources into offshore markets because used to not paying taxes); US encourages people to bring back dollars, use tax arrangements to induce MNCs based in US to repatriate some of profits and soak up excess liquidity back in monetary system (context of triffin dilemma; MNCs want to avoid those taxes so put profits in offshore accounts)

Reforms facilitating trade - China's commitments

Decreasing trade barriers throughout 90s; agreed to implement further tariff reductions on agricultural and industrial goods immediately upon accession even though reductions phased for other members; impact of this eased with tariff-rate quota system - imports above set quota still subjected to higher tariff rate; quota levels would be steadily raised; agreed to eliminate most non tariff measures (NTMs) like other import quotas and restrictive licensing procedures; agreed not to subsidize exports, cap subsidies of domestic industries, eliminate state-controlled monopolies for agricultural goods; sanitary standards uniform and scientifically based; treat exports of WTO members same as treated domestic goods; adhere to standard customs and valuation procedures designed to ensure that gains from reductions in tariff rates were not undermined by increases in total tariffs from overvaluation of imports

EB curve - how resolve disequilibrium with chronic trade deficit

Demand up; need to devalue, lower real wages to be more competitive

Keynes and Bretton woods

Demolished ideas underpinning gold standard with two points (idea of smooth adjustments not real - have labor unions, other kinds of friction one economy that prevent automatic adjustment from occurring, price specie flow mechanism nonviable in political reality; confidence in inviolable connection between gold and country's currency irrational - confidence had to come from acceptance of international rules not from domestic legislation); also a nationalist though - his vision for postwar international monetary order reflected perception of declining hegemony's national interests creating american v british conflict

Confidence mechanism underpinning gold standard

Depended on inviolable belief in convertibility - coins/paper currency as good as gold and rate not change; confidence price specie mechanism would operate smoothly with no deviation from rules of the game; convertibility had to be preserved even when pain caused by domestic adjustment extreme

World economic conference June 1933

Depression going on; UK and other european countries had abandoned gold standard resulting in exchange rate system being in disarray; purpose was to spur joint effort to repair damaged international financial system; FDR stayed back but last minute because concerned that economic recovery at home stymied if london agreement prevented dollar from continuing to fall so he dismissed currency stabilization, devalued dollar and led to mistrust

Eurodollar market

Describes market that arises before euro was a thing, not a currency; description of offshore market for currency trading and then for cross-border banking loans; offshore space so regulatory black hole, no international organization or state responsible for governing or regulation it

What NIEO wanted

Develop system of buffer stocks (primary commodities, field, goods developing countries specialized in), have developed countries contribute to these buffer stocks and use them to enter into global commodities markets to ensure price volatility tamped down on (any commodity group remain relatively stable over time and increase relative to price of manufactured goods); forced technology transfer from rich to poor countries - get rid of intellectual property rules

Unofficially pegged

Developing east asia (korea, china), many small developing countries; dont let it float - not daily fluctuation; dont announce to IMF and say here what we're doing; definitely do peg it and follow it closely

Interest rates in Asia

Did not tell them to defend values of currencies like brazil but told them raise interest rates to persuade investors keep many there (some say bad - should have done what australia did and let fall until looked cheap to investors); but IMF said to let it fall unchecked would have led to hyper devaluation and result in massive financial result and inflation but distress happened anyway

What did America, Britain, France do in response?

Did same thing to compete with germany and preserve own spheres of influence; used as instrument of FP to induce dependency, power politics; ratchets up tension among great powers

Panadreo PASOK 2009, papaconstantinous finance minister taking over

Didnt know how much deficit underestimated by previous gov; triple previously projections; met with Eu leaders, came clean about tax evasion, corruption, deficit twice as largest set out on austerity program to lower deficit

Eurozone

Difficulty in maintaining internal stability with members facing budgetary difficulties and painful adjustment without escape of devaluation

3 things want for economy - trilemma

Discretion in monetary policy so can fight recessions, curb inflation; stable exchange rates - business not too uncertain; leave international business free - let people change money however they like; can only have two

2008 and dollar

Dollar soared - treasury bonds in demand, causing american interest rates to plummet; US role as bedrock of global financial system crucial reason terrible situation didn't become worse; safety net

White's plan: adjustment rules, sources of liquidity/store of value, confidence mechanism

Domestic adjustment moderated by adjustable exchange rates (like Keynes; adjustment made easier by degree of flexibility of exchange rate), credit lines conditionally supplied by IMF (endowed with resources contributed by members, made available to members particular deficit countries but oversight and conditions, review of economic policies), deficit countries bear greater burden of adjustment (no clear mechanism forcing surplus countries to adjust; this was because Britain was coming out of war deficit country and wanted burden shared; US coming out as creditor/surplus country and wanted to impose discipline on deficit countries); US dollar tied to gold at $35/oz (US dollar only currency pegged to gold, other currencies pegged to dollar that could fluctuate within 1%; US legislated and in rules of IMF - cannot be changed; goal of this - confidence, feel comfortable transacting in this global currency, system function in orderly fashion with US dollar at center of system); American commitment to honors the $35/oz of gold peg

Keynes's plan: adjustment rules, sources of liquidity/store of value, confidence mechanism

Domestic adjustment moderated by adjustable exchange rates, credit lines unconditionally supplied by International Clearance Union (ICU), binding membership rules for both trade deficit and surplus countries, thought countries should be able to revalue or devalue exchange rates to mitigate large and chronic imbalances but also dont want them to be crazy in fluctuating, every member pay in to ICU so can unconditionally supply credit lines to countries in trouble, rules for both deficit (need to engage in degree of adjustment but able to use exchange rates with oversight by ICU) and surplus (pay fees and be open to possibility of trade sanctions if ran large chronic surpluses; member could discriminate against their goods if shown to be using policies to engineer chronic large surpluses); bancor (synthetic currency, global currency issued by ICU not one country), pound sterling, and US dollars, multipolar system, sterling more power though (saw US would be hegemonic force and feared dollar would overtake sterling); legitimacy of rules and norms of the new multilateral institution (multilateral organization that can impose strong rules; though would instill confidence - dont need single powerful state)

Price of membership for China

Domestic competition - banking sector, rural-urban poverty worsened, privatize SOEs, people in china save so if run on banks occurs banks would never recover; environmental damage; social costs with pension system, unemployment, privatization, insolvency of SOEs, social welfare

Why did Brazil do opposite of Keynes and raise interest rates, slash spending, increase taxes?

Double standard and perceived need win market confidence at all costs; australian solution ruled out - fixed rate between dollar and real led to price stability, give that up bad for investor confidence; avoided devaluation by IMF supplying money to support currency in markets, high interest rates prevent money from running out, help keep money in brazil

Internal balance (IB) curve

Downward sloping; if economy starts on IB line in equilibrium, combos of two categories (economy overheated or under-employment)

Collapse of world trade in 30s

Dual financial market shocks: US stock market crash in 1929, may 1931 failure of Austria's creditanstalt bank (banking system falls into credit squeeze where banks no longer trust each other, credit hard to explain), drive many countries into deep recession; PD structure kicks in again - fear of exploitation by trading partners leads to mutual defection (cut back on trade, trade barriers increase, volume of world trade shrinks); hegemonic leadership absent and no viable international institutions

Troika

EC, ECB, IMF

Loss of confidence in country can produce

Economic crisis that justified loss of confidence; vulnerable to self-fulfilling speculative attacks

US government has control in some areas (___) because gives up control in others (____)

Economic sanctions; exchange rate, capital flows, legal protections for foreign investors

Why is exchange rate important?

Effective way managing imbalances; create limits on what they can do; graph for euro and swiss franc; swiss export performance highly correlated with relative strength of swiss franc; as franc strengthens, trade balance gets worse (exports go down; one euro buys fewer swiss francs); when franc weaker, swiss trade balance getting stronger; if franc weaker, swiss producers underprice goods in foreign markets, get paid in foreign currency, bring that back and exchange currency with lots of purchasing power for weaker swiss franc and make profit (even if underprice goods because takes more francs to get that foreign currency so have more money domestically)

What enabled greece avoid default?

Emergency loan from EU and iMF in May 2010; gov enacted harsh retrenchment, reducing salaries and pensions, raising retirement age, cutting services, increasing taxes

Real exchange rate appreciation did what

Encouraged imports resulting in gap between what produced and consumed, disequilibrium in current account; fixed exchange rate not sustainable - growth in productivity not fast enough impact it because econ stagnant

Deficit results from providing key reserve currency which

Erodes confidence; other countries can take on burden of adjustment (revalue) or switch to other reserve assets (not option in one-reserve system)

Bretton Woods

Established IMS based on intergovernmental cooperation; monetary authority controlled market through international coordination of economic policies - resulted in economic stability; did not last long though and cannot restore it now because today's system led by market forces rather than governments and IMF

1920s - shifts in gold reserves causing system to come under strain

European countries which had broken link with gold when war started returned to fixed exchange rates of gold standard - UK went back on gold at overvalued exchange rate while France undervalued franc on purpose; result was that during late 20s, french accumulated further 30% of world's gold shortages while G and UK had chronic shortage

2 excretions for currencies floating against each other

Eurozone (given up national currencies; same problems of adjustment in 30s - Greece, portugal spain; but temporary assistance programs); dollar bloc (wake of 1997-1998 asian financial crisis - some countries sought build up dollar reserves as insurance against future domestic bank runs or downturns in global economy; china launched program of export-led growth which depended on selling cheap products to US consumers; resulted in them pegging currencies to US dollar at artificially low levels)

Prospering post-WWII

Eventual civil war and ban of communist party; resulted in two political dynasties (Karamanlis PM 1955-1962, conservative parties until 1995, nephew Karamanlis mid-200s; George Papndreou progressive parties, son PM through 80s, grandson 2009)

Neoclassical economics - reasons like free trade

Everyone benefits, innovation more likely; countries should specialize in economic categories in which have comparative advantage and exchange with other countries for things they have comparative advantage

Overvalued v undervalued exchange rate

Exports expensive, imports cheaper, depresses demand, current account deficit; boost exports, shrink trade deficit, purchasing power strong but price low

2 steps to shift to multicurrency system

Facilitate diversification to multicurrency regime in which dollar, euro, and regional asian currency share role of global reserve currency backstopped by special drawing rights (SDRs) - multipolar reserved currency that could provide new competitive mechanism to help discipline issuing countries; internationalization of chinese renminbi - both depend on china's domestic economic policies and development of liquidity and open capital market, some intention with this

What did 2008 represent to many?

