Popular in International Political Economy
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verified elite notetaker
verified elite notetaker
verified elite notetaker
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PS 340 Intro GTF Patrick Van OrdenPLC 932 Mon 1121 vanordenuoregonedu Tariff Increase price on foreign goods Quantitate restriction Limit supply Price Increase Monarch use foreign econ policy to increase policy of state LIBERALISM 1776 looking at the relationship between politics and the economy Formed a new set of answers about the proper relationship between the two SEPARATE 1 Free trade 1846 2 Gold stamp Determines value of lb of gold to determine monetary value Interest groups have easy access to policy makers and congress Authoritative regime top down policy making BUT any successful country pursued protectionist policies MNC multinational corporations Setting up shop abroad to circumvent trade barriers China keeps exchange rates low to aid easy exports leading to the necessity of trade and exchange rate policies INTL POL Econ politics of exchange flow of goods and services capital and people determined by degree of openness Openess affects interest of groups Domestic internal Stayed open in last depression 2008 because change in way dominant firms expressed interest lntl Focus on systemic level factors World Ideology Openness is good reason why we turned down protectionist policies in 2008 recession Interdependence Too difficult to have war or foreclosure because it is too costly Wed Oct 1st Agricultural Protectionism Reductions in agricultural protection main goal of Doha round Rich countries spend 300 billion a ear on farm support In 2002 top 10 of American farmers received 65 of government subsidies Cotton USA is worlds biggest exporter 25000 American cotton farmers receive 4 billion in subsidies to produce 3billion worth of cotton Our cotton subsidies push down the world market price Sugar Sugar makers are supported by rural and urban tea party and liberal lawmakers who all have sugar operations in their states Florida is worlds biggest refining operation Fanqu family Generous campaign contributions and personal ties Al Franken and Marco Rubio Protection making it almost impossible to buy foreign sugar opposed by candy makers and food manufacturers Hershey Mars Kraft because costs of raw materials go up These kinda of programs existed in various forms since the Great Depression combining import quotas price floors taxpayerbacked loans to support about 45000 growers Claim is that it needed to protect producers from a world market heavily distorted by subsidies from Brazil Mexico ext lndustry sugar protection is costfree Government and academic studies cost food makers and consumers at least 19 bilion a year Recent Initiatives Transatlantic Trade and Investment Partnership TTIP or Transatlantic Free Trade Area TAFTA between US and EU to make up new trade routes talk began in 2013 and finalized 2014 focused on non tariff barriers under 3 in part a reaction to lack of progress in the Doha Round TransPacific Partnership TPP trade agreement under negotiation since 20100 Obama admin fast tracking TPA to conclude negotiations China and American Foreign Economic Policy Issues Trade and Currency Exchange Rates 2012 Obama filed a trade case against China at he World Trade Organization His claim was that china is unfairly subsidizing sports of cars and auto parts US is countervailing duties on Chinese paper steel tires and chemicals Then china filed its won WTO case on the same day US calculation of countervailing duties in anti subsidy cases is unfair Revalue China s Yuan Yuan is undervalued so should increase in value per dollar china has a higher rate of inflation than we do so it makes Chinese goods more expensive on the world market Currency manipulation jerks Make american companies more competitive at home and abroad Reduce US trade deficit with China Senate in 2011 any fundamentally misaligned currency is a subsidy subject to countervailing duties Emergence of Markets Markets displaced other means of exchange Reciprocity Redistribution Emergence of States The nationstate displaced other forms of political organizations like tribes city states and empires States vs Markets Two opposed forms of social organization State and market Markets work best in the absence of political interference invisible hand operates States economic activities designed to serve national interest or interest of powerful groups within states States are necessary for markets to function Enforcement of property rights Intervene when markets break down Market Failure major entry point between economics and politics Oct 6th Week1 Continued Public goods non excludability once the good is produced you cannot stop people who didn t produce it from getting benefits from the produced good ex Policies passed in law and nonrivalry ex Light emitted from a lighthouse assuming we are all rational people why participate in some political campaign when it will happen anyways and you can enjoy it without effort but if everyone thinks that way we will not get organization and action is undersupplied Private goods your own consumption subtracts from anyone else s ability to consume the good Pure world of economics states absent along with all government markets allocate