INTL 102 Final

Convergence and divergence in the 1990s

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Käthe Kollwitz

A German expressionist painter, Käthe Kollwitz captured the horror of World War I. The casualties and costs of war were numbers never seen before. The misery, suffering and poverty that ensued deeply marked this era. Kollwitz's paintings, such as "Widows and Orphans" (1919), are mostly in black, and attempt to portray the tragedy of the world's first world war on all those involved, notably the civilians left behind by their husbands and brothers and sons, as well as their government and economy.

WTO dispute settlement mechanism

A unanimous vote is required to block a report by the panel of experts, which is appointed by the "Dispute Settlement Body" - this unanimity voting rule eliminates the ability of a member to veto an unfavorable ruling (GATT). If the accused party wishes, it can request an appellate review before final vote. The losing party proposes implementation of reforms and a timetable. If implementation is not achieved, parties negotiated compensation to injured party. If no agreement can be reached, the injured party is authorized to impose retaliatory tariffs.

Destabilizing U.S. policies after WWI

After WWI, US implemented a series of destabilizing policies that aggravated the aftermath of the war. First, it insisted that their war debts be repaid in full, putting pressure on victor states to received reparations from Germany, whom was in no capacity of providing that kind of money. Second, it implement trade protectionism that raised tariffs to record levels in isolated them economically. This prevented trading partners, especially Europe, who was in deficit, from acquiring foreign currency to pay their bills. This triggered retaliation as a tariff "war" that imposed a series of "beggar-thy-neighbor" trade policies. Thirdly, US refused to join the League of Nations, which undermined the global effort to prevent another global war by bringing cooperation militarily and economically.

Marshall Plan

After WWII, US government provided foreign aid in order to help those harmed by the war recover economically. The Marshall Plan (1948-51) provided $13.2 billion for European recovery and was extremely effective - Western Europe enjoyed unprecedented economic growth. It also facilitated European economic integration as it erased trade barriers and set up institutions to coordinate European economies. Yet US support for the Marshall Plan was dismal. Truman built support by playing on American's fears of soviet empire and communism, advocating for "containment" of communist spread. Yet, in order to receive Marshall Plan aid, had to accept US plan including committing to balanced budgets, financial stability and free trade. Demonstrates the influence of US leadership and economy.

War Debts and Reparations

After World War 1, allies owed the US government over $10 billion. During the war, the US had gone from the world's largest debtor to the world's largest creditor through loans from private banks and government "Liberty Loans". US became the world's dominant financial power. After the War, US refused to reduce or forgive these debts - a decision that posed major problems and paved the way for the Great Depression and WWII. The allies also demanded reparations (war damages) from Germany, who they required to pay $33 billion in damages to victors. This imposed a harsh "victor's peace" on Germany, one that they were clearly unable to pay. Created a triangle: Victors required reparations -> Allies required to pay back war debts -> Dawes Plan in order to stabilize German economy so they could pay victors. Dawes Plan created a cycle of money from US to Germany, which then made reparations to other Europeans nations, which then used the money to pay of their war debts to the U.S.

Depression of 1873-1896

An economic phenomenon that contributed to dissatisfaction with free trade and the gold standard. From 1873 to 1896, the world suffered from a gradual and continual decline in world prices. Prices and earning declines , but debt burdens remained constant. Expectations of more declines caused uncertainty and pessimism. The prices of good that entered readily into world trade fell particularly rapidly such s raw materials, while price sod other goods an services fell more solely or not at all.This sparked social protests. Producers faced with declining prices sought relief by protection from imports. Isolation rose, and financial flows slowed. This caused greater frictions among the great powers than had existed for decades. Free trade was called into question as voices everywhere were raised in favor of trade protection. New gold discoveries rose the supply of gold, raising prices. So ended the Depression, to the achievement of capitalism and globalization.

Communism

Another Autarkic Authoritarian response to the Great Depression, Communism was developed in the Soviet Union. It was characterized by protectionist dictatorships that served labor at the expense of land and capital. This was a backlash in developing countries against globalization that they felt had been unjust. Separated from world economy, through protectionism and state control over the economy.

Keynes' "Economic Consequences of the Peace"

Attended the Versailles Conference as a delegate of British Treasury, and argued for a more generous peace. It helped consolidate American public opinion against the treaty and involvement in the League of Nations. Perception by much of the British public that Germany had been treated unfairly was a crucial factor in appeasement. Criticisms : First, he argues as an economist that Europe could not prosper without an equitable, effective, and integrated economic system, and the economic terms of the treaty precluded this outcome. Second, the Allies had committed themselves in the Armistice Agreement to critical principles regarding reparations, territorial adjustments, and evenhandedness in economic matters, and these terms were materially breached by the Treaty

Successes of the GATT

Brought tariffs down considerably. It was very robust, succeeding despite the Cold War, Vietnam, many wars of independence, de-colonization, etc... It also created the WTO which went on to replace it and go beyond it's dispute settlement mechanism. WTO incorporated all GATT provisions, but tackled new issues such as trade in services, agriculture and intellectual property rights, as well as proposing a new Dispute Settlement Mechanism.

Collective action theory and OPEC

Cartels are inherently unstable due to incentives to free ride 0r cheat. Each member wants others to cut production but wants to maximize its own production and profits. Free riding occurs when a member enjoys benefits of the high cartel prices without reducing its own production - increases individual profits, but decreases cartel profits. If too many producers cheat, cartel is unsuccessful. Conditions for cartel success are inherent in Collective Action Theory. Small groups are easier to organize: fewer members organize, cheating is more obvious and enforcement relatively easy. Groups with unequal members collude easier as well. A very large member can manipulate prices even if others free ride in order to keep the cartel together.

Dawes Plan of 1924

Charles Dawes was an American banker who was entrusted to settle German reparations and stable its finances. Under the Dawes Plan, US bankers took charge of the German central bank and Germany fiscal policy. This stabilized the currency and brought increased loans from consortium of US investment banks to Germany. Eventually, this created a cycle of money from US to Germany, which then was able to make reparations to the victor nations. This then allowed those victors to repay the US for their war debts. Effective solution to war debts/reparations triangle.

Collective action problems in agriculture

Collective Action Theory states that there is a free-rider problem because government policies that benefit a group of people do not differentiate between individuals in that group. This creates incentives for individuals to "free ride" on the efforts of others in the group because lobbying is costly. Solutions to free riding are small group solutions because fewer members are better abel to organize, form lobbies, and keep each other accountable. Unequal Groups is another solution, when some members in a group benefit more than others. "Selective incentives" is a third solution that gives special benefits to members that contribute, motivating them to help. Finally, "Social" Selective incentives that pine on doing the right thing and social benefits. In agriculture, the problem is that producers have higher incentive of getting tariffs because it means a larger per-capita gain, than a consumer has incentive in lowering it and paying a lower price. The producer is concerned with his million of fruits/vegetables, the consumer only cares about a few. Hence, Farmers have powerful lobbies where food consumers do not. This is why agriculture is still a very protectionist industry, because they have well organized special interest groups.