Failure of the global financial system's capacity to self-govern; opportunity to claw back some of authority financial market governance institutions surrendered in 90s

Savings rate in US

Falling as consumers keep spending; firms borrowing heavily too including financial institutions and US government (not really saving at all); funding for this borrowing from surplus savings imported from other countries

Notion of impossibility of collective action

False - secondary powers willing participate provided they benefit and have some power to have impact; minimum number of states that will benefit from cooperation despite noncooperation of others; benefits of cooperation for cooperating states begin to outweigh the costs

How going wrong though

Falsifying data - firings; three largest rating agencies kept downgrading gov's debt forcing them pay rising interest rates and tight deadline

Bailouts

Fed had to bail out bank bear sterns march 2008 - pioneered securities market, JP morgan acquired it; bailout and nationalization of fannie mae and Freddie mac - gov-supported so incentives to take risks ; September 2008 to provide market stability and support housing market, government seized control of them

Global liquidity crunch avoided in 2008

Fed lent 600 million to foreign central banks to alleviate shortage; major source of short-term instability eliminated

4 lessons from Asia

Financial globalization and liberalization of capital movements without appropriate regulatory framework put financial stability of many countries at risk; speed and impact of financial contagion among economies interconnected through capital flows can generate cycle of debt and hit real economies; rebuilding and expanding FX reserves in countries affected by crisis seen as form of self-insurance against further crises; need for greater financial cooperation within region in face of common crisis (eventually came together and agreed on series of bilateral swap arrangements; seeds of regional financial safety - Chiang Mai Initiative (CMI))

2008 v 1929

First 12-14 months, decline measures on par or steeper; stock market collapse; net worth falls

Issues delaying China's accession

First started seeking membership GATT 1986; but state's role in economy too great - price controls, industrial outputs produced by SOEs, international trade trivial and directed by government; tiananmen square 1989, 1991 collapse SU (created transition economies; china became template for GATT's protocol on transition economies; negotiators more inclined be more stringent with china because so many applicants); attitude toward violations of american intellectual property rights within borders; whether allowed in as developing or developed country

Inversion of Keynes with Asia

Fiscal austerity - raising interest rates, IMF policies (due to fear of speculators - trade high risk for high return)

Reforms facilitating foreign enterprise in China - China's commitments

Foreign firms given advantages over domestic firms in form of tax breaks; but also retained substantial restrictions on operations on foreign-invested businesses especially in strategically important sectors up until accession; right to distribute products in china (wholesaling, retailing, franchising reserved for chinese companies), location and scope of operations for companies providing services (banks in all but two cities could transact only in foreign currency), some firms like telecoms barred from entry to markets altogether; China had to promise to phase in full trading and distribution rights to all foreign-owned firms and joint ventures over course of three years (abolish dual pricing - foreign and domestic goods could not be charged at different prices for inputs; foreign companies allowed to hold majority shares in chinese retailers within 2 years and provide own retail services within 3 years; service sectors opened to foreigners provides immediate and all geographical restrictions eliminated in 5 years; foreign insurance allowed to expand scope of activity to pensions and health insurance; max % equity share of foreign telecom suppliers allowed to hold din joint ventures increase to 50%; banking phaseout of geographical restrictions - foreign banks by 2003 permitted to conduct domestic-currency business with Chinese enterprises and 2006 with Chinese individuals)

SEZs

Foreign investment limited to these coastal zones; government aimed to encourage transfer of technology to domestic firms but protecting state-owned sector from competition; imports restricted with tariffs and non tariff barriers that varied by locale (business environment lack of transparency that led to reliance on social networks to lower costs of business)

Karamanlis to lead transition gov

Founded center-right new democracy party; papandreou formed PASOK; ND won majority; new constitution bring rapprochement between left and right, abolish monarchy, proclaim state seek employment for all; but lack of culture of civic society; tax evasion, bribery widespread

Which of the currency regimes is best?

Freely floating exchange rates (work with US - can live with single currency because workers can move from depressed regions to moving regions so one size fits all monetary policy works)

What made this whole process work?

Fueled explosion of new financial instruments (notes arranged by trust manager and sold to different investors around the world); housing prices continuing to climb (massive spike after 1999; reassures originators who produced debt contracts, managers of pools, buyers of investment vehicles that activities will continue to be profitable)

Internal balance

Fully employment + price stability; want to have policy mix that ensures full employment of productive resources economy has; but don't want over-employment such that overheated economy with lots of inflation; and don't want under-employment so stable prices but lots of people out of work

Resolving collective action problems - international institutions

GUTS with columbia (shaming by taking photos of people who didn't go; adds another element, reputation element, to calculus; free riding less attractive makes collective action more likely); Cohane - in anarchical environment, even without hegemon can have cooperation with international institutions; they provide information, monitor, provide means of sanctioning (WTO - trade review mechanism, living up to agreements or not); changes payoff structure - get out of PD one-shot game; institutions also create iteration - keep having interactions, length time horizons, reputation, formalized, if screw over partner now problems making deals later

Institution of hypocrisy in EC

Gap between laws and regulations required of members and actual practices; exacerbated by incorporation of greece, spain, portugal; institutional underdevelopment and political pressure (from industries hurt by reopening gov procurement to competition) impede greek compliance; greece faced directives requiring harmonize laws and practices with EC standards but implemented entire backlog by 1992 - concluded could be useful to bringing greece into complicance

First deal

Germany agreed to loan but demanded Greece implement more radical reforms in exchange, subsidy kept to minimum; EU pledge 3-year 30 bil loan package, while IMF pledge 15 bil, interest rates base don Euribor (interbank loan rate in euro area), some loans variable-rate matching 3-month Euribor rate and some fixed ratio rate matching euribor rate for relevant maturity around 5%; aimed at reassuring investors, providing pledge greece have enough liquidity get through fiscal adjustment - more confident investors lower yields and allow greece continue borrow in market

Behave in public-spirited way to

Give exchange rate stability priority over domestic objectives like employment; in times of crisis though, this can erode confidence if go for domestic

Trilemma - US or Austria, Argentina, Europe, China and Malaysia now

Give up exchange rate stability and get floating exchange rate; give up discretionary monetary policy and fix exchange rate; give up own currency; give up completely free markets and impose capital controls

Sum up Roscini, Schlefer and Dimitriou - greek crisis

Gives history of Greece, financial and economic history/problems; process of providing loan/bailout rather than restructuring debt

Amendment in 1976 of IMF's Articles of agreement

Giving member states freedom to pick whatever kind of exchange rate they preferred; rules gone

Unless export ambitions of China reconciled with import capabilities of ret of world

Global economy will experience sharp slowdown in growth and cycle of trade wars as countries compete for contracting markets

Sum up Subbachi - the cost of free money: how unfettered capital threatens out economic future

Goes through different economics crises, capital flows common denominator; says not learning lesson - then concludes with 2008

Markets play major role in

Governing creation and distribution of international liquidity and in deciding which businesses, financial institutions and countries are creditworthy

Asymmetry of current IMS

Governments may be tempted by protectionist measures if capital flows (movement of money) destabilize currencies and adjustment perceived as unfairly distributed; if devalue, neighbors may retaliate with tariffs and quotas

IMS as system that

Governs creation and management of the liquidity necessary to support trade and investment within world economy

Encouraging signs and problems for future

Greek fiscal adjustment on track; deficit narrowed; reviews positive; political situation improving, privatization raising new revenues, some confidence returning; questions as to whether it can stabilize its debt to GDP ratio (have to tax rich more to get budget surplus, deflation and push down export costs which could undermine growth; may not be supported by public in long-term), maybe markets spooked again driving up interest rates and forcing them default

MFN status

Guarantee same trading privileges and market access enjoyed by current WTO members; US yearly review of MFN status - always ended in renewal but sparked protests over human rights there, would eliminate this annual process

Financial sector

Healthy except for debt problems

Two ways resolve collective action problems

Hegemonic stability theory (HST) or international institutions

Costs of capital mobility

Heightened threat of banking and currency crises; two indicators move well together (capital mobility rises, crises more common)

Benefits of membership for China

Human rights taken off table because US no longer renewing MFN; tech spillovers; share of world GDP increasing a lot

Key idea behind classical gold standard

Hume's price-specie flow mechanism

Effect of departure of sterling on britain

Humiliating - cemented euroskepticism

Why was membership in IMF higher than GATT and then WTO?