resources via price mechanism optimal efficiency think econ 201 Pure world of political science markets are absent states allocate recourses administratively ex Former Soviet Union andor china Neither world exists in pure form but the relative influence of state and markets varies across time and across countries Week 2 PS 205 in 10 minutes or that book he told us to read and admitted nobody will Levels of analysis Anarchy There is no legitimate world government ready to enforce the law Systemic level Power matters because the more that one person has the less another does distribution All states want to survive and to survive they need security that comes from power Distribution of international economic power and a variation of that Cause independent variable Cooperation con ict Domestic level The domestic level of analysis locates causes in the character of the domestic system of speci c states Thus war is caused by aggressive or warlike states not by evil inept or misguided people or the structure of power in the international system Wikipedia Individual level Distribution matters internal issues matter but theres a variable amount of actions that can peruse We have to look at the characteristics of individual leaders if you put another individual in the role you will get another result ex Romney vs Obama This all explains the variation in which states cooperate and function States with similar cultures are more likely to cooperate States respond to depression differently so the variation is on reaction to the dependent variable In the 30 s states responded by turning inward instead of opening up to the international market Culture is our independent variable Inward turn during the great depression 30 s dependent variable effect trying to explain this 1 Differences in culture Countries want to protect their people and focus on their problems before anyone else s 2 If you re going to look at differences in behavior look at the individuals persona 3 Containment 4 Too many initial factors means no causation can be correlated 5 Individual leaders beliefs becomes policy all various presidents exerted containment and that cannot be explained need to nd something else that would explain why we peruse containment despite all the differences in personality and beliefs competition with the soviet Theoretical frameworks Liberalism RealismMercantilism Marxism Distribution of economic power 1 Systemic level argument 2 Krasner realist hegemonic distribution of potential economic power open trading system 3 Problem lags between shifts in distribution of power and degree of openness 4 Domestic social structures prevent the adoption of policies in line with the international distribution of economic power Domestic Politics 5 Who gets to vote 1 Landed aristocracy vs bourgeoisie vs working class 6 How are individual and group preferences expressed in the political process 1 Do certain groups have privileged access to policymakers An institution is the rules of the game RealismMercantilism 7 The primacy of politics over economics 1 Political factors do or at least should determine economic relations 8 The market should be subordinate to the pursuit of state interests 9 Every economic con ict is both economic and political 1 Because economic resources are necessary for national power 10 Relative power determines the functioning of the international economy cf Krasner Liberalism 11 Politics and economics exist at least ideally in separate spheres 12 Markets should be free from political interference 1 Maximizes efficiency economic growth and consumer choice Marxism 13 Economics drives politics 14 Political con ict arises from struggle among classes over the distribution of wealth 15 Political con ict will cease with the elimination of the market and of a society of classes Mercantilism 15001776 16 Political and diplomatic concerns primary 17 Economic relations are tools to enforce or reinforce dynastic power 18 Manipulate economies for military advantage 19 Foreign trade central to the politics of mercantilism 1 Manipulate trade by military means Traditional view of mercantilism 20 Power was the main objective of foreign policy 21 Wealth vaued only as a means to power 22 Focus on a favorable balance of trade 1 Wealth associated with the accumulation of precious metals gold and silver 23 Implied that wealth just like power is a zerosum game Modern view of mercantilism 24 Both power and plenty are ends of foreign policy 25 There is longrun harmony between these ends 1 But possible shortterm trade off 26 What do we do if con icts arise between these two goals Different answers Mercantilist economics 27 Wealth identi ed with money thus the stock of precious metals 28 Stock of precious metals constant 1 Quantity of money constant 2 Quantity of wealth constant 29 Countries could only gain at each others expense 1 Close relationship between balances of trade and power trade surplus increased your power Mercantilist policies 30 Prevent gold and silver from being exported 31 Tariffs to limit imports to necessary raw materials 32 Exports encouraged 1 Exports of raw materials and technology discouraged Mercantilist colonial policies 33 Force colonies to buy manufactured goods and services from the mother country 34 Force colonies to sell primary goods cheaply to the mother