Consumer durable revolution

Consumer durables is the name used for these new goods being produced in the early 1900s to distinguish them from less permanent products. Durable products used many more intermediate manufactured inputs than did the earlier consumer nondurables. These were expensive products that people would buy to use for years. These innovations spurred productivity growth. They were the most visible change of technical change. The revolution occurred during the interwar period.

Export-Oriented Industrialization (EOI)

Countries in East Asia adopted policies that promoted exports, instead of ISI. All experience rapid growth in manufactured-goods exports and rapid economic growth. EOI is characterized by high export volumes in areas of comparative advantage rather than industrialization in areas of comparative disadvantage. Government policies focused on promoting export industries rather than protecting import-competing industries. Sometimes associated with the political repression of labor. Chose EOI over ISI because of small domestic market for manufactured goods which could not achieve economies of scale, poor endowments of land and natural resources means there was little capacity to export these goods and need to import indispensable items made exporting essential. The underlying conditions for success were priority on education, high savings and investment and relatively stable political system. Also used policy tools for export promotion such as government loans, tax breaks, marketing assistance and "sliding-peg" exchange rate system.

Raul Prebisch and the declining terms of trade

Does it make any difference whether a country exports primary products and imports manufactured goods, or vice versa? Theory of CA says "No", but Raul Prebisch says "Yes". Prebisch was the head of Argentina's central bank during the Great Depression. He divided world into 2 parts: Center (industrialized nations) and Periphery (developing nations). He observed that the prices of primary products produced in the periphery fell much more during the Depression than the prices of manufactured products produced in the center. His hypothesis relied on what he called the Terms of trade = price of exports/price of imports. He believed that the terms of trade for nations exporting primary products and importing manufactured goods may deteriorate over time. Eventually, engaging in trade with the center can be detrimental to the periphery. So Free Trade based on comparative advantage may be harmful to less developed nations.

U.S. sugar program

Due to tariffs and quotas, sugar has sold for as high as 22 cents when the world market price is 4.5 cents. Consumers bear the burden. However, whereas the cost of sugar to each consumer is just $10/year, it is, by contrast, more than $150,000/year for sugar farmers assuming they produce the same amount. The small group of sugar producers therefore have a much stronger incentive to lobby than the large group on sugar consumers. On top of this, Sugar is a concentrated industry, more than 50% of it being produced in Florida by 17 plantations. Since the payoff to these huge plantations is enormous, they have very strong incentives to lobby, even if the 12,983 sugar growers do not. The implication is that farmers are powerful in all rich countries, where they benefit from a vast array of trade policies, subsidies, etc... Their costs are borne by everyone else. They are powerful because they are such a small group (2% of population).

Liberty Loans

During WWI, US government loaned allies about $10 billion in "Liberty Loans" to finance war effort. This positioned US into become the world's dominant financial power and world's largest creditor. However, after the war, US refused to reduce or forgive these debts. This posed major problems because most of Europe's economies were heavily damaged. In response, the victors imposed on Germany huge reparations in order to deal with their loans and the damage the war had done to their countries.

Bretton Woods exchange-rate system

Exchange rates were not permanently fixed, but occasional devaluations of individual currencies were allowed to correct fundamental disequilibria in the balance of payments (BP). Ever-increasing attack on the dollar in the 1960s culminated in the collapse of the Bretton Woods system in 1971, and it was reluctantly replaced with a regime of floating exchange rates.

Foreign Direct Investment (FDI)

FDI's are ownerships of productive assets by foreign residents for purposed of controlling uses of those assets. Control distinguishes FDI from bank loans or bond lending. MNCs engage in FDI. There are two types of FDI. Horizontal FDI: when a MNC produces the same product in multiple countries (ex. Coca Cola). Vertical FDI: when a MNC owns and controls different stages of a worldwide production process (ex. Exxon). To choose FDI, the MNC must both have a "locational advantage" in doing so and a "market imperfection". Locational advantages refer to "market-oriented" investments where nations with large consumer markets are attractive to MNCs, "efficiency-oriented" investments where MNCs "outsource" portions of the production process to different nations based on different factor prices, and "natural resource" investments where MNCs need to located abroad to obtain raw materials that are spread unevenly. For FDI, there MUST also be an "Market Imperfection", which exist when the price mechanism fails. One of these is "intangible assets" where firm knowledge is an important asset, but are hard for firms to price and protect. This goes hand in hand with Horizontal FDI, which exists to control and protect the intangible asset. MNCs engage in FDI to maintain intangible assets within the firm (ex. Coca Cola). Other one is "specific assets", which goes hand in hand with vertical FDI. They are both physical and human investments that are specialized and unique to a certain task. They are adapted to a particular use. This can give rise to "hold-up" problems, where MNCs dependent on a single supplier could try to demand more money. To avoid this, MNCS buy supplier and internalize transaction.

Fernando Henrique Cardoso

FHC was the first Brazilian President to start a program to address the inequality issue in Brazil—the enormous gap between rich an poor in the country. He started the following programs: Bolsa Escola, the Auxílio Gás, the Bolsa Alimentação, and the Cartão Alimentação. A feature of Cardoso's administration was the deepening of the privatization program, launched by former president Fernando Collor de Mello. During his first term several government-owned enterprises in areas such as steel milling, telecommunications and mining, such as Telebras and Companhia Vale do Rio Doce were sold to the private sector, marking the deepest process of denationalisation in Brazilian history amidst a polarized political debate between "neoliberals" and "developmentalists". Ironically, this time Cardoso was against the latter group, generating uproar among former academic colleagues and political allies that accused him of reneging his previous work as an intellectual. Economists still contend over its long-term effects; research shows that the companies sold by the government achieved better profitability as a result of their disengagement from the State.

Coalition of Iron and Rye

First in a series of European tariffs resulting from demands for protection from cheap imports and globalization. Early example of "backlash". Before 1870, Germany had been relatively abundant in land and scarce in capital - Prussia was farm belt of Europe, with lowest costing grain. After 1870, falling transportation costs allowed cheaper grain from land-abundant countries to enter European markets, making Germany relatively scarce in land and capital. German agriculturers lost comparative advantage. Junkers, Prussian landed nobility, desired protection. At the same time, German capitalists required protection as well from British manufactured goods. Chancellor Otto von Bismarck brokered the "Iron and Rye" coalition - brought high tariffs on both grains and manufactured goods. Germany was a nominally parliamentary democracy where power rested in the Bundesrate, which the Prussian state controlled. The dominant position of Prussia in the parliament gave Junkers a central role in policy decisions.