IMF code of conduct and rules more pervasive than rules governing international trade; more global membership and less drive to create alternative rules - more widely accepted, provided credit to countries that needed it and let countries use capital controls; helped make international monetary order more stable than 20s and 30s

Sum up Irwin - the choice facing china as its currency becomes more global

IMF decided Chinese renminbi would join dollar, euro, yen, and pound in elite group of currencies (global reserve currency); question as to whether it will replace dollar - whether china wants to have global reserve currency or aspires for it to be as important as dollar; geopolitical supremacy and financial supremacy; costs though - price US pays for this role is having fewer tools to manage its domestic economy (for example, china can restrict ability of businesses and individuals to transfer funds in and out of country helping it prevent huge economic swings, made exports central to development keeping currency undervalued; but US anyone anywhere can buy US treasury bond, dollar rises or falls based on market forces and is stronger than would be because of reserve currency role, exporters at disadvantage)

Institutions of global economic governance

IMF key here (1929 no key international institution); 2002-2017, IMF made 953 billion available to its members, bulk of this after 2008 (members particularly rich members donated more, increased lending capacity); so if unable get swap lines, IMF became very important

Protection of intellectual property rights

IPR violations one of major stumbling blocks in negotiates; china accepted Trade-Related Intellectual Property Rights (TRIPS) agreement and committed to tightening legal protection of patents, trademarks, trade secrets, copyrights and enforcement in accordance with international standards; but violations not stopping - not lack of legal reforms but lack of enforcement; consequences - made firms more likely use older tech, less likely engage in R&D there and less likely give employees technical training, limited spillovers for China

Price-specie flow mechanism

Idea of exchange rate being pegged to gold by legislative act, cannot change; money supply and interest rates change automatically to return to balance

Problem of balance sheets in government and households

If too costly to borrow in own currency, create currency mismatch when borrow to enter those markets, assets in two different currencies; Poland example - many households wanted to borrow to buy homes so went to banks and borrowed in swiss francs, got mortgages in swiss francs; so had to get swiss francs to pay back debt; vast majority of external debt of developing countries denominated in another country's currency; so if loans held by swiss bank operating in poland goes up relative to liabilities (if polish currency falls in value), the polish households have lots of difficulty paying back loans (now takes more of polish currency get swiss francs); demand falls in econ, prices fall, reduces confidence in polish currency which then devalues further, bankruptcies, demand falls further - amplification effect that makes crises much worse

Explain price specie flow mechanism with france and England - start with france running trade deficit with britain

Imbalance develops -> france sending franc notes and gold shipments to england to pay for imports -> british exporters receive payment, convert francs to gold -> gold converted to pounds sterling by bank of england at fixed rate -> money supply expands in britain, interest rates fall, spending increases, pushing prices up (of labor and goods) reducing relative competitiveness of british exporters, banking system swelling with reserves (getting deposits from people saving, money supply expands causing interest rates to fall, cheaper for british people to borrow), international prices of goods suddenly up and less competitive causing downward pressure on trade deficit; meantime, contraction of money supply in france because many flowing out to england, prices, wages fall, central bank raises interest rates to attract gold and capital, more expensive for average consumers and french companies to borrow so British exports to france fall but french exports increase and balance restored; natural, no central planning or authority doing this; britain and france just have to observe parody of currency and allow those payments to flow without intervention - can't say no you can't make payments for goods brought from abroad, allow payments flow freely across borders

Argentina crisis 2001

Imitated mexico - irresponsible lending, complicity; econ minister Cavallo in 1992 - convertibility plan to stabilize exchange rate, end hyperinflation, improve economic performance, hard peg to dollar forcing central bank curb money creation, did reduce hyperinflation but also monetary straightjacket, deregulation; foreign capital poured in, bonds piled up, US financial institutions pushed Argentinian bonds, reluctant weaken exchange rate and curb inflows ( IMF provided funds to help them do this); IMF said could not longer do that and country plunged into crisis, resulting in bank run, default on majority of public debt, end of convertibility program

Double standard of free trade

Imperialism; free trade and reciprocity not extended to colonial areas under British domination; tariffs on imports from colonies remained high (20%) for decades and trade agreements between metropole and periphery (colonies) highly imbalanced (peripheral areas induced to purchase industrial goods at inflated prices - echo of mercantilism)); system and ideas factor (imperial hierarchies rested on racialized, eurocentric double standards)

Reforms facilitating trade - implementation

Implemented all of promised tariff and non tariff reductions on or ahead of schedule; but nontransparent practices continued to impede trade (customs often refused US imports on dubious sanitary grounds; 2005 - only 32% of Chinese customs decisions followed international standards; also not clear what china's official tariff-rate quotas were and administrative hassle unfairly preventing american farmer goods form qualifying for quota); export quotas and subsidies - WTO prohibited most restrictions on exports except for taxes or other fees but china still restricting exports of coke for steel, high price of it harming steel producers in US, EU, japan; retained export subsidies for corn - harmed US farmers; large trade surplus since 1994

Sum up Keohane - international institutions: can interdependence work?

Importance of international institutions; talks about when successful, when not, how evolved over time, how can resolve collective action problems; democratic deficit with them and how overcome

Corn Laws

Imposed high tariffs on imported grains (especially wheat; not corn) to protect British farms; agricultural market highly protected; other countries responded by protecting their agricultural markets

Social welfare states and trade openness

In rich countries, as became more open, greater social spending; social spending to compensate/restrain displaced workers

Government bureaucratic reforms

Increased discretionary power over budget and influence over appointment of employees; increased investment and loans for TVEs - firms huge part of industrial growth and rural employment; but still discouraged private firms from expanding - looked to form partnerships with government instead as pseudo-TVEs

Is dollar-based system coming to end?

Increasingly important role of market actors (customers, distributors, facilitators) changed function of primary reserve currency, euro drawn attention to possibility of having more than one reserve currency (has liquidity and stability to make it attractive to FX reserve holders) but likely stay for awhile; China incentive to maintain status quo - largest holder of dollar reserves

Who in favor and who not in favor in Britain?

Industrialists and workers in favor of repealing these laws; farmers/landowners not in favor of it

After collapse bretton woods

Inflation soared - reached 29.9% 1974, real GDp fell 6.4%

Speculative pressure 1997

Intensified

Consequences of prices of mortgage-backed securities plummeting

Interbank lending comes to standstill (banks dont trust each other, had purchased these assets), share prices plummet, credit dries up (causes panic in equity markets), american economy falls into deep economic crisis; widespread because investors all over world and integrated nature of American financial system; huge decline in volume of loans, difficulty making payroll, unemployment increases a ton

Freiden 1991

Interest-based explanation for what materially-oriented societal groups want; which coalitions emerge to pull policies to one side of trilemma or another

WTO and legalization of trade rules

International agreements vary in degree of legalization and shift from GATT to WTO marked big step toward hard law in realm of trade; bring complaint, before panel, can appeal if lose but then becomes law - only overturned in unanimously agree; can implement sanctions

Classical gold standard was which of two

International capital mobility and fixed exchange rates

Resolve IB curve, us___; resolve EB curve, use___

International competitiveness (revaluation, wages); demand (fiscal policy, interest rates)

Effect of Fed reversing monetary policy 1994 and raising interest rates to slow down economic activity and control inflation

International investors turned to mexico; but capital inflow halted after assassination - gov raised interest rates, used reserves, issue more debt instead of reserve, investors no longer trusting exchange rate policy; most of mexico's debt had to be repaid in dollars

What hegemons do

International leadership for provision of global public goods and international regimes (global governance structures) in various issue-areas like trade, monetary, security, technology, energy; acts like state but free of charge; lets others take advantage of it - so smaller states benefit more

Impact of end of Cold War

International politics during it were materialistic - national interests shaped by economics; but then self-determination and values since 80s, beliefs of actors important for outcomes (how think about expectations, differentiated information, other side)

Preferred degree of exchange rate flexibility and monetary policy autonomy low: preferred level of exchange rate high, low

International traders and investors who derive income from international activities so want stability in country's exchange rate (if volatility, wreaks havoc on planning); export oriented producers of tradable goods

Bad risk models

Investors in notes didnt think making bad investments; underlying models 20,000% average difference between predicted default rates and reality

HST and broke bridge example

Island connected to mainland by bridge (crucial, only way); bridge breaks; if island broken up evenly, free riding problems, think neighbor will pay so you won't, bridge won't get fixed, lack of trust; if one farmer owns most of land, has incentive and ability to bear cost of free riding, bridge will get fixed

Price specie flow mechanism becomes

Justification for adjustment rules under classical gold standard

Idea of leaderless economy

Kindleberger said global economy only remain open if one country willing to provide leadership and be supplier of capital when others in panic, keep markets open, and act countercyclically; UK to US (after WWII because US refused at first - this refusal to lead contributed to depression); but US weekend today - no other country can do it (china has mercantilist approach to trade - unlikely be market of last resort; exporter rather than importer); hope G-20 hold each other accountability and sustain demand and keep markets open

Hegemonic stability theory (HST)

Kindleberger; hegemons have the interest and capability to provide collective goods; problem of 30s - no one wanted take on burden; 40s - US could do it and had the interest; interest-based argument - hegemon can supply collective goods and has interest to do it

Effect of this

Largest step euro area had taken toward fiscal union - state could request assistance in exchange for oversight, foregoing some fiscal sovereignty, investors finally reacted positively (global stock market great day, yields on greek bonds fell sharply)

John Jackson

Law prof U MI - said need stronger set of international rules and lays out plan for WTO

IMF intervention

Lenient approach - tied closely to US; disaster for IMF's reputation - inability of policymakers call off game when money to be made; financial globalization spread junk bonds

Wage costs

Let wage costs rise, ran trade deficits, borrowed from broad

What does Bank of England do about this?