country Explaining mercantilism 35 Different erroneous understanding of the economy 1 Lacked the analytical tools to see why the mercantilist view is wrong 36 Rent seeking who bene ted 1 Merchants reaped monopoly pro ts 2 Governments reaped tariff revenue payments from merchants The role of industrialization 37 Industrialization important because 1 It has positive spillover effects externalities 2 It is associated wit economic self suf ciency and political autonomy 3 It is the basis of military power and therefore is central to national security Hamilton on American industrialization 38 Hamilton report on manufacturing to the rst congress 1 Argued for trade protection and a strong role for the state in promoting domestic industries 39 Industrialization required the adoption of protectionist trade policies 1 Would help its industries compete with the more mature industries of other nations 40 An infant industry argument 1 Obama sponsored solar panel programs Friedrich list on German industrialization 41lt is in the national interest for the state to promote industry 42 Manufacturing develops greater human skills and opportunities than does agriculture 1 A rmer basis for wealth and power 43 Promote industrial development through tariff barriers investment government services such as roads education and railroads List on trade policy 44 Every industrial nation has pursued and should pursue protectionist policies to safeguard infant industries 45 Once industry is strong enough states pursue free trade and seek to convert others to the virtues of free trade 46 Free trade is the policy of the strong 47 Still limits on range of goods eligible for protectionism and on size of tariff 48 Protectionist measures should be temporary Mercantilism vs Liberalism 49 What matters is productive capacity not wealth 1 Liberals argue this too 50 What matters is not the balance of trade but eh composition of trade 1 Differs from liberals Week 3 Mercantilism vs Liberalism II o Neomercantilistrealists do not deny the gains from trade but they are more interested in dynamic comparative advantage Liberals comparative advantage is static a natural endowment Mercantilists you can create comparative advantage through industrial policy Modern NeoMercantilism o Developingcountry import substitution focus on industrial development and national autonomy 0 Relative gains still matter 0 But Gold and silver not the measure of wealth No attempts to limit the export of raw materials No belief that wealth is a constant Theoretical Frameworks II Economic Liberalism 0 Human beings are by nature economic animals False markets evolve naturally without central direction 0 Market mechanism will achieve maximum ef ciency economic growth and individual welfare 0 Main point of economic activity is to bene t individual consumers Economic liberalism and the state 0 Economic activity enhances the power and security of the state cf mercantilism 0 Limited role for the state Market failure 0 Provide for national security Protect private property and insure that the market is allowed to function properly Power and exchange 0 Power and coercion do not affect terms of exchange in a truly competitive market 0 Terms of exchange determined by supply and demand 0 If exchange is voluntary by de nition both parties bene t 0 Left alone the market will lead to harmony Distribution and equality o Neglects distributional issues 0 Individual productivities differ so not everyone will gain equaHy 0 International relations everyone better off in absolute terms under free exchange but the relative gains might differ Institutional liberalism 0 International institutions promote cooperation between countnes Provide information that removes uncertainty and makes it easier to detect cheating Provide standards of behavior against which performances can be measured Reduce transaction costs 0 Costs associated with negotiating monitoring and enforcing agreements Commercial Liberalism 0 Trade has paci c effects 0 Trade creates bonds of mutual interest 0 Interdependence l peace Interdependence raises the bene ts of economic exchange Wars interfere with economic exchange In the era of interdependence wars are therefore costlier Because wars are costlier they are less likely o Marxism 0 Individuals economic position class will determine their political views 0 Politics is a superstructure upon an economic base 0 Classes are the units of analysis and the political actors o The state in capitalism is the executive committee of the bourgeoisie o The theory of history 0 History as a progression of modes of production Slave society Feudal society Capitalism Socialismcommunism o Contradiction between the social relations of production and the forces of production technology leads to crisis 0 Class struggles drive history forward from one stage to the next 0 The nature of capitalism 0 Capitalism is driven by capitalists striving for pro ts and capital accumulation in a competitive market economy 0 Labor has become a commodity that is subject to the price mechanism 0 Capitalists exploit the workers Capitalists own the means of production capital Workers not fully compensated An inherent con ict between those who own the means of production and those who do not l class struggle Week 3 Day 2 Marxism continued The critique of Capitalism Although