Rules of the GATT

GATT was founded in 1948 to foster trade liberalization after WWII and to unwind protectionist measures. GATT rules are set in form of a contract, where member nations are called "Contracting parties". They are obliged to carry out the rules, but have to right to retaliate with tariffs against members that fail to follow them. This provides enforcement. Reciprocity in the GATT allows countries to negotiate trade barrier reductions bilaterally between the principal supplier of a product and the principal purchaser which makes the trade agreements more politically palatable. Most-Favored-Nation (MFN) generalizes the concessions multilaterally to all other members. MFN reflects the principal on nondiscrimination, where the deals struct between two members apply to all. There are no special or exclusive deals.

"Financial Oligarchy"

Form of power, governmental or operations, where such power effectively rests with a small, elite group of inside individuals, sometimes from a small group of educational institutions, or influential economic entities or devices (banks, commercial entities, lobbyists) that act in complicity with, or at the whim of the oligarchy, often with little or no regard for constitutionally protected prerogative. Monopolies are sometimes granted to state-controlled entities (Royal Charter to the East India Company). Today's MNCs function as corporate oligarchies with influence over democratically elected officials. Since collapse of SU, privately owned Russia-based MNCs, including producers of petroleum, natural gas, and metal have become oligarchy. A report by Credit Suisse in 2013 states that Russia has the highest level of wealth inequality in the world. In Russia today 110 billionaires own 35% of all wealth. Still, equality in Russia is better that in UK or USSR. Some contemporary authors have characterized current conditions in the US as being oligarchic in nature. Simon Johnson, Jeffrey Winters, Bernie Sanders to name a few. The top 1% in 2007 had a larger share of total income than at any time since 1928. In 2011, according to PolitiFact and others, the 413 American billionaires own more than 50% net wealth of the US. Martin Gilens says that the average citizens only get what they want if economic elites or interest groups also want it, that is economic elites and interest groups are influential.

George Soros

George Soros was one of the world's most prominent financiers. He was the target of the Malaysian prime minister who accused him of obtaining his wealth by impoverishing others, leading him to having too much money and power. Soros was a strong proponent of global capitalism and currency trading. He started of by working for an international banking firm. His reputation grew as he bet billions of dollars against the British government and won. In 1992, he speculated against the sterling and this earned him a billion dollars. To many, it appeared that wealthy invests had single-handedly voce a major government to reverse economic course. Brought forward the fact that governments were under massive press to satisfy international investor, even if the domestic political costs were high. The Malaysian prime ministers attack on him represented a broadly held view that global capital markets had gone too far in constraining government policies. Soros' financial and philanthropic activities put him in a unique position to encourage the development of capitalism and democracy in the former Communist countries. He was also a strong supporter of open societies on both principled and pragmatic bounds, believing that the new international economic order necessitated a commitment to social justice. He argued that global capitalism would be safe only if attention were paid to national and social confers. Soros represented both the achievements and the anxieties of international finance. Global financial system moved trillions of dollar around the world with extraordinary speed and efficiency.

Rise of organized labor

Great shortages of labor gave trade unions a power that was probably unrivaled anywhere in the world and they used their power to press for severe restrictions on immigration. For racial and economic reason, principal target was immigrants from Asia because they were willing to work for less and were so physically and culturally distinct. Imposed great restrictions on immigrations at the turn of the century.

What went wrong with ISI?

ISI began with positive results: accumulation of industrial experience and capabilities, high growth during 50s to 70s, but ISI countries never managed to move forward: Infant industries never matures, and so maintained excessive rates of trade protection for final goods. Under cover of high tariffs, domestic firms had little incentive to be competitive, efficient or productive. ISI created vested interests with stakes in continuing ISI, making it hard to keep it temporary. Paradoxically, ISI increased depended on imports because new factories needed capital goods that went into producing final goods, which all had to be imported. This caused BOP problems (imports>exports). Since they were not exporting (tariffs), ISI became highly dependent on foreign capital through loans and FDI's to balance payments. This set the stage for the Debt Crisis of the 1980s. An Anti-market philosophy also promoted excessive regulations and corruption that these countries still struggle with today.

Decolonization

In 1945, 700 million people, 1/3 of the world's population lived under colonial rule. By 1970, less than 2 million remained colonial subjects. Between then, formal colonialism came to an end, largely at US insistence. Empire are dismantled because of US opposition to colonies. As a former colony, US was deeply opposed. They also disliked the closeness of these empires to American businesses. The Atlantic Charter called for autonomy of colonies, so after the War, US put pressure on empires to abide by the Charter. Empires were also no longer vital to security: US military forces provided global security and empires no longer needed colonies for strategic purposes.

Fed Chairman Paul Volcker

In 1979, Jimmy Carter appointed Volcker to head the Federal Reserve in order to help with the oil and debt crises on the 80s. Volcker used high interest rates to reduce inflation from near 10 percent per year. It was successful, but at a cost: entered deepest recession of the post WWII ear, with unemployment near 10%. Recovery did not happen until the late 1980s.

Unemployment in Europe

In Europe, low-skilled workers have experience high and persistent unemployment rather than falling wages. This is due to stronger labor market restrictions in Europe that prevent firms from adjusting wages such as higher minimum wages and legal restraints on adjusting wages. Since employers in Europe can't reduce wages, they don't hire as many workers, high European unemployment is thus the flip side of falling wages in the US. This is part of a global phenomenon of increasing inequality.

Bretton Woods System

In July 1944, delegates from 44 countries met at the "Bretton Woods Conference" to design a new international monetary system, a new liberal system. UK and US sought to recreate a stable and open capitalist world economy akin to the Golden Age but with more leeway to pursue national economic policies. There was a recognition that the Gold Standard was too constraining. They established a new form of international governance, a permanent system overseen by international organizations to manage the interaction of national economies. It was a new interventionist model of capitalism, a Global New Deal. "Bretton Woods system" was composed of several key factors. The US dollar was pegged and convertible to gold at $35 per ounce; other currencies fixed their exchange rates to the US dollar. They established the IMF and World Bank whose roles were, respectively, to provide BOP loans and stabilize the international monetary system, and to provide loans for economic development and reconstructions. They also established formal institutions where member countries contribute money to support global operations. It shared similarities to the Gold Standard, but also new factors: the dollar was the only currency fixed to gold, it allowed restrictions on international capital movements, and it created a new international institutions that would deal with BOP problems. Bretton Woods prioritized the need for full employment and social insurance policies at the national level over complete international economic integration. Bretton Woods lasted until the inflation of the dollar in the 60s due to the Vietnam war and deficit spending on social programs. Finally, Nixon ended convertibility in 1971.

Lend-Lease program

In order to avoid another war debts-reparations fiasco, during WWII, the US "leases" arms tot the allies via this program. Under it, the US supplied over $50 billion in munitions, vehicle, food, etc... to the allies. It was a fiction disguised under the notion that everything would be returned after the war, but cannot return food. Demonstrates the idea of Pax Americana, strength of US economy and leadership.