Lets it happen - chooses not to regulate it because can't tell bankers to refuse to accept money; leads to swelling of offshore markets

Why might we prefer reduced transnational barriers to capital flows?

Letting capital ruin from where it is abundant to where it is scarce lowers borrowing costs, increases returns to savers especially where scarce and make price of credit higher than would otherwise be; pooling and diversifying risks - diversify away from risks, makes more stable

Pre-2008 macroeconomic orthodoxy, commonly held belief

Light-touch regulation, lack of regulation; thought crises wouldnt happen in US because US did not suffer from weaknesses (had well-capitalized and supervised banks, effective corporate governance and bankruptcy codes, and credible means of contract enforcement); let financial system churn out huge amounts of debt, complex financial instruments on large scale but without high probability that activity yield big crisis; glaring red flag of capital though

Scope of intervention before WWI

Limited - limited budgetary policy because balanced budget; limited monetary policy because no central bank and had gold standard; limited command over investment resources

Rajan warning at Jackson Hole Economic Policy Symposium 2005

Limited regulation, low interest rates, and high returns attached to risk assets had shifted investors' desire for risk which had built up in financial system; warned of this; banks selling risk of default on loan books repackaged as complex securities that didnt need to be displayed on balance sheets

Policy environment for Mexico

Losing reserves to sustain exchange rate arrangement, not much to do to control it because no capital controls

Terms as unreasonable

Low level GDP but WTO members reluctant to give it full developing-country status because of size and rapid growth - forced to agree to stricter concessions than other developing countries like limiting agricultural subsidies to 8.5% of production cost rather than standard 10%; subjected to punitive safeguards to protect industries in US and other members - other members allowed to impose quotas on excessive chinese imports and safeguards for textiles permitted for 7 years, other members for first 15 years accused china of dumping goods on their markets (selling below production cost) and were allowed to estimate production cost of Chinese goods using input costs form other market economies, production costs higher in those countries than in china so easy to find china exporters guilty of selling below cost

Why did China want to join the WTO?

MFN criteria reviewed by US annually - something China wanted to lock in with membership; new tech to china, bring foreigners in - share physical and human capital; increase FDI - more access, MFN and non-discrimination (better for them to invest there; WTO membership lowers uncertainty because mFN - takes away ability of US take away that status, imports legal structure (China ROL just being built really)); crucial link with intermediate goods - access to WTO markets at MFN rate, let firms more easily join global supply chains - import intermediate products, do assembly then export to all other members, no longer enmeshed in bilateral agreements; modernize econ

Treating exports of WTO members same as domestic goods

MFN; after import tariffs paid, foreign goods could not be subjected to internal taxes in excess of those paid by domestic companies; treating imported goods comparably with domestic when making regulatory judgements

Keynes

Macroeconomic intervention like cutting interest rates or increasing budget deficits to fight recessions could keep free-market economy more or less stable at more or less full employment; ok to have free markets from now on, know enough prevent depressions in future; keynesian compact still honored today - fed cutting interest rates

Stronger presence of market actors

Made IMS more unstable and vulnerable, less reactive to automatic mechanisms to restore equilibrium, less responsive to policies

3 currency regimes

Maintain independent monetary policy and let exchange rate fluctuate (free to fight recessions but uncertainty in business life); fix value of exchange rate and convince markets they would never devalue (make business life simpler and safer but bring back problems of one size fits all monetary policy); maintain adjustable peg (fix rate but retain option of changing it), workable only if maintained controls on capital movement which were hard to enforce, source of corruption

ECB

Maintain price stability and act as lender for euro-area banks; standard tools weekly main refinancing operations (MROs) to influence rate at which banks lent to and borrowed from each other overnight, set minimum interest rate, assess liquidity needs, determine volume of funds to offer in loans, long-term refinancing operations (LTROs) maturity of three months, banks could deposits idle funds at interest rate norm lower than overnight rate in interbank market (borrow from peers and use marginal lending facilities, posting collateral to obtain overnight liquidity at rate higher than that of interbank market); first expansionary monetary policy b lowering benchmark rate on MROs to 1%; nonstandard measures after lehman brothers - no longer fix volume of loans make in MROs but set interest rate and lined all funds banks requested at that level, intro loans in LTROs with longer than 6-month and 1-year maturities to give banks more time, after oct 2008, broadened range of assets accept as collateral

WWI caused shift in capital flows and trade patterns

Major european nations left with debt and only recovered by borrowing from US; DC had strong external position - accumulated over 50% of world's gold reserves

Collective goods

Make international markets more open, stable, and orderly but may be undersupplied due to the fear of free riding; examples are rules of road for managing trade agreements (ensure orderliness, can get complicated when have every country negotiating bilateral trade agreements with each other), universal currency (make things easier)

Nazi Germany's New Plan

Manipulate terms of trade so favorable to target and less favorable to germany (prices offered by germans for agricultural goods - 30% above world prices); creating blocs of influence, not territorial expansion or occupation, not imbalanced trade agreements; importance of german markets to targets increased substantially, share of total trade in hungary, Romania, bulgaria, yugoslavia, greece, turkey shot up (1920 15%, 1938 40%); german trade heavily diverted to poor countries in european periphery and latin america - purpose was to induce political dependency by making germany more important to target than target is to germany - can threaten to remove his, lean on them to follow foreign policy priorities without using troops

How does speculation work?

Many developing countries don't let currency float, and speculators understand that central banks committed to buying up currencies to keep that peg; so can go into FOREX (why can do this - all offshore), make contracts and get loan for lots of pesos, find counterpart to give them loan of huge quantity of pesos for example; then go to central bank, say we know you're trying to maintain peg, so i'm going to sell your country's currency and you will give me dollars; know to maintain peg, you'll give me dollars; so borrow foreign currencies, sell off, get huge quantity of dollars and if coordinate activities, can rapidly deplete their reserves - central bank forced to let peso be market determined in value which means there will be huge devaluation; if knock off peg (because they run out of reserves buying excess peso), make huge profit - after having borrowed pesos, driven off peg, got lots of dollars, then huge devaluation, can then buy up pesos, give back borrowed from dealer and make profit off difference between cost to borrow at previous peg and amount sell for at new peg

Did China actually harm western economies?

Many think no; yuan undervalued - argued increased imports from China since WTO replace imports from other producers (if yuan revalued, effect on prices would be muted; would only increase chinese sale prices in proportion to value added); complaint about jobs (downward trend in manufacturing jobs reflected gains in manufacturing productivity not offset by increased purchases of manufactured goods - biggest job losses occurred in which chinese imports to US minor)

London and gold pool

Market price gold > official price in US (35/oz) because London reopened in late 50s private markets for gold; gold pool - members contribute some of own holdings of gold into gold pool empowered to enter London gold market, when upward pressure on that price, pushes price back down to meet demand; but problem because if investors see price of gold in London higher, will go to US, sell dollar holding for 35/oz then go back to London and sell at higher price, making profit; creates speculative pressure

New neoliberal consensus

Market-oriented, export-led growth superior to statist ISI; developing countries liberalizing over next 40 years, tariffs falling over time

3 key analytical factors for IPE (motives)

Material interests (figure out if certain trade policies enhance financial standing/income of certain collective actors but harm others); power (states may pursue agendas which seek to enhance relative power even if at cost of material interests); ideas, worldview, and principles (inform foreign economic policy agendas - people believe those policies should be pursued, fit with their principles, right thing to do)

What is needed in good IMS

Money acceptable to creditors to settle international transactions, market players trust, readily available to meet demand; currencies used as reference for central rates; particular countries must have financial reserves sufficient to meet balance of payments deficits cause body sudden economic shocks; should help national economies to restore equilibrium in their international accounts and minimize cost of making such adjustments; confidence - must have confidence that reserve currency country will not pursue inflationary policies leading to devaluation of their own reserves

Source of widely shared confidence

Money and value of money perpetual, no physical characteristic; has inter subjective quality (expectation about 10 dollar bil depends on what other people believe - if others believe worth 10 dollars, then it's worth 10 dollars); stabilize people's expectations; hard to gain and easy to lose; international monetary orders more unstable than international trade system because confidence so important

WTO

More ambitious than GATT; mechanism for ensuring compliance (Dispute Settlement system) strong and legalized; bigger, global membership, larger staff

End of GATT

More and more countries joined, new complex issues, negotiations becoming trickier; US and western europe put host of new issues on table during Uruguay Round (1986-1994), divisions widened (services - open up to foreign insurance, banks; stronger intellectual property rights; countered by why dont you open up agricultural markets in return); consensus dead after this

Benefits of gold-based international monetary order for imperial Great Britain

More currency stability = more lucrative trade and investment opportunities abroad for british entrepreneurs and bankers; peak of hegemony; price specie mechanism ensured degree of predictability and stability which let firms engage in trade and investment abroad - business expanded

EB curve - how resolve disequilibrium with chronic trade surplus

More international competitiveness at any given level of demand, can't consume all of output producing so export it; to get back to current account balance, increase demand with fiscal expansion or lowering interest rates; allow people to be able to consume domestically, reduce exports and increase imports

Benefits of membership for rich countries

More sustained evaluation of China - figure out how treat it, how design domestic policies; access to very large market; increasingly make use of relatively cheap labor; give china strong terms then impose for other countries

As the volume of stateless cross-border capital flows swelled, the market-determined values of countries' currencies became

More volatile

US and protectionism

Most ardent user of infant industry promotion; 1816-end of WWII one of highest average tariff rates

Not so free managed floaters

Most large developing countries (late 80s to present); dont announce pegging value to another country; let them have some wiggle room, how much market prices impact; but intervene to preserve some degree of stability in exchange rate

Collective action is akin to

Multi-player PD; public goods sustain open, stable international economic orders; with PD payoff structure facing states international system though, public foods are underprovided

Us and European safeguards to protect industries against chinese goods

Multifiber agreement expired in 2004 that protected textiles - lifted quotas that protected them; europe and US flooded with chinese imports; china imposed tax on own exports bu US and China governments still invoked safeguards; china abandoned dollar peg 2005, revaluing yuan and switching to heavily managed float

Prior to crisis, exchange rate stability and rapid credit growth did what to investors' capacity assess risk

Muted it; currency mismatches on balance sheets and leveraged position of borrowers under radar; banks exposed to maturity mismatches; lax regulatory practices; short-term foreign borrowing and long-term domestic lending

PD payoff structure means that

Mutual defection in one-shot setup is the dominant strategy; anarchical international system = PD payoff structure commonplace?