the individual capitalist is rational the capitalist system itself is irrational Capital accumulation leads to the periodic overproduction of goods surplus capital falling pro t rate less investment and downturns in the business cycle Economic crises would become increasingly severe and eventually would lead to a revolution Lenins Problems Why did nationalism triumph over proletarian internationalism at the outbreak of the First World War Why had the impoverishment of the proletariat not taken place as Marx had predicted Instead wages were rising and workers were becoming trade unionists Working class should ve aligned with the other class but that didn t happen Lennins Imperialism Coverted Marxism from essentially a theory of the domestic economy to a theory of intl pol relations among capitalist states Focus on colonization or imperialism a necessary feature of advanced capitalism Colonies made it possible for capitalists to dispose of their unconsumed goods acquire cheap resources and nd outlets for their surplus capital The struggle for colonies and war Capitalist economies compete and divide up the colonial world in accordance with their relative strengths The First World War A war of colonial redivision Wars to control colonies would continue until the industrializing colonies and the proletariat of the capitalist countries revolted against the system What drove the war was the disappearance of the Ottoman Empire Lecture 4 Industrialization and the rise of liberalism Industrialization began in Great Britain at the end of the 18th century First major textiles late 1700 s followed by railroads after 1820 British industrial supremacy played an important role in defeating Napoleon By 1840 large parts of Western Europe was industrialized COAL coal coal Napoleon was defeated in 1814 Political and Ideological Changes Aristocracy replaced the bourgeoisie Economic liberalism justi cation for organizing society according to market principles Basic tenets of laissezfaire with a competitive labor market free trade and a gold standard Free Trade in GB 18151846 debated over whether to keep the Corn Laws tarrifs on grain Struggle for political power between the industrial middle class and landed aristocracy The 1832 Reform Act increased the power of industrial interest middle class in Parliament Attack on the Corn Laws protection of grain production Peel Political compromise reduction of tariffs on agricultural and manufactured goods higher gov spending in rural areas Domestic institutional repeal of corn laws to make quotfree tradequot from Interest group pressure I Liberal ideology spread to rest of western Europe from great Britain 18731896 the original Great Depression Downward pressure on prices exacerbated by technological developments Revolution in transportation railroad steamships Made American grain available in Europe Same effect as lowering tariff on grain Agricultural and industrial tariffs in Germany and France Industrial tariffs in Y5 Continued free trade in Great Britain Gold standard Liberal institution removed money supply from political control reliance on market 18701914 the high summer of the international gold standard Spreads from England 1816 coinage act France follows in 1850 Germany 1871 US joins in 1900 Rules of the Game Value of currencies in the system is legally xed to gold Citizens are free to convert the currency to gold Free movement of gold between countries in the system The domestic money supply must be linked more or less automatically to movements of gold in and out of the country Balance of payments gold standard essentially a system of intl balance of payment ad The balance of payments Divided into two parts Current account checking account impact of intl transactions on current ntl income Balance of trade net investment income net unilateral transfers Capital account impact of ntl transactions on natl wealth Ownership of physical intellectual and natural resources like bonds stocks real estate and patents More on the capital account Capital account surplus Foreigners buy more domestic assets than we buy foreign assets We end up with more money but fewer assets and less wealth A capital account surplus means you39re a borrower nation Experienced a net increase in foreign ownership of our wealth Capital account de cit more domestic purchases of foreign assets gt foreign purchases of domestic assets A capital account de cit means you39re a creditor nation End up with less money but an increase in wealth Why Balance Technical reason double entry books must balance By de nition cannot have a balance of payments de cit or surplus A de cit in one account will be offset by a surplus in another Practical reason each international transaction involves foreign exchange for supply and demand to be equal in foreign exchange markets in ows and out ows of a currency must balance Theoretical Relative Prices DOWN l Exports UP imports DOWN l BOT surplus I Gold ln ow I Supply of Money UP Demand UP Prices UP Exports DOWN lmports UP Equilibrium Underlying Assumptions Emphasis on relative pricelevels Demand for imports and exports are price elastic Whoe effect would be in price level and none in employment and output Governments will stick to the rules supply of money contracts and expands in tandem with gold stocks automatic mechanism