Hyperinflation in Germany

In order to pay exuberant reparations to victors after WWI, Germany simply printed money. This led them to leave the gold standard because they currency value had greatly changed and resulted in hyperinflation (> 50% per month). By the end of 1923, Germany prices were 1.3 trillion times higher than 1914. Economic recovery required stabilization, which finally came with the Dawes Plan in 1924, when US bankers took over German central bank and fiscal policy, stabilized the currency and brought increased loans from US investments banks. This created a cycle of money from US to Germany, which made reparations to the victor nations, which then in turn could pay off war debts to US.

Welfare capitalists

In the U.S. during the 1920s, welfare capitalism refers to the policies of large, usually non-unionized, companies that have developed internal welfare systems for their employees. Based on the idea that Americans should look not to governments or labor unions but to the workplace benefits provided by the private sector for protection against the fluctuations of the market economy. The benefits offered by welfare capitalist employers were often inconsistent and varied widely from firm to firm. They included minimal benefits such as cafeteria plans, company-sponsored sports teams, lunchrooms and water fountains in plants, and company newsletters/magazines—as well as more extensive plans providing retirement benefits, health care, and employee profit-sharing. Welfare capitalism was also used as a way to resist government regulation of markets, independent labor union organizing, and the emergence of a welfare state. Welfare capitalists went to great lengths to quash independent trade union organizing, strikes, and other expressions of labor collectivism — through a combination of violent suppression, worker sanctions, and benefits in exchange for loyalty. Also, employee stock-ownership programs meant to tie workers to the success of companies (and accordingly to management). Workers would then be actual partners with owners—and capitalists themselves. Owners intended these programs to ward off the threat of "Bolshevism" and undermine the appeal of unions. In the end, welfare capitalism programs benefited white-collar workers far more than those on the factory floor in the early 20th century. Average annual bonus payouts at U.S. Steel Corporation from 1929 to 1931 were approximately $2,500,000; however, in 1929, $1,623,753 of that went to the President of the company.[23][24] Real wages for unskilled and low-skilled workers grew little in the 1920s, while long hours in unsafe conditions continued to be the norm. Further, employment instability due to layoffs remained a reality of work life. Welfare capitalism programs didn't often work as intended and company unions really just reinforced the authority of management over terms of employment.

"New Deal" for Globalization

In the US economy, real income growth has been extremely skewed, with relatively few high earners doing well while incomes for most workers have stagnated or fallen. By some measures, inequality in the US is greater today than at any time since the 1920s. US policy is becoming more protectionist because the American public is becoming more protectionist, and this shift in attitudes is a result of stagnant or falling incomes. Public support for engagement w/ world economy is strongly linked to labor-market performance, and for most workers labor-market performance has been poor. More investment in education and more trade adjustment assistance for dislocated workers (the two most common responses) are not adequate. Significant payoffs from education investment will take decades to be realized, and trade adjustment assistance is too small and too narrowly targeted on specific industries to have much effect. Best way to avert rise in protectionism is by instituting a New Deal for globalization - one that links engagement with the world economy to a substantial redistribution of income. In US, means adopting a fundamentally more progressive tax system. A New Deal would combine further trade and investment liberalization with eliminating the full payroll tax for all workers earning below the national median. The economic burden of this tax falls largely on workers, so this tax cute would be a direct gain in after-tax real income for them.

WTO and the Shrimp/Turtle Case

In this case, US environmental law protected sea turtles from shrimp nets by requiring "turtle exclusion devices" (TEDs). US law, accordingly, prohibited shrimp imports from countries that did not require or use TEDs. Foreign shrimp producers from India, Malaysia and Pakistan filed a case with the WTO, claiming that they were being discriminated against. US had provided some Caribbean countries with technical and financial assistance to start using TEDs, but complaining nations did not get this aid. US lost on the basis of non-discrimination.

Intangible assets

Intangible assets are a case of "Market Imperfection". They are considered firm "knowledge", assets that are difficult to price and protect. Some FDI exists to control and protect the intangible assets in order to maintain the asset within the firm where they can control them. Horizontal FDI is explained by the combination of Intangible assets and Market-oriented locational advantages.

"Good" political institutions

It is thought that government policies and institutions are the cause of economic growth. Yet, institutions is thought the be the root cause. Countries with good policies and endowments but "bad" institutions have lower growth rates and are diverging. Countries with poor policies and endowments but "good" institutions have higher growth rates and are converging. Endowments have a large historical influence on institutions. Engermand and Sokoloff states that where endowments 300 years ago led to extreme inequalities such as plantation and conquest economies, elites established "bad" institutions that were characterized by vote restrictions, restricted access to education, etc..., that maintained their positions but were harmful to growth. By contrast, where initial endowments led to greater equality like settlement economies, "good" institutions were established, characterized by unrestricted franchise and public education, that provided the foundations for long-run economic growth. Other endowments-based arguments are the Resource Curse and the High Settler Mortality.

Countercyclical demand management

Keynes name for the new role for government of using public policy to shift expectations en masse. This was a manner in which the US broke from the Pre-1929 orthodoxy of self-correcting business cycles, when they realized that liquidationism was not increasing aggregated demand. Keynes figured out that negative expectations about the economic future create a vicious cycle in which people act rationally as individuals and don't invest or consume, but irrationally as a group because since we all behave this way, we all lose. Countercyclical demand management was the only thing big enough to have an impact of this scale. To reduce the amplitude of business cycles, they used 2 policies: Monetary policy to lower (raise) interest rates to encourage (discourage) demand (lower during recession to encourage demand) and Fiscal policy to use government spending and taxation to sustain or limit the pace of economic activity. Keynes emphasized the importance of fiscal policy because even if interest rates were 0, investors could still not invest, and unlike monetary policy, fiscal policy stimulates aggregated demand directly by creating new projects and hiring new workers (New Deal Programs).

Kleptocracy

Kleptocracy is a form of political and government corruption where the government exists to increase the personal wealth and political power of its official and the ruling class at the expense of the wider population, often with a pretense of honest service. These are generally associated with corrupt forms of authoritarian governments. It is most common in developing countries who economies are based on the export of natural resources (Resource curse and Settler Death). The effects are typically adverse in regards to the state's economy. An example in King Leopold in the Republic on Congo.

Cap-and-Trade System

Kyoto also developed a "Cap and Trade" system that issues tradable permits, representing a right to emit a specified quantity of greenhouse gases. By issuing only a limited number of permits (a "cap"), treaty members can reduce the total quantity of gas emitted at the international level. Because permits are limited to a quantity that is less than the amount of gas that would normally be emitted, the right to emit becomes a valuable commodity. Buying and selling permits establishes a market price of them. Nations wishing to emit gases beyond permitted levels must either reduce their emission or purchase permits to emit. Polluters able to reduce their emissions relatively cheaply will do so, rather than purchase permits. Polluters who face higher abatement costs will buy permits to satisfy requirements. In this way, reduction in emissions are made by those polluters who can do so at least cost, being compensated by polluters who face higher costs.