Why did Mexico maintain the peg?

NAFTA in 90s and WTO - tariff barriers coming down, greater market access; so interest in mexico is manufacturing sector growing and expected to get greater access to markets - rising political importance; priority was international

Mexico's tequila crisis 1994 - context and lead up

NAFTA ratified Jan 1994 - caused political instability and protest; external indebtedness, policy mistakes and reversal of accommodative monetary policy in US that led to devaluation of peso which triggered interest rate crisis; lead-up - struggle with debt burden there, economy stagnant for years; capital inflows to mexico early 90s as result of Fed reducing federal funds rate in response to unemployment after 1990-1991 recession; capital inflows source of savings but also increased vulnerability to sudden changes in feelings of foreign investors

What did Karamanlis do until 1981 with econ

Nationalized commercial banks, raised defense spending but reduced public investment, shelving infrastructure projects; fiscal deficits less than 3% of gDp for rest of 70s; GDp growth peaked at 7.2% in 1978 and unemployment only 2-3% of workforce; 1975 wanted join EC but said too far to catch up, both politics overcame and joined EC 1981

5 categories of post-bretton woods exchange rate arrangements

Nearly free floaters; not so free managed floaters; unofficially pegged; officially pegged; unifiers and the dollarizers

Strong leadership combined with IMF

Necessary, build institutional framework for governance of IMS; but also mistrust of IMF due to asymmetrical surveillance - reform this

Postwar lessons from interwar trade collapse

Need rules and institutions so international trade system more orderly, more stable, and more durable; need to manage the multiplayer PD (cooperation requires effective international rules embedded in multilateral institutions; IMF, World Bank, ITO; rules enshrined in global, multilateral (large memberships, near-global) institutions); mitigate the social costs of increasing trade openness (members of new, more open international economic order need to be allowed to use domestic policies to compensate societal groups that lose from openness in the short term; encourage redistribute from winners to losers so losers accept system)

Adjustment under the bretton woods rules - what do when trade deficit and decreased demand (underemployment)

Need to increase competitiveness (may be because strong labor unions, bid up wages too high); get back on internal balance to get back to full employment - expand demand, fiscal policy, ease interest rates; get back on external balance line - managed devaluation (so burden not entirely by workers, change nominal exchange rate rather than wages, go to IMF and have it approved)

Why tariffs bad?

Negative effects on productivity and innovation of domestic firms; if shielded from foreign competition, may not upgrade and innovate

How to join WTO

Negotiate bilaterally with any WTO member that wishes to obtain some changes in prospective new member's trade regime and all changes that are agreed are extended to entire membership in accord with MFN principle

Coordination of supply/demand graph

New price/quantity equilibriums result without central planner giving people directives

Does declining hegemony mean end of international order?

No - small group of large countries that share common interest can cooperate to provide them

GATT's key limitation

No enforcement authority; could bring compliant before panel but decision not international trade law or binding unless all members unanimously agreed to accept panel's judgement including member judgement agains and they won't agree

Exchange rates as result of floating currencies

No longer policy instrument under direct control of government

Structure of WTO

No powerful bureaucracy like IMF and World Bank; General Council primary decision-making body; secretariat some influence over key decisions but mostly member-driven organization; each country one vote - power evenly distributed; favored nation treatment (treat everyone the same - no discrimination against country's goods)

Before gold standard

No real international monetary order; mercantilist lines - manipulate terms of trade so always have trade supers, accumulating resources from abroad

Are we likely to see spiral of competitive devaluations similar to that of 30s again? Why?

No; US external position different (then large surplus, encouraging devaluation seen as predatory; now weak external position, deficit and external liabilities - if deficit to be reduced, fall in dollar would be necessary and supported); more tools for policymakers to address recovery (keynes; fiscal policy now); unlike 30s, now whole world not in depression (because of fiscal policy, emerging markets recovered and booming)

Did government depreciate peso and why?

No; committed to price stability; caused real exchange rate appreciation intensify on back of capital inflows; this + savings investment gap exacerbated current account deficit; lots of capital flowing in, central bank built up reserves but not sustainable - low domestic savings rate vulnerable to problems in debt servicing

Trade imbalance between US and China

Not as dangerous as 30s because dollar is world's primary reserve asset; US not at risk of running out of international reserves since can print dollars at will - license issue international money; not same pressure to default

Why does US win out?

Not because greater persuasive capacity but because greater material capabilities and can threaten to walk away; domination of countries' foreign currency reserves from 50s-80s; sterling roughly same as US dollar for first decade but then drop-off 60s; dollar stable 60-70% share of reserves

Problems with international institutions

Not costless - may need hegemon to get them going; legitimacy probelms - if hegemonic power necessary for creation or development of them, may write rules that benefit them; create resentment and loss of legitimacy; perceived as being distant from domestic publics as world of states

List on free trade

Not natural; more episodes of protection, closure, international fragmentation rather than integration in history

Multicurrency system

Number of international currencies represent main trading areas and functions of storing value and providing unit of measure; would be more flexible to demand for liquidity; also supranational currency; best able to support healthy and flexible multipolar world economy; could also become leaderless system if transition not done right - why need policy cooperation

Trade deficit under classical gold standard - what do to get back to equilibrium

Off external line = deficit, off internal line = too much demand and spending boom; have to get back on external line balance with improving competitiveness (but exchange rate can't be changed with gold standard so can only push down wages); to get back to internal balance have to decrease demand (money supply shrinking under price specie flow so only raise interest rates)

Britain and Italy ERM

Only EEC member not join in 1979; only country granted 6% band due to weakness of currency; britain joined in 1990 - sterling put on wide band; italian lira moved to narrow band 1990

Asymmetry develops

Only clientele IMF until 2008 developing countries; adjustment process much more difficult; designing arrangements to squeeze countries to follow stricter and stricter policies, keep going back to IMF

Gold standard prior to war

Operate according to rules of the game in dealing with trade imbalances - domestic money supplies linked to gold reserves so countries accumulating reserves would automatically experience easy credit, strong demand and rising prices; countries with diminishing reserves faced tight credit and falling prices; trade imbalances were largely self-correcting without need for negotiations; but inherent asymmetry between deficit countries (no choice - had to contract credit or run out of gold) and surplus countries (pressure to expand credit not as strong); system survived because trade imbalances small and temporary

Goals of market actors v monetary authorities

Optimum combination of risk and return; monetary and financial stability

Why are there so many currency and banking crises in emerging/developing countries?

Original sin - mismatch in currency

Problem

Over time, real average hourly earnings for production and nonsupervisory employees stagnates over 40 years; gains from productivity and economic growth from 80s on concentrated at top 1%; education and healthcare becomes very expensive; so housing prices spiking but income stagnant

Free trade involves

Overall welfare gains from specialization/comparative advantage, distributional costs of tariffs, negative impact of tariffs and restrictions on productivity and innovation

Stolper-Samuelson conjecture (1941)

Owners/users of abundant factors of production benefit from trade openness, while people involved in production that makes intensive use of scarce factors lose from freer trade (countries with low level land, people involved in production will lose from trade)

Gov of Greece

Parliamentary monarchy - unstable, defaulted debt four times in 19th, depreciations frequent, 1909-1940 lots of coups; 19th can economy based on a agriculture and shipping, 20th protectionism helped create manufacturing of consumer goods but industry still comprised only 16% of GDP by onset of WWII

What caused housing prices to fall?

Particularly subprime loans (given to people with credit score lower than 620 threshold, floating interest rates - so pay one rate first few years then higher rate, makes it impossible pay back mortgages for many); prices begin to fall and mortgages harder to pay back because can't refinance in wake of income loss, see huge segment of american public beginning to miss mortgage payments; happens after 2006; income stream flooding into pool begins to dry up - questions about whether notes will sustain value; securitization had to go into subprime loan market to get more assets, problem; results in crisis of confidence in which investors want to sell off these toxic assets, once everyone doing that price collapse

ISI

Policies to protect infant industries (those that hadn't existed because imported those products but exist now); high tariffs, currency policies which make it more costly to obtain foreign currency to get foreign products

Why did gold standard monetary order disintegrate?