Required governments to give up active monetary policy How it worked in practice How automatic was itgt A standard operated by technocrats central bankers Sterling and gold were often used interchangeably to settle intl balances between countries Long term capital movements offset de cits and surpluses rather than price changes De cits on the current account offset by a surplus on the capital account long term borrowing The Role of British Hegemony The bank of England was the regulator of the gold standars and the intl payments system Cooperation of the great central banks of leading countries Central bank cooperation involved surrender of natl sovereignty To the rules of the game to the bank of England Why did the Gold Standard survive No signi cant de cits or surpluses that require correlation Long run de cits could be corrected by borrowing Bank of England would adjust interest rates according to how they thought money should ow Lecture 5 The lnterwar Period External vs domestic stability Con ict between External stability the stability of the currency Domestic stability A steady price level full employment and economic growth This con ict eventually destroyed the gold standard in the interwar pedod The importance of domestic stability Ful employment a more salient issue Wartime governments encouraged the spread of trade unions to ensure labor peace Extension of the franchise Growth of political parties dominated by the working class Determination of wages and employment now a political issue Implication for the Gold Standard How would governments decided in con icts between employment and current stability Created doubt about the credibility of the commitment to gold No longer did capital necessarily ow in stabilizing directions Self ful lling prophecy Forced countries to devalue take the currency off gold Turning inward The immediate effects of the crash in 1929 End of US foreign leading no money to re nance debt The 1930 smoot Hawley tariff closed off the US market US devalued the dollar by laving the gold standard in 1933 Week 4 Day 2 Watched the market crash movie from 29 When the market is in trouble the solution is a private solution private bankers get together to buy stocks and restore faith Buy bonds and then make money available to the owner Market not regulated means lots of cheating and group work to drive up prices and sell to unsuspecting investors quotThe market will self correctquot Fishing trips Prez Hoover Leads to abandoning the gold standard industrial production picks up 19291937 Turning Inward Starts with USA Great Britain imperial preference in 1932 Germany and Japan Political control of markets to insulate themselves from intl econ shocks Latin America Developing nationalism Colonies movement toward decolonization Colonies didn t want to be attached to a sinking ship Trade Protectionism in the 1930 s Domestic level vs systemic level explanations nterest group theory lnterest group pressures Eichengreen Hegemonic Stability theory Distribution of intl econ power Krasner Adoption of protectionism driving unemployment rates down Everyones looking for a private or domestic solution to the problem over relying on anything else in the rest of the world Domestic level explanations Factors of production land labor capital classes labor capital sectors steel lm industry Interest Group Theory Interest groups become numerous in the 20 s than ever before Interest groups have more extensive links to governments Eichengreen smoothawley the outcome of ogroing between border agriculture grain growers exposed to imports and labor intensive ight industry Tariff protection was opposed by Southern agriculture capital intensive heavy industry and banking A sectoral view agriculture land and industry capital and nore monolithic blocks not the politically relevant actors Logroing I scratch your back you scratch mine we will support your groups interests if you do the same for us The groups want to reduce competition from foreign producers so they make groups Main claim The more powerful groups get what they want power tariffs Critical issue What measures power Ease of organization overcome problem of free riding Access to policymakers MIDTERM Put together GOOGLE DOC Do the questions and let him on it Essays 36 Bring a green book Week 5 Day 2 Gerschenkron and Power Institutional and organizational factors explain why the coalition of iron and rye win out in Germany in 1879 over the coalition of small manufacturer and farmers who favored free trade Political dominance of the Junkers Ease of organization of heavy as opposed to small manufacturing Two measures of power that are independent of the outcome we are tying to explain tariffs Way to measure power in terms of cause and effect Eichengreen and power Rise of trade associations labor farming business Reforms of congressional procedure More difficult for individuals to dictate policy opening up the legislative process to competing interests Growth of interventionist sentiment But Why did border agriculture and light industry win Why protectionism did they have better access to poicymakers maybe Systemic Level Explanation Hegemonic stability theory Concentration of power hegemony international economic stability liberal international economic order Dispersion of power protectionism instability The