Liquidationsim

Liquidationism was the belief that, during the 1930s depression, one had to liquidate all bad investments and loans and useless products before recovery could take place. This was part of the Pre-1929 orthodoxy beliefs that advocated for laissez faire strategies and viewed the economy as self-correcting. They believed that business cycles worked in booms and busts, and that the 1930s crash was nothing else but the response to the excesses of the 20s. Yet, liquidationism did not work. The Great Depression was off the scale - prices, wages and employment kept falling, and demand was not increasing.

Logrolling in the U.S. Congress

Logrolling is the process of voting for tariffs on goods in one congressman's district in exchange for his vote for tariffs on goods in your district. In other worlds, legislators would trade votes in order to ensure that their protectionists trade policies were ensured. This was especially seen during the Smoot-Hawley Act of 1930 which was amended over 2,000 times. With the RTAA, delegation of trade policy decisions to the executive branch made it impossible for Congressman to influence the outcome of trade policies, ergo severely limiting logrolling.

MNCs and national sovereignty

MNCs are firms that own and manage productive facilities in 2 or more countries. They engage in FDI. In 2000, the world's 500 largest MNC's had sales of $13.7 trillion - nearly half the value of all goods and services in the world. Largest MNCs have revenues greater than GDPs of some nations. The sheer size of MNCs combined with control creates potential problems for national governments on a range of issues: location of production, jobs, technology, managerial expertise... Tensions arise because the goals of MNCs may conflict with the goals of governments. Historically, developing countries have been more concerned about MNCs because of legacy of colonialism, concern about foreign domination. Result is a greater degree of regulation: restrictions on profit repatriation, technology transfer requirement, employment requirements, local content requirements, ownership restrictions, and at the limit, expropriation, where the Host Government can seize and nationalize the company.

OPEC "Hawks" and "Doves"

Members of OPEC are internally divided into "Hawks" and "Doves". "Hawks" are those countries such as Iran and Iraq that have large populations and relatively small oil reserves. Their preference is for high oil prices in the short run. "Doves" are those countries such as Saudi Arabia, Kuwait and UAE, that have small populations and large oil reserves. Preference is for moderate oil prices to prevent consumers from reducing dependence on oil by finding substitutes. The Yom Kippur War united OPEC in 1973, when they overcame differences and achieved a four-fold increase in oil prices by cutting production. Key to success was Saudi Arabia who absorbed largest burden of production cuts and punished free rider shy flooding the market with oil, driving prices very low. OPEC has been unsuccessful since 1973. OPEC reflected concern with "unfairness" of international trade when Shah of Iran explained that the North that buys their oil sells it back to them refined as petrochemicals at much higher prices.

Newly Industrializing Countries (NICs)

NICs are countries whose economies have not yet reached developed country status but have, in a macroeconomic sense, outpaced their developing counterparts. Another characterization of NICs is that of nations undergoing rapid economic growth (usually export-oriented). Incipient or ongoing industrialization is an important indicator of an NIC. In many NICs, social upheaval can occur as primarily rural, or agricultural, populations migrate to the cities, where the growth of manufacturing concerns and factories can draw many thousands of laborers.

Chinese Exclusion Acts

New world, which was labor scarce, saw inequality rise due to immigration of low-skilled workers who flooded labor markets at the bottom of income distribution, therefore lowering unskilled wages relative to skilled wages. Created a stage of "backlash" against globalization. U.S. began imposing restrictions on immigration in the 1880s: literacy requirements, Chinese exclusion,etc... In 1882, Chinese exclusion act suspended Chinese laborers fro 10 years and ultimately led to a permanent ban. In 1921, national quota system banned all Asian immigration. This ended era of mass migration and restricted globalization all in response to rising inequality due to immigration.

"Pax Americana"

Parallel to the name given to the British during their leadership of the world economy, Pax Americana demonstrates the acceptance of US world leadership.

Import Substituting Industrialization

Post-independence developing countries such as former colonies of Africa and Asia, and long-independent nations of Latin America previously specialized in primary products and imported manufactured goods from the North. However, they were hit considerably hard by Great depression, and the prices of their primary exports fell more than the manufactured goods they imported. With the fall of their export earnings, they could no longer buy imports from the North. So, after WWII, the goal was to replace imports of manufactured products by promoting expansion of domestic industries. They used high tariffs to protect these new "infant" industries. The rationale was to break from comparative advantage. While ISI did lead to industrialization, it did not lead to growth or convergence.

Developmental Nationalism

Present in the Developing World, Developmental Nationalism was an "Autarkic-authoritarian" response to the Great Depression. It was a protectionist, populist dictatorships that served urban labor and capital and the expense of landowners (ex. Argentina).The Great Depression hit developing countries very hard: exports of primary products fell severely as market demand in the North collapsed and price of primary products fell more than manufactured goods prices, harming developing countries. With the fall in their export earning, developing countries could not long import manufactures goods from the North, in addition to loans from the North drying up. In sum, prior linkages to the world economy based on comparative advantage were broken. The Great Depression led to a backlash against globalization, especially in developing countries. Landed elites, tied to the world economy, were discredited, New coalitions of "populist" forces took power and political institutions were remade to empower them. Government policy shift to autarchy, promoting separation from the world economy through trade protectionism and state control over the economy to promote industrialization.

Secure property rights

Property right is the exclusive authority to determine how a resource is used, whether that resource is owned by gov't or by individuals. Society approves the uses selected by the holder of the property right with governmental administered force and with social ostracism. 3 basic elements of private property: 1. exclusivity of rights to choose the use of a resource 2. exclusivity of rights to the services of a resource, and 3. rights to exchange the resource at mutually agreeable terms. Such limitations as price controls and restrictions on the right to sell at mutually agreeable terms are reductions of private property rights. Accompanying and conflicting with the desire to secure private property rights for oneself is the desire to acquire more wealth by "taking" from others.

The Brady Plan of 1989

Put into place by US Treasury Secretary Nicholas Brady, the Brady Plan states that debtor countries should negotiate large reductions of 30-50% of overall levels of debt and that their bank loans be converted to dollar denominated "Brady Bonds" which diversified risk away from commercial banks. Developing countries then adopted ambitious economic reforms and regained access to the international capital markets. This plan successfully reduced debt and lowered interest rates that allowed return to growth.

Social Democracy

Responses to the Great Depression in US: Counter-cyclical demand management Social insurance (unemployment, social security) Class bargain between labor and capital, with appeasement of land (farm sector) Responses in Scandinavian countries (e.g. Sweden): Same as US but with more extensive "cradle to grave" social insurance and a direct role for labor in industrial relations.