Politics could no longer support pain of adjustment

Two elements of securitization

Pooling (to get securitization, ID assets (debt contracts, 2008 mortgages) which yield income stream/cash flow, lets people consume something out of reach but can also be combined with other unrelated debt contracts in pool to create huge flow of cash); firm that has created these assets (made mortgages available - firms get payments from mortgages), go to different firms and buy rights to some of the cash flow they're getting from people paying back debt contacts, buying claim on fraction of that cash flow; disconnected mortgages funnel through master trust that buys claims on cash flow; benefit is diversify away risks (buy claim on flow of income form debt contracts held by people in different local economies, expectation some dry up but generally have predictable stream of monthly income)); tranching (master trust creating different financial instruments out of that pool; managers of these master trusts (collateralized debt obligation; CBOs) paid fees to get access to claim on this, want to make magnet out of it; sell notes (contractual claims) to outside investors around world who have own claims to those cash flows; ordered under tranching order (seniority - first senior tranche A, gets paid first least risky; then lower tranches; more risky notes highest yield, equity tranche, get paid last)

3 analytical forms for understanding the variation in the global management and resolution of two massive financial crises (1929/1931 and 2008)

Power/leadership; international institutions; shared ideas

2008 parallels to depression

Preceding decade of easy credit, overborrowing, excessive leverage which led to asset bubble - real estate this time; bursting bubble and economic downturn led to banking and sovereign-debt crisis; malfunctioning global financial system (misaligned exchange rates, intractable current account imbalances, growing threat of protectionism)

Uncertainty and credibility

Preferences of states amount to private information - respond to uncertainty by being less willing to enter into agreements; promote negotiation with transparency - international institutions can do that

Freely floating exchange rates

Preferred since 90s; exchange rates more volatile than should be but preferred; leaves countries free to pursue both free-market and full-employment policies; US well served - neglect toward foreign exchange value of dollar, absence of exchange rate commitment gives freedom go action to fed, can cut interest rates sharply and immediately

Why not bail out lehman brothers?

Prevent moral hazard and discourage belief that all insolvent institutions would be saved

Automatic adjustment mechanism

Prevented any country from running large and persistent deficits or surpluses; running deficit would see its currency depreciate to gold-export point

How the global governance system worked in 2008-2010

Prevented world from falling into another great depression but gains not shared equally; stock market bounced back much more quickly, within year; same with household net worth, world trade

Global public good

Preventing pandemics, averting asteroid strikes, securing loose nukes - non excludable and nonrivalrous so everyone better off; often under provided or not provided at all because not excluded (problem of collective rationality) - state structure anarchy so no taxation, no system to get contributions/enforcement; only powerful hegemons can do this - provide global public goods for free and have net benefit for them and everyone

Crash in asset values cause

Previously sound banks to collapse, economic slump, higher interest rates and devalued exchange rate causing sound companies to go bankrupt, economic distress causing political instability - buying not good idea

Price and benefits for developing countries

Price (China undercut exports by offering greater resources, cheaper labor there, capital flight as result; currency issue - increasing competition, template for other developing countries and difficult standards, lowers leverage and power they had)

Post-bretton adjustment - how developing country resolve trade deficit and too much domestic demand (overemployment)

Price inflation resulting from this, common situation, mexico; global capital mobility here, rules gone; get back on external line by increasing competitiveness, nominal devaluation of peso (doing that became impossible due to capital mobility - resulted in overshooting); currency speculators bet against you and attack your currency, devaluation out of control resulting in hyper-devaluation; results in new external balance target (upward shift in curve), IMF comes in - lost credibility and overshot so old target not available anymore, have to change internal balance scheduled to get to new equilibrium; IMF provides loans pay debt but have to make pretty big cuts in level fo real domestic demand (austerity - ensure new external balance target credible, show how markets mean business - squeeze economy by raising taxes, increasing interest rates to shut down credit creation, cut back a lot on fiscal spending then can get back to equilibrium)

Shared economic beliefs and global governance

Pro-liberalization, neoliberal New American Model that was shared framework, idea before crisis shattered; brief return to pro-stimulus Kenyesian ideas (spending dramatically, stimulus packages); quickly ended with london and Toronto meetings G20, due to Greece (spending gone too far), have to return to austerity

Preferred degree of exchange rate flexibility and monetary policy autonomy high: preferred level of exchange rate high, low

Producers of non-tradable goods like construction, health care (cannot be traded, delivered locally o nationally), want capital mobility and monetary policy autonomy (why - mostly focused on domestic demand, none of income from foreign sales and might be competing with foreign producers so want gov to get economy out of recession by having free hand raise or lower interest rates); import-competing producers of tradable goods aimed at the domestic market

Way GATT worked

Provides focal point - forum with code of conduct for organizing countries' efforts to negotiate trade openness, get rid of tariffs and bring trade barriers downs tarted with constrained number of topics and small number of countries but grew over time

Trouble in public sector

Public-sector deficit (15.5% in 2009; employee compensation large part of this (32% of total compensation , above 22% average); pensions (retired 58, received 96% of pre-retirement income; OECD 63 and 61%, 13% of GDP but 10% Eu averaged inefficient, fraudulent)); problems with taxes (tax evasion widespread; informal economy; tax evasion + political patronage 8% of GDP, if collected half of that, no fiscal deficit problems; micro enterprises and self-employed lying about bracket); official data disguised, falsified

Transparency

Publishing laws regularly and inviting comments or questions on those laws; uniform and fair enforcement of those laws and creation of process for investigation of complaints of non-uniform application; general good reviews for this (almost all laws made available to public before went into effect) but not as rigorous as allowing for public comment on laws before passed

Hume on mercantilism

Pushed back on it on monetary side, not trade side; proposed response to idea that if Scotland was able to through mercantilist policies obtain 20 million in shillings or other currency from abroad, how much of that preserved and he said not a shilling more

FDI and state-owned banks

Put them and businesses in jeopardy; unless ratcheted up reform, feared foreign companies would barrel over them once barriers to foreign investment lifted

Battle and repeal of corn laws

Putted urban workers and industrialists (pro-free trade) against rural landowners and peasants (pro-protection)

What happened between 1844 and 1846?

Rapid change in british economic structure - cattle-producers in agricultural bloc defect to other side v corn-growers; cattle producers become more cattle intensive in economic activities, becomes more capital intensive than land intensive with technology; material interest in group

IB curve - how resole disequilibrium with overheated economy and inflation

Real domestic demand expanded at given level of international competitiveness, zone of inflation; to get back on line, have to drive economy down on international competitiveness side; too few goods to go around, consuming too much so need to cool off by revaluing currency (make stronger) or wage increase which will bring prices back down because less competitive

Result of crisis

Rebuilt economies within a few years due to strong demand for exports; abandoned pegged exchange rate for more flexible one - keep inflation under control

Liberalization of capital movement following breakup of bretton woods + belief markets should be left alone with little intervention and limited regulation results in

Recurrent episodes of financial instability - eroded rules-based international order

Bilateral trade game

Reflects PD structure; when given payoffs, actors thinking about welfare (material) gains, think that free trade is mutually welfare advancing (both sides gain from cooperation), not ideologically committed to cooperation (just material enrichment for country as a whole so thinly rational); US and China freely trade, both get 10 million; US agrees then adopts 20% tariff on chinese imports (US gets 10 + 1 mil in taxes, China gets 4 because tariffs increase chinese steel prices in US, exporters find alternative markets but some stay so still make something); if China retaliates with own 20% tariff, both get 5 million (5 mil for sale of goods + 1 mil in taxes - 1 mil in taxes paid); China could also unilaterally defect; with PD structure, both likely to defect, expected outcome is trade war; in environment marked by anarchy, countries may face PDs

3 realms of requirements for membership

Reforms facilitating foreign business (expansion of rights of foreign businesses to distribute goods and provide services especially financial); reforms promoting free trade (slashing tariffs on imported goods and removing non tariff barriers by 2005); systemic reforms to improve transparency and predictability of chinese law (codification of trade and investment laws - crackdown on IPR violations); transitional review mechanism every year for 8 years and then again in 10th year after accession

How France and US made it worse

Refused to loosen credit and allow prices of their goods to rise; trade and reserve imbalances became major source of economic instability

History of international institutions 1919-1989

Rejection of league - negotiations on ad hoc basis; only with UN and strong US support did they really come to be important; yet UN paralyzed because no enforcement power and UNSC vetoes; still NATO, GATT, IMF very important; 70s oil crises led policymakers in US to want to come up with international institutions o regulate these issues (founded IEA 1974; IMF); 80s broke with legalism (law can be effective regardless of politics) for realism (state power and competing interests) - reducing transaction costs

External balance

Relatively balanced current account; don't want huge surpluses or huge deficits year after year

New International Economic Order (NIEO)

Resistance to GATT 70s; group of 77 countries identifying points of solidarity in economic experience, policies more favorable to them, level playing field; write out what this should look like - got endorsement from UN GA; Michael Manley (PM Jamaica) - distinguish their economy (world in two parts - developed western lots of industrial power, technology; developing - not great industrial power, technology, producers of primary products result of imperialism, price of things importing high, but exports stays same s condemned to poverty); wanted to change nature of exchange between developed and developing

Effect of collapse of bretton woods and crisis of 70s

Restless - free trader market emerging but many believed under threat from exchange rate volatility; policy shifted towards constructing system of pegged by adjustable exchange rates

1963 Papandreou left gov

Retained most econ policies but income redistribution to; tensions between left and right; resigned 1965; mil coup 1967 - junta's expansionist polices

Zhu Rongji 1998

Reversed trend of rising public-sector employment, selling SOEs, lowered barriers to trade and investment