role of public goods The hegemon as a privileged group Stability as a public good Changes in the distribution of power Structura change Decline of Great Britain and the rise of the United States The US From debtor to creditor country Us exports and loans during the war gave it a stake in stability after the war The US Response Involved economically but not politically in the interwar period Charles Kindleberger quotIn 1918 world leadership was offered by almost universal consent to the US and was declinedquot Stephan Haggard quotThe British couldn t supply international leadership in 1929 and the United States wouldn t Problem for hegemonic stability theory Lake Incomplete transition from one hegemon to another Britain and the US could have cooperated but did not The role of domestic politics A serious split between internationalists and economic nationalists Midwestern industry was nationalist Wall Street was internationalist Dispute resolved in factor of the former International involvement required domestic support Domestic Institutional Changes 1934 RTAA President authorized for a xed period of time to reduce US duties by up to 50 in return for compensating tariff reductions by the partner trading country Two rule changes From unilateral reductions to reciprocity rule change 1 Simple majority rather than two thirds majority required to pass tariff reductions in Congress rule change 2 The TRAA and its consequences ncreased support for tariff reductions exportoriented industry Made it more difficult to change policy bound by treaty foreign retaliation Why t he RTAA congressional workload reduction but nothing does this too Learned a lesson from 1930 so tired and overwhelmed that they decided to never again get involved in that kind of trade policy making 1934 simply too few republicans around to oppose it Chnages in institutions and preferences A domestic institutional explination Change in institution rules of the game change in trade policy free trade Postwar boom in export sector explains why republicans did not overturn the rtaa after they ained a majority in both house of congress in 1946 Why did the RTAA survive in the long run Over time republican support for proctectionism disintegrated as export dependence grew Republican electoral base shifted to exportoriented constituencies in th South and West Long term shift in US comparative advantage in favor of capital intensive production Executive Legislative Relations Today Advance authorization origionally did not apply to nontariff barriers so could be overturned by congress 1974 Trade Act granted quotfast trackquot negotiating authority on both NTB s and tariffs goes back to congress but no libuster and no amendments Fast track in effect from 19751994 Trade promotion authority TPA or fasttrack was restore in 2002 by the trade act Expired at midnight in 2007 Brettonwoods and domestic politics New deal coalition supporters of free trade The south strong against democrats Northeast Wilsonian democrats Labor movement wanted jobs in export sector and cheap imports Against free trade Industrial Midwest Discredited by the 1930 s Industry as a whole was competitive Brenttonwoods and ideology Ideology Free trade particularly non discriminatory trade was the underpinning of world peace Security considerations From nondiscrimination to discrimination in favor of allies The US agreed to continuation of imperial preference and Great Britain agreed not to increase preferences Most favored nation apply all favors to every nation aka favor france for wine imports grant it to all countries way to get around it is make rules about a certain color or alcohol content that applies to only one country or cows at elevation Week 6 Day 1 The Bretton woods economic order Advanced industrial countries run the show Agreement that an open world economy will bene t all Regional integration is OK Source of friction What happens if openness leads to domestic economic problems Embedded liberalism Open world economy will bene t everyone but not equally Money and Finance A gold dollar xed exchange rate system currencies were convertible to the dollar and the dollar was convertible to gold The IMF insure the functioning of the international monetary system Finance current account de cits to prevent devaluations Today nance short term de cits to stabilize currencies in the developing world Get around the current account de cit you can devalue the currency in comparison to other currencies exports go up because they re cheaper in relative to others instead they would lend countries money to avoid frequent devaluations In the developing world they recommend same with brentenwood system doing something about domestic prices need to get exports up and imports down so they change aggregate demand down so prices go down Gov reduce spending Investment The international bank for reconstruction and development IBRD or World Bank Facilitate private lending by making developing countries attractive for foreign private investment Reconstruction function replaced by the Marshall plan Today Finance longterm development projects that are too risky for private investors Trade 1 The International Trade Organization ITO Envisioned as a special agency of the UN March 1948 draft agreement was initialed to create the ITO Not rati ed by congress