Wage inequality in the U.S.

Since the 1970s, low-skilled wages in the US have fallen sharply while wages for the high-skilled have increased. US has become a more unequal society. High-skilled wages and increasing while low-skilled wages are decreasing. The incomes of the top 20% are doing extremely well with positive growth, while the income of the bottom 20% have experienced negative growth. The gap between the "haves" and "have-nots" has widened. This is part of a global phenomenon of increasing inequality.

Specific assets

Specific assets are a case of "Market Imperfection", one of the conditions for FDI. They are both physical and human investments that are specialized and unique to a certain task. One example is the production of a certain component that may require specialized equipment. They are dedicated to a particular use and cannot easily be adapted to another purpose. They give rise to "hold-up" problems if the MNCs are dependent on a single supplier for an input, in which the seller could demand more money. To avoid this, the firm buys the supplier and "internalizes" the transaction within the firm. This explains Vertical FDI, which occurs when specific assets combine with Efficiency-Oriented locational advantages.

Vertical Integration

Vertical Integration refers to those MNCs with vertical FDI. This means that the MNC owns and controls different stages of a worldwide production process. An example is Exxon, who owns and controls everything from oil wells, to transportation pipelines, to refining firms, to storage and distribution facilities, to retail gasoline stations. This demonstrates the importance and the reach of MNCs within the world economy and international trade.

Debt Crises of the 1980s Stagflation

The 1973 Oil Crisis cause a "wage-price inflationary spiral" called "Stagflation". A mix of recession and inflation, producers raised prices to compensate for higher energy costs, so workers demanded higher wages so producers raised prices to deal with higher labor costs - vicious cycle. With so much uncertainty about prices, and with high energy costs eating into profits, firms cut back on production and investment. Slow growth and high unemployment resulted. The debt crisis that erupted from this was a major threat to borrowers and to the world financial system. Major banks were seriously overexposed. Resolution of the Debt Crisis involved keeping loans current to prevent international finance collapse and debt reduction through the Brady Plan of 1989.

Asian Financial Crisis

The 1997 Asian financial crisis was a period of financial crisis that gripped much of East Asia and raised fears of a worldwide economic meltdown due to financial contagion. The crisis started in Thailand with the financial collapse of the Thai baht after the government was force to float the abut due to lack of foreign currency to support its fixed exchange rate which led to collapse of its currency. As the crisis spread to other Southeast Asian countries and Japan, they saw devalued markets and a rise in privates debt. IMF stepped in to initiate a $40 billion program to stabilize the currencies of South Korea, Thailand and Indonesia, this hit particularly hard by the crisis. This demonstrates the fragility of the international finance system, and how easily crisis spread from one economy to others, exemplifying how interrelated globalization has made countries.

Trade Adjustment Assistance

The TAA is a federal program that provides a path for employment growth and opportunity through aid to US workers who have lost their jobs as a result of foreign trade. This act was put in place as a way to reduce the damaging impact of imports felt by certain sectors of the US economy. It was 4 components: Workers, Firms, Farmers, Communities. Way for government to compensate for effect of free trade.

The Truman Doctrine

The Truman Doctrine committed the United States to a global effort agains the Soviets and their allies. In 1947, launched the Economic Recovery Plan, also known as the Marshal Plan. They created the North Atlantic Treaty Organization, an American military bloc to accompany its sphere of economic influence. This was a way of countering the "Soviet" threat and containing communism.

Smoot-Hawley Tariff Act of 1930

The infamous tariff instated "beggar-thy-neighbor policies" that imposed cost of adjustment on foreigners. Us already has some of the highest tariffs in the world due to the 1922 Fordney-McCumber Tariff, so Smoot-Hawley only added and exacerbated it. The act was caused by endowment and interests from farmers along the Canadian border and Easter seaboard who faced competition from cheap Canadian goods and light manufacturing industries that were labor-intensive and faced foreign competition (in opposition to free traders: Southern farmers and heavy manufacturing industry, private bankers). Partisan representatives of protection interests in Congress traded their votes for imposing tariffs on products produced by import-competing industries. President Hoover did not intervene. Both Presidency and Congress were controlled by Republican party (Protectionist). As the worlds dominant economy and major surplus nations, the US needed to open its markets so that deficit countries could earn foreign exchange and pay their bills. Instead, US raised tariffs on over 9,000 imported goods to record levels, triggering retaliation by trading partners. This started an era of economic isolation. Started a tariff "war".

Petrodollar recycling

The reason lenders "over-lend" to developing countries was to "recycle" OPEC petrodollars. OPEC oil wealth was deposited in commercial banks that then needed to invest it and developing countries looked like good bets, especially in the case for oil producers like Mexico and Venezuela. This brought forth a herd mentality: affected by the huge profits for banks, this stimulated a dangerous rush to lend. Eventually this brought to the Debt Crisis of the 80s. Nonetheless, Petrodollar recycling was composed of (1) 1973-1980 rise in oil prices provided OPEC members with huge windfall. OPEC nations deposited these "petrodollars" in British and American commercial banks. (2) The second stage of recycling occurred with the onward lending by these banks to developing countries who were keen to industrialize under ISI and saw loans as a way to finance development and... (3) Pay their growing oil import bills.

"Gains from Trade" Hypothesis

Theory that claims that globalization helps the environment. Hypothesis states that trade leads to growth via specialization and comparative advantage. As people get wealthier, they demand and receive a better environment. Therefore globalization improves the environment. This theory meets the Environment Kuznets Curve which demonstrates that there is an inverse U relationship between pollution and per capital GDP. Starts with environmental decay, where higher incomes mean more production and consumption and these activities increase pollution. These are "bad" institutions with limited political freedom, weak rule of law, and poor property rights. Then, reaches turning point where we see improvement: as income grows, demands for environmental protection increase, leading to a development path characterized by both economic growth and environmental improvements. This is characterized by "good" institutions with political and economic freedoms, rule of law and strong property rights.

"Race to the Bottom" Hypothesis

Theory that globalization harms the environment. Countries open to trade and investment adopt weaker environmental regulations out of fear of a loss in competitiveness. This theory is though of as to be semi-flawed. Environmental Kuznets Curve shows that as economies grow due to globalization, pollution increases until at a certain cap, pollution diminishes. This serves to prove that by increasing national income, international trade should work to protect the environment.