Lesson of 20s; lesson of 30s

Rigidly fixed exchange rates bad; fixed exchange rates of gold standard replaced by disorderly system of floating exchange rates that led to competitive devaluations, which in turn catalyst for disastrous move to protectionism (many deliberately drove down currency to make its goods more competitive to export way out of depression but because everyone did this no one able to get advantage)

GATT's 3 basic principles

Rules (not results) base system (just ensure they followed the rule - results open-ended and product of negotiations); non-discrimination (at and behind the border barriers; ensure same products treated same once cross border; to achieve this, deal with barriers put up at borders like tariffs; also subtler ways - examples with J and foreign skis (said dont work as well because J snow different)); flexibility (safeguards; compensate losers; lots of loopholes in rules, ways to opt out; allows members to alleviate social pressure emerge in implementing freer trade agreements; could say make exception - suspend agreements agreed to to alleviate pressure on these groups, say politically unfeasible right now)

Adjustment rules bretton woods

Rules of IMF articles of agreement + capital controls facility a degree of orderliness int the adjustment process (not worried about speculative pressure); capital owners bear some costs of adjustment along with workers (nominal devaluation and then expansion in domestic demand - decreased interest rates harm capital owners and capital controls under this order); weak countervailing adjustment pressure on the issuer of reserve currency (US - doesn't play by rules), what eroded confidence mechanism

International institutions

Rules that govern elements of world politics and organizations that help implement those rules

IJMS should allow countries to

Run current account surpluses and deficits and accumulate net financial claims on each other

Loss of confidence results in

Runs, speculation, instability; 1931 example with sterling abandoning gold standard (market pressures too strong and government reacted by restricting trade and foreign exchange which resulted in collapse of system)

States v markets (Gosplan)

SU, command economy; highly complex economy; decentralized markets compared to this more efficient mechanism

Countries in developing world - what they thought about this

Said integrating with rich countries could be politically risky (use good terms of trade to manipulate them); trade openness stagnates or reverses in many developing countries; forced to substitute ISI in 30s when trade collapsed but now choosing implement it in 60s, 70s (upgrade, generate own industries and grow faster)

Sum up Subacchi - who is in control fo the international monetary system (IMS)

Says current IMS inadequate, highly imbalanced; proposes multipolar currency system with euro, dollar, asian currency; says integration and influence of market forces made things difficult - not bretton woods anymore; calls for policy cooperation - says absolutely necessary to keep this system going and transition to new system

Result of US and France having surplus of gold

Should have had expansion of credit but both neutralized monetary impact of reserves by setting limits on domestic credit growth - worried about inflation; result was that gold standard's automatic adjustment mechanism through credit system was short-circuited and burden fell on deficit countries (resort to austerity in UK - tight credit, lower spending, resulted in deflation and high unemployment; germany avoided austerity by borrowing from US)

Sum up Davis - Why adjudicate? enforcing trade rules in WTO

Smaller countries disadvantage - less money, expertise, legal costs high, smaller market size; but advantages to them - forces both sides make consistent argument based on existing law, cannot issue threats, adds leverage; Advisory Centre on WTO law for legal assistance, membership fee; compares Peru (in WTO) and Vietnam (not in WTO - only bilateral agreement; did not get what wanted); Peru challenged European food labeling - unfair based on Technical Barriers to Trade (TBT) agreement (technical regulations should not have effect of creating unnecessary obstacles to international trade and encourages members to use international standards as basis for regulations), fishermen and sardines; got help from advisory centre - huge impact, also help of third parties including US; peru won

3 key units of analysis for IPE

Societal groups (collective actors who may have common interest or beliefs, who work together to try to pull policy in direction that fits their perceived needs; exporters v importers, workers v capitalists); the state (what is it about state that might influence its social purpose; state as composed of different bureaucratic agencies with own interests; democracy v authoritarian); international system (distinguished by distribution of material capabilities at given point in time (always uneven); sometimes bipolar, multipolar, now unipolar (US monopoly on exercise of military power))

Problems with HST

Sometimes cross line from leadership into domination; no longer perceived as legitimate, may face subversion which erodes hegemonic foundations that enabled cooperation to go forward

Effect of speculators

Soros betting against sterling, selling a lot on market, made lots of money but sterling plummeted further; Uk to cap speculation increased interest rates and authorized spending on marginal intervention - didnt stop selling, Uk forced suspend membership with Erm, reversed increases in interest rates; italy announced reserves not adequate, forcing it suspend intervention in FX and let lira flow; both currencies depreciated

Describe what happened to currencies

Sterling fell to ERM floor forcing others to intervene to support own currencies; france maintained link to deutsche mark (though sign of weakness prevent yes vote); britain did not want to devalue or with italy - indicate sterling's weakness; bank of italy allowed short-term rates to increase and german, dutch, belgian authorities had to intervene (lira devalued and other ERM currencies realigned by same amount - not enough steam off pressure from countries with weak currencies)

Placate markets?

Still no; global stock markets plunged

Effect on relationship between Ger and France and Ger and UK

Strained; french felt paying for cost of german reunification like in 60s when felt Us using dollar to fund budget deficit, britain also felt this; britain and italians felt speculative attacks on sterling and lira could have been mitigated if germany was willing to drive value of deutsche mark down, letting other currencies adjust

Even in non crisis, country that is leading global reserve currency will have

Stronger currency and lower interest rates than otherwise would due to continuing purchases of its assets

4 zones of economic unhappiness

Suppressed demand (underemployment) + trade surplus; excess demand (over-employment) + trade surplus; excess demand (over-employment) + trade deficit; suppressed demand (under-employment) + trade deficit

End of gold standard

Suspended during WWI but restored 1924 when Britain reinstated (re-legislated) prewar pound sterling-gold parity; 1918-1924 had a free conferences (brussels 1920, genoa 1922) to do this but no international agreement coming out of them - strongman to return to that system; some said we'll return but at devalued rate which created tension; post-WWI environment bad (britain prideful, france spiteful, americans disdainful and distrusting, germans heading out of economic collapse and into massive political crisis, russians had bolshevik revolution, not good for restoring this order); new political actors in 20s (labor unions and socialist parties - democratization and franchise extended after war) - what made it no longer viable

How could Greece default?

Sustain surplus of 6% of GDP to stabilize total public debt; future interest rate on debt 5-6%, relaxing that level to 3% or GDP surplus would require slashing total debt by 50% of GDP; risk premium and interest rates of other members soaring; sense of national greek disappointment would be bad

2010 G-20 meeting Seoul

Talk of currency war (one country devalues then other responds); accusations of currency manipulation because dollar being devalued; shifting focus away from china's exchange rate by setting limits on current account surpluses - foundered under recriminations

Sum up Ahamed - currency wars then and now

Talking about situation of depression v 2008; gold standard and dollar dilemma (devaluation)

Sum up Krugman - return of depression economics

Talks about different exchange rate systems, double standard with market confidence (brazil as example), IMF being good or bad

Sum up Chang - kicking away the ladder: infant industry promotion in historical perspective

Talks about how developed countries are hypocrites (did protectionist policies when catching-up, unfair to say these policies are bad now when the good policies of free trade and laissez-faire harmful to developing countries)

Political economy is result of

Tension between states and markets

Effect of this pressure

Thai monetary authority first to capitulate - rundown of reserves and strong speculative pressure, broke peg with dollar, currency plummeted and capital flowed out, domestic institutions large liabilities dominated in dollars but assets in domestic currency so liquidity shortfalls and insolvent; spread to indonesia, south korae, malaysia, philippines causing deep recession and GDP drops

Tiger economies mid-90s

Thailand, indonesia, malaysia, south korea; growing fast, low inflation, gov budgets balanced; exchange rates pegged to dollar - capped exchange rate risk; favored destination for international investors - foreign capital field rapid credit growth which encouraged more inflows and lending; peg to dollar became straightjacket which triggered crisis in 1997

Origins of the global pool of capital

The emergence of the offshore Eurodollar markets in the late 50s and early 60s

Unifiers and the dollarizers

The eurozone countries (1999-?), CFA franc zone in central/west africa, el salvador, ecuador, panama; adopt another country's currency as own - often in wake of hyperinflation, adopts US dollar

Productivity gap today

Then 2 or 4 to 1; now 50 or 60 to 1 - need protectionist policies to make up this gap

Prior to 1846 - describe trade

There was trade, but free trade (reciprocity - we open up, you do too) as policy agenda pursued by national governments very unusual; pursuing mercantilist trade policy (trade used to dominate weaker states/territories; countries enriching themselves by manipulating terms of trade, hoard specie (currency), impose unequal terms of trade)

What did people think?

Thought financial system more resilient to financial shocks as impact would be scattered across securities; though systemic risk thing of past - banks too big to fail; could pay high yields while borrowing underpinned by leverage

Domestic impacts of China's accession

Threat to domestic sectors (motor vehicles especially; agricultural sector at risk - employment drop by 78 million from 1997 to 2010 - price of chinese grain substantially higher than global market price, also WTO-induced gains in employment in other sectors though); household welfare (high unemployment worse with competition and privatization; pension system increasingly endangered - aging population, mismanagement; corruption at municipal level worsened situation); rural-urban inequality worse (funding for social services scarce in rural areas, widening income gap, WTO provisions result in greater drops in producer prices of farm goods by 2007 leading to lower incomes; barriers preventing rural poor from migrating into cities, household regulation system and lack of property rights so could not trade deeds); environmental damage immense - decentralization limited government's ability to deal with this

1931 central banks dumping pounds for gold

Tightened credit by raising interest rates even though unemployment high; turned bad depression into great depression

China undervalued exchange rate

To sustain its peg forced to accumulate lots of dollar reserves - then neutralize them by limiting credit growth to prevent domestic inflation from undermining competitive advantage; result was dollar was prevented from falling against chinese currency and manufacturing goods continue remain cheap; this isa bled mechanisms for reducing trade imbalance between china and US

Government announcing change one exchange rate policy (devaluation)

Too late; resulted in financial crisis that spilled over; had to take up floating exchange rate and left on verge of default; got bailout from US and IMF which restored confidence in peso, exchange rate stabilized, econ grew

What is behind integration, expansion of global markets, and rise of big emerging markets contributing to growth of world economies since 90s?