Opposition from US business community to government intervention in the market and to rules governing FDI that favored host countries Trade 2 The General Agreement on Tariffs and Trade GATT Salvaged from the ITO negotiations Originally intended merely as a stopgap mechanism A negotiating process and not a formal organization such as the IMF and IBRD Trade 3 The WTO Oversee agreements on trade not just in goods but also in services and intellectual property Dispute settlement mechanism WTO rules that states agree to will be applied by a legaltechnical body that they do not control WTO unanimity require to block reports WTO right to appeal a decision Signatories voluntarily give up sovereignty Why WTO but not ITO 1948 the business community largely ignored Mistake was not repeated during the Uruguay round of the GATT Business communities in the advanced industrial countries supported liberalizing trade in services Business backed the agreements covering intellectual property rights Comparative Advantage A major theoretical underpinning for free trade Ricardos Example Portugal had an absolute advantage in the production of both wine and cloth used less labor producing both But Portugal was even more ef cient relative to England in the production of wine than in the production of cloth Portugal had a comparative advantage in the production of wine Both countries would gain from exchange and from specializing according tot heir comparative advantage A world of harmony of interest because both gain Factor Endowments Comparative advantage rooted in differences in factor endowments Factor endowments shape the costs of production The Heckscher Ohlin Theorem A country will export those commodities which use its relatively abundant factor relatively intensively the factor that was relatively cheap before trade A country will import those commodities which use its relatively scares factor relatively intensively the factor that was relatively expensive before trade Assumptions Neoclassical theory of trade based on a number of important assumptions No transport costs The factors of production are perfectly mobile domestically but completely immobile internationally Comparative advantage is static a gift of nature Constant returns to scale Perfect competitions in all markets no market power Size matters Large countries can affect world prices and therefore the terms of trade PxPi they have market power Large countries may not have an interest in free trade they nd themselves in a prisoners dilemma Small countries cannot affect od prices Small countries should always pursue free trade even unilaterally Prisoner s dilemma protectionism vs free trade Cooperate cooperate cooperate not not cooperate not not Stolpher Samuelson Theorem Protection ecreased trade bene ts he ocay scares factor protection is good for labor in a labor poor country and is good for capital in a capital poor country Conversely free trade is good for labor in a laborabundant country good for capital in a capital abundant country The theorem explained With trade demand for he product in which the country has comparative advantage will rise A laborrich country tends to export products that use labor intensively the more the country trades the more labor is used and the more wages rise Without compensation to those who lose from trade there will be a class in the economy permanently harmed by free trade even though the country as a whole gains Stopper Samuelsson theorem gives us an idea of which factor of production or class will want protection which free trade Commerce and coalitions Rogowski using the stolper samuelson theorem to explain domestic political cleavages Urban and class con icts Three factors of production land labor capital Lower transportation costs will have same effect as a decrease in tariffs reverse also true Urban rural con ict When capital and labor are abundant but land is scares Expanding trade bene ts capitalists and workers urban sector will avor free trade Harms landowners rural will favor protectionism Examples Britain at end of 19th century liberal party representing manufacturers and workers vs conservative party representing landed interests Battle over suffrage and imperial preference US in 19th century capital labor scares land abundant Aggrarians advocated free trade capital and labor protectionist Sector model Ricardo viner speci c factors model Capitalists and workers have sectorspeci c assets or skills Factors of production are speci c to a particular industry at least in the short run Another way of saying that factors of production are not perectly mobile domestically Stolper Samuelson may be more appropriate for analyses of the long run assets are moremobie in the long run Sector model elaborated Not class con ict but con ict between industries in important competing and export oriented sectors Real incomes are tied to how well their industry is doing ndividuas with assets in export oriented industries bene t from free trade Free trade expands the demand for goods produed in export oriented industries which increases the demand for labor and capital employed in those industries Individuals with assets in importcompeting industries lose from free trade Obstacles to Collective Action Free riding non excludability Generally less of a problem for small groups Costs