Reciprocal Trade Agreements Act of 1934

These agreements fundamentally changed trade policy. Before the RTAA, trade policy was Protectionist, Partisan (responded to changes in government control) and subject to Logrolling. After RTAA, trade policy was less protection and partisan and less subject to protectionist log-rolls. The RTAA 2 key features were: Delegation and Reciprocity. Before the RTAA, Congress decided on tariffs - when Democrats were in control, tariffs fell, when Republicans were in control, tariffs rose. Delegation meant that Congress delegated its constitutional authority on trade matters to the executive branch: the President. This led to more free-trade policy, because in opposition to Congress who is more influenced by personal interest President has national interests at heart. This reduced logrolling because Congress gave up power to set tariffs on specific goods. Reciprocity couples US tariff reductions with reciprocal foreign tariff reductions, meaning that trade policy was no longer unilateral and therefore US was not subject to foreign protectionism while it was free trader. Reciprocity bolstered the lobbying position of exporters, creating winners from trade and increasing the size of the export sector. This made Republicans begin to support free trade, explaining why RTAA was not repealed in 1953 when Republicans took power again.

"Beggar-thy-neighbor" trade policies

These trade policies impose costs of adjustments on foreigners. Such policies include the infamous Smoot-Hawley Tariff, which raised US tariffs on over 9,000 imported goods to record levels. This prevented deficit countries from earning foreign exchange and only intensified their adjustment problems. It triggered a global trade war. They are called this way because in an effort to serve one's national economy, one impoverished greatly our neighbor or trading partner by secluding our market, making it expensive to enter.

Delegation and Reciprocity

These two key features were components of the RTAA. Delegation meant that Congress delegated its constitutional authority on trade matters to the executive branch: the President. This led to more free-trade policy, because in opposition to Congress who is more influenced by personal interest President has national interests at heart. This reduced logrolling because Congress gave up power to set tariffs on specific goods. Reciprocity couples US tariff reductions with reciprocal foreign tariff reductions, meaning that trade policy was no longer unilateral and therefore US was not subject to foreign protectionism while it was free trader. Reciprocity bolstered the lobbying position of exporters, creating winners from trade and increasing the size of the export sector. This made Republicans begin to support free trade, explaining why RTAA was not repealed in 1953 when Republicans took power again.

Atlantic Charter

This Charter was negotiated by Churchill and Roosevelt aboard a warship off the coast of Newfoundland in 1941. It laid out the plan for the post-WWII world economic order. Britain, being under attack, needed US help and so US had major say in most agreements because US had not even entered way yet. US required the UK's acceptance to this future order before it would help in war - quidproquo. It established that after WWII, no territorial gains were to be sought, all peoples had the right to self determination, trade barriers were to be lowered, Europe had to open their colonies to US trade, and that there would be global economic cooperation after the war. However, many in US congress were still isolationist and many opposed the war, so Atlantic Charter brought staunch opposition.

Kyoto Protocol

This demands that rich countries cut emissions of green house gases by 5% from 1990 levels by 2012. 5% is the global target, so different countries have different targets. Countries can offset cuts by properly managing forests and farmlands that absorb CO2. Developing nations are also not required to reduce emission, though they must report it. Kyoto also developed a "Cap and Trade" system that issues tradable permits, representing a right to emit a specified quantity of greenhouse gases. By issuing only a limited number of permits (a "cap"), treaty members can reduce the total quantity of gas emitted at the international level. Because permits are limited to a quantity that is less than the amount of gas that would normally be emitted, the right to emit becomes a valuable commodity. Buying and selling permits establishes a market price of them. Nations wishing to emit gases beyond permitted levels must either reduce their emission or purchase permits to emit. Polluters able to reduce their emissions relatively cheaply will do so, rather than purchase permits. Polluters who face higher abatement costs will buy permits to satisfy requirements. In this way, reduction in emissions are made by those polluters who can do so at least cost, being compensated by polluters who face higher costs.

Environmental Kuznets Curver

This describes the inverse-U relationship between pollution nd per capital GDP. By increasing national income, international trade and globalization more generally should work to protect the environment. Furthermore with appropriate institutions in place, the extent and duration of the high pollution phase of development can be mitigated. Curve begins by upward sloping: this is the environmental decay. Higher incomes initially mean more production and consumption and these activities increase pollution. At some level of GDP, there is a turning point, where we begin to see environmental improvement characterized by a downward sloping curve. As income grows, demands for environmental protection increase, leading to a development path characterized by both economic growth and environment improvements. Good institutions flatten the EKC for these pollutant because demands of citizens translate into effective regulation and reduction of pollution. However, there is not evidence of a Kuznets curve for CO2.

The Resource Curse

This is and endowments-based argument that determines what causes good (or conversely bad) institutions. The resource curse dictates that the easy availability of natural resources such as copper in Zambia, oil, gold, etc..) stunts institutional development. Instead of promoting economic and political liberties, elites can dig wealth from ground and put it in Swiss bank accounts. Paradoxically, countries with lots of valuable natural resources are "cursed" to experience lower growth. Resources may preclude the development of good institutions. Clear negative relationship between primary product exports and economic growth.

Washington Consensus

This is the set of 10 policies that the US government and the international financial institutions based in the US capital believed were necessary elements of "first stage policy reform" that all countries should adopt to increase economic growth. At its heart is an emphasis on the importance of macroeconomic stability and integration into the international economy - in other words a neo-liberal view of globalization. The framework included: 1. Fiscal discipline - strict criteria for limiting budget deficits 2. Public expenditure priorities - moving them away from subsidies and administration towards previously neglected fields with high economic returns 3. Tax reform - broadening the tax base and cutting marginal tax rates 4. Financial liberalization - interest rates should ideally be market-determined 5. Exchange rates - should be managed to induce rapid growth in non-traditional exports 6. Trade liberalization 7. Increasing foreign direct investment (FDI) - by reducing barriers 8. Privatization - state enterprises should be privatized 9. Deregulation - abolition of regulations that impede the entry of new firms or restrict competition (except in the areas of safety, environment and finance) 10. Secure intellectual property rights (IPR) - without excessive costs and available to the informal sector Reduced role for the state.

The "Obsolescing Bargain"

This posits a negative relationship between MNC "power" over host governments and time. At the time of initial investment, MNCs are powerful but power gradually shifts to the host government over time. At some point, the host government no longer needs the MNC to operate affiliates and it expropriates it. This exemplifies the downward sloping power of MNC relative to Host Government over Time. Initially, the MNC controls capital and expertise and has bargaining power. Over time, the host country develops the skills to run the MNC affiliate and market its products. Power of MNC declines and the situation is ripe for expropriation. However, expropriations don't usually occur anymore because those in raw materials industries have already been expropriated and others don't serve any purpose outside of MNC.

The "Unholy Trinity"

This principle includes the 3 objectives of economies: Fixed-Exchange rates, International Capital Mobility and Monetary Policy. It is called the unholy trinity because only 2 of these objectives are possible at any time. Under the gold standard only the first two were possible, explaining why US had to leave the Gold Standard in order to provide Counter-cyclical Monetary policy.