Trade and capital flows; grown at faster rater than world GDP and US GDP; demand for US dollars risen rapidly and increased as share of US GDP putting strain on US by encouraging rise of deficit

Price of membership for rich countries

Trade war; immediate surge in imports from china (inability impose tariffs protect themselves; safeguards not last forever); manufacturing jobs/undervalued currency politically salient things; oil FP implications; adherence to commitments as problem (IP, laws, monitoring difficult)

EU

Treaty forbade them from bailing out member states through assuming their debts - had to invent new solution approved by council of ministers; nations outside euro area ruled out participating in rescue; germany fearing would bear brunt of cost of greek aid; fears of moral hazard - if bailed out greece, what would stop others from spending recklessly; france and others supported it - sustain euro and european ideal, maintain attractively against dollar; also banks holding lots of greek government bonds, self-interest bail them out

1846 clear hegemon

UK; had been at peak of international hierarchy since defeat of Napoleon at waterloo 1815; yet not pursuing free trade - had very high tariffs (sometimes 50%), not acting like liberalizing force

Global imbalance at time

US as net spender, rest of world as net saver; imported trillions of capital in form of excess savings from surplus countries forming into US; countries with huge surpluses where imports coming from came out of 90s, having gone through crisis and experienced painful IMF adjustments, decided to change policies to generate higher savings rate, run big surpluses and stockpile reserves, decide should invest some of those savings in higher-yielding assets that were seemingly safe (NYC and London)

China joining WTO

US demanding top-to-bottom makeover of chins economy; still stat enterprise with cradle to grave, bureaucratic banking system, heavy government interference and party officials; but freed themselves from threat of unilateral action against exports; most quotas and license requirements eliminated; average tariffs cut; allow foreign firms in

Evidence of this scenario after WWII

US had surplus due to overseas investments; but difficult to sustain and eventually net importer; G, F, I, J in 60s not willing to revalue currencies or increase domestic demand because had surplus vis a vis US; result was international liquidity dominated in dollars that exceed demand, fueling inflationary demand; system breaking down in 1971 when flows from dollar to deutschmark (confidence in dollar eroded, nixon suspended commitments to provide gold to foreign holders of dollars and overthrew bretton woods system; ended convertibility from dollars to gold)

Hegemonic power and global economic governance

US stabilizing force during height of global financial crisis (unprecedented injection of liquidity by Fed all over world, swap agreements), no hegemon 1929; but also privilege taker (only some countries given access to dollars - punish those who didnt accept American centric order)

Signs of 2007/2008

US subprime mortgage market collapsed 2007 - brought housing boom to end and forced foreclosures; defaults on mortgages spread to investment banks and commercial banks all over world - though spreading risk had strengthened financial system but uncertainty about value of mortgage-backed securities; banks began implementing restrictions on lending to one another to protect funds - fed intervened, providing liquidity to unfreeze interbank market

How could China sustain export push?

US willing to import chinese goods and run large current account deficits - required continued borrowing by american households, Us companies, federal government

Nearly free floaters

US, J, Aus, Ger until 1999, Eurozone as a group; selling and buying of US dollars in FOREX market, value of dollar determined by that activity; most countries dont fully float

2003 negotiations

US-EU plan for cotton; africa resisted - cotton prices down, wanted reductions in farm subsidies US and EU wanted, cuts in amber box subsidies (encourage farmers overproduce, biggest impact), caps on green box (payments for conservation), eliminate blue box (blocking US plan categorize payments program); whole thing failed - breakdown over singapore issue (criticized US for doing that on purpose so no breakdown on cottom and not take blame)

Effect on investors and bonds

Unconvinced; fell at first then increased

Countries most likely to resort to trade barriers when

Unemployment high and all other ways for dealing with failed or not option (printing money, lowering exchange rates, using fiscal stimulus); protectionism only real threat if china's peg prevents dollar from falling and stimuli fail to make dent in US unemployment

1998 Brazil economic slowdown

Unemployment rising, inflation given way to price stability; collapse of economic reform in russia triggered attack on Brazil's real and country went to US and IMF for help - wanted money and good housekeeping seal on policies; program involved higher taxes, reduced government spending, continuation of high interest rates - guaranteed recession 1999

ECU

Unit of account determined by basket of participating nation's currencies weighted by their strength; nations with strongest currencies have to sell theirs for those of nations with weakest currencies

Domestic borrowers tapping into cheap foreign currency loans

Unsustainable; strengthening of dollar kept it going but dollar began hitting lows in 1995

New safety net 750 bil euros

Up to 440 bil from EFSF for 3-year period (make loans directly, seek funds in market backed by guar from members states and designed have AAA rating, conditions loans similar to greece; managed by former german finance officla); up to 60 bil from ESFM (allowed EC raise funds inc capital market guar by EU budget); IMF component estimate 250 bil

External balance (EB) curve

Upward sloping; goal to have relatively balanced current account

IMF program

Very severe - too strong focus on structural reforms, not enough on stopping crisis, restoring confidence, stemming outflows; IMF mishandled it; but govs did it because no choice - resentment to this day

Country that takes primary reserve currency must have

Vibrant economy, deep financial markets, range of short-term instruments for which strong foreign demand; encourages initial adoption of currency for international purposes

WTO's more ambitious pro-trade agenda

WTO got rid of many loopholes (some survived) and new rules pushed free trade agenda further into areas of members' economies that had been shielded from international oversight (behind the borer); example with US complaint brought against Thailand for ban on cigarettes with additives like nicotine, US won - now health department relevant to trade; created conditions for backlash like massive Seattle protest

Foreign competition in the state sector

WTO-induced competition spurred them to accelerate privatization of failing SOEs - had been backbone of economy but lagged behind private sector and were inefficient; government reluctant shut them down though because essential social services; privatization began in 1995 with smaller first, then privatized largest on eve of accession but government retaining tight hold over critical interest like energy

US and Eur mood v China mood coming up on 5 years following China's accession to WTO

West (US trade deficit with China skyrocketed; europeans and americans blamed China for jobs losses in manufacturing; accused them of currency manipulation and ongoing protectionism); China (retailers there concerned about international competitors like walmart; competition worsened its high unemployment rate and rural-urban income gap)

Triffin's dilemma

What happens when dollar holdings abroad exceed US gold reserves; cause crisis for confidence - peg meaningless if no gold left, US would have to devalue; next 10 years becomes order maintenance, efforts to tweak rules of system and ad hoc solutions to keep it going but unsuccessful

Did IMF make situation worse? - two things did wrong

When called to Asia, it demanded austerity to avoid large budget deficits which caused negative effect on countries and worsened recession by reducing demand; demanded structural reform as condition for loans (closing bad banks, giving cronies monopolies); breadth of demands prolonged wrangling and worsened confidence

August 1993 - EC monetary committed did what to ERM band

Widened to 15% to avoid another black wednesday, de facto suspending EMS; key movement of development of postwar economic order

What political factors underpin shared expectations about legitimacy of adjustment rules and longer-run security of top currencies? What unsettles or undermines those expectations/confidence?

With gold standard - new political players like labor unions and socialist parties representing workers harmed by adjustment; say not good, adjustment too much to bear - need something else, not follow these rules

Difference between gold standard and bretton woods

With gold standard, not organized around international agreement; decentralized order in which countries chose of their own volition (and influence from abroad) to legislate that their national currency pegged to some amount of gold in perpetuity; legal arrangement not changeable - key

Why no longer adequate

World economy greater in size, private sector more prominent; integration resulted in large financial imbalances and accumulation of foreign exchange reserves by countries with balance of payments surplus (exports more)

What did Keynes worry about capital flowing easily?

Would flow from low interest rate to environment with higher interest rates to increase returns on investment; would put pressure on countries to follow what other countries doing and move toward convergence

Heightened competition

Would hurt domestic businesses but would gain from lowering barriers to trade and foreign companies; competition help iron out inefficiencies in chinese economy

Internal balance graph - describe

X-axis real domestic demand (spending, credit creation), subject to policy influences, government raises and lowers taxes, uses monetary policy to increase or lower interest rates to move economy along this axis, real domestic demand stoked by loose fiscal policy (spends lot) and lowering taxes/interest rates; y-axis international competitive (e/w), measure of nominal exchange so how much of domestic currency it takes to buy another currency over wage rate, to move economy up this devaluation (takes 1000 pesos to buy dollar rather than 500) or lower wages

China - inflationary pressures as result of keeping currency pegged to dollar

Yet fears instability and losses in reserve values that loosening of link would entail; wants to maintain status quo

Free riding and collective action - grad students example

You can either organize or disengage, same with everyone else; if both organize, good outcome (benefits funding but costs are time, effort, grades/research); if one defects, free ride (get benefits without paying costs); if you organize but other defects, you get no benefits and all costs

Adjustment rules placing limits on how manipulate exchange rate

Your choice to strengthen or weaken affects other countries