Factor-Price-Equalization (FPE)

This process refers to the theory that with globalization, through trade, immigration and FDI, less skilled wages are determined by the global supply of less-skilled labor, rather than by domestic labor market conditions. This theory partly explains the reason for rising US wage inequality. Yet, estimations suggest that globalization "explains" at best about 30% of income inequality in the US.

Fiscal implications of immigration

This refers to the impact of immigrants greater use of welfare programs, as opposed to natives use, such as public assistance, unemployment benefits and other services. Immigration thus increases the net tax burden on native taxpayers and thereby bias politics and policy toward immigration restrictions. In the 19th century, have open immigration and closed trade, and were no costs. The reason for this is that unlike today, immigration had no fiscal impact because there was no welfare state, so taxpayers were not affected by immigrants.

Business cycles

This was the Pre-1929 orthodox idea that the economy went through business cycles of booms and busts. This therefore attributed the Great Depression to being the response to the boom of the 1920s. The idea attached to this idea of business cycles was that they were self-correcting- once prices/wages fell low enough, capitalists and consumer would begin buying, hiring and investing again, stimulating aggregated demand. However Keynes demonstrated that this theory was flawed because of the negative expectations of capitalists for the economy and investment opportunities.

Pre-1929 Orthodoxy

This was the belief that business cycles and the economy were self-correcting. Laissez faire principles opposed government regulation beyond minimum necessary for a free enterprise system to operate. They believed that business cycles alternated between periods of economic growth and decline. These were considered natural and necessary, as well as self-correcting. During the recession of the 1930s, it was believed that prices and wages had to fall in response to the excess of the 20s - big depression in response to a big boom. Liquidationists argued that economy had to liquidate all bad investments, loans and useless products before recovery could take place. They advocated for letting prices and wages fall until people begin to invest, buy and hire again.

Grain Invasion

Transportation revolution allowed farm products from the new world (U.S., Canada, Australia, and South America) to enter European markets, exposing Europe's farmers to severe competition. Before this "invasion", Prussia and Eastern Europe had been farm producers. Now the low-cost of imported grain from the ARS' threatened farmers in Europe with extinction. Agricultural technological changes in farming allowed for dramatic improvements in farm productivity that greatly advantaged land-abundant countries and disadvantaged European agriculture. This resulted in an adoption of protectionism for agriculture in Europe, notably Germany (also protected industry). Also resulted in disadvantaged shifting away from grain into livestock and dairy farming as seen in England. Basis of Iron and Rye coalition, which raised trade barriers in response to threateningly low imports.

"Golden Fetters"

Under the Gold Standard, governments could not lower interest rates to stimulate demand (which would encourage domestic investors to invest abroad, buying foreign currency). In order to use monetary policy for countercyclical demand management to stimulate aggregate demand, this required breaking up with the Gold Standard. Those who broke up with the Gold Standard did much better during the Great Depression. This is due to the principle of the "unholy trinity".

Offshoring of services

Until recently, off shoring involved sending manufacturing jobs overseas to take advantage of lower labor costs. Now information technology has made it possible to deliver services from afar. Not only low-skilled services, but also high-skilled services. Entry of 1.5billion "new" workers into the world economy means that there are plenty of people willing to provide services from afar. Polls showed deep concern for globalization. Conversely, most economists would say that US economy is enriched by off shoring, but some have also expressed concern about the distributional implications. Winners: US capital owners who substitute cheap foreign labor in the service sector for expensive domestic labor and US consumers who gain from decline in prices. Losers: US workers that experience falling wages and increasing job insecurity for all skill levels. With powerful lobbies, these groups could initiate a backlash. Yet, not everything is off-shorable: physical proximity, experience and cultural nuance are needed to perform the higher level services. Highly specialized and require physical proximity should remain immune.

Post-war European economic stabilization

Versailles Treaty created new countries called "successor states" carved from old empires in central and eastern Europe. These countries faced serious economic challenges. They had to balance budgets and control inflations while facing strong political pressure from civil servants and the unemployed. These governments simply printed money to pay civil servants and provide social services, leaving the Gold Standard behind, and resulting in hyperinflation. Economic recovery came with the Dawes Plan in 1924.

Wage inequality

Wage inequality refers to growth in the gap between the top 20 % and the bottom 20%. Since the 1970s, low-skilled wages in the US have fallen sharply while wages for the high-skilled have increased. Inequality has increased since the 1970s. In Europe, by contrast, low-skilled workers have experience high and persistent unemployment rather than falling wages. This is due to stronger labor market restriction in Europe that prevent firms from adjusting wages such as higher minimum wages and legal restraints on adjusting wages. So instead of lowering wages, they simply don't hire as many workers. High European unemployment is thus the flip side of falling wages in the US. Determine that with globalization, less-skilled wages are determined by the global supply of less-skilled labor, rather than by domestic labor market conditions. This process is called "Factor-Price-Equalization" (FPE). Estimations suggest that globalization explains at best 30% of income inequality. Attribute the other 70% of rising wage inequality with the technological upgrading of the economy which has created a wage premium, the de-unionization of the private sector which has reduced the bargaining power of workers and the super salaries of CEOs, who have seen their incomes literally explode since the 1970s. Also, claim increasing supply of low-skilled labor in the US with immigration puts downward pressure on wages of native-born low-skilled adults.

Competitive devaluations

When a country tries to devalue its currency to increase international competitiveness. However, this often encourages other countries to also devalue leading to only temporary increases of competitiveness of exports. Devaluation can often lead to inflation which reduces long term gains in competitiveness.

International commodity cartels

When a group of developing countries cooperates to artificially reduce supply in order to raise the price of a commodity, it has formed a cartel. A cartel is an attempt by producers to cut production so as to obtain higher prices for their products. The goal is to improve terms of trade by way of production controls and to raise export prices of primary products. OPEC is a prime example.

Jean Monnet and European integration

When tensions b/t France and Germany rose over control of the then vital coal and steel industries, Monnet et al. conceived the idea of a European Community. In 1950, with agreement of Chancellor of West Germany, French Minister of Foreign Affairs Schuman made a declaration in the name of French gov't. This declaration, prepared by Monnet for Schuman, proposed integration of the French and German coal and steel industries under joint control, a so-called High Authority, open to the other countries of Europe. When Germany agreed to join the European Coal and Steel Community according to the Schuman Plan in 1951, the ongoing dismantling of German industry was halted and some of the restrictions on German industrial output were lifted. In 1955, Monnet founded the Action Committee for the United States of Europe in order to revive European construction following the failure of the EDC. It brought political parties and European trade unions together to become a driving force behind the initiatives which laid the foundation for the EU as it eventually emerged: first the European Economic Community (1958), established by the Treaty of Rome of 1957; later the European Community (1967) with its corresponding bodies, the European Commission and the European Council of Ministers, British membership in the Community (1973), the European Council (1974), the European Monetary System (1979), and the European Parliament (1979). This process reflected Monnet's belief in a gradualist approach for constructing European unity.