of organizing Generally lower for small groups Individual contributions more likely to decide outcome in small groups The collective action problem produces a bias toward industry speci c protection because industries are better able to overcome the collective action problem than are consumers Domestic institutions 1 Domestic political institutions the rules and norms governing policy making the rules of the game Shape how the preferences of various groups are aggregated De ne what political power means in a particular society Will competition over policy depends on votes which favors labor or on campaign contributions or bribes which tend to favor capital or ideas and arguments Domestic institutions 2 Electiosn and representation who gets to vote matters Cf the repeal of the corn laws The size of the constituency matters House vs senate vs president In the US the president generally supports free trade cf RTAA The bigger the size of the constituency the greater the support for free trade The number of veto players matters stability and the status quo Increasing returns to scale Production is most efficient when taking place on a large scale High xed costs The larger the scale of production the lower the marginal costs will be the cost of producing an additional unit of output We will not have perfectly competitive markets Violates another assumption of neoclassical trade theory Strategic trade Protectionist policies can maximize national welfare Governments can promote the domestic development of high tech industries that create excess returns on investments or generate external bene ts positive externalities High tech industries tend to be characterized by oligopoly and increasing returns to scale Competition between governments to capture excess returns or external bene ts Why Government intervention is good In the absence of government intervention economies of scale means that the rst rm to enter the industry will have signi cant advantages rst mover advantages Without government subsidies or other forms of intervention latecomers will never enter the industry and the rst mover will capture all the rents Consequences of economies of scale Furnish a basis for trade that is independent of comparative advantage Where industries are located is a function not of factor endowments but of things like the timing of market entry or historical accidents The pattern of trade tends to be indeterminate Week 7 Day 2 The liberal perspective lntegration in the world economy promotes economic development Economic progressions is not uniform throughout the economy domestic or international Long Run Equalization of economic levels of development among nations and regions of the globe Why no development Most important obstacles to economic development are omestic policies Inef cient government policies High Tariff barriers and overvalued currencies Political corruption Domestic market imperfections especially inadequately seci ed property rights overvalued currency encourages imports and ect leads to a de emphasis on exports reduce level of integration in the world International obstacles Advanced economies can hamper development through protectionist policies low levels of foreign aid still believe that the main obstacles are domestic Empirical evidence The most integrated developing economies have been the most successful Hong Kong Singapore South Korea and Taiwan Both Chiina and India grow rapidle once they abandon autarky The economies least integrated in the world economy are among the most backward economically Burma and North Korea Main contrast Success of the quotexportled growth strategies of the Asian NlC s and the failure of the quotimportsubstitution strategy of most Latin American countries Empirical puzzles Variation within the Newly Industrialized Countries Signi cantly different policies laissezfaire state intervention associated with economic development Signi cant state intervention in the market in East Asian NlC s South Korea interest rates kept lower for exporters other subsidies South Korea industrial policy EOl export oriented industrialization Why were South Korea and Taiwan able to develop despite state intervention Liberal retort getting prices right The realist perspective Since economic growth relies on the use of power weak states will suffer Politically weak countries forced to play a game whose rules were made by the powerful developed countries Demands for reforms ultimately doomed to faul unless also in the interest of the powerful states Group of 77 efforts to push for a New international Economic order Development in weaker states Depends on the security interest of the Stronger Powers Taiwan south korea in the united states security sphere Is the Rest like the west Pre capitalist stages did not exist outside Europe No stages were identi able with the ancient and feudal modes of production The nonEuropean civilizations seemed to lack any internal mechanism of social change No class con ict to drive these societies from one stage of social developmet to the next Asiatic mode of production Characterized by an autonomous and parasitic state separated from the rest of society Only a centralized despotic bureaucracy could ensure production irrigation societies lacking advanced technology Why capitalism is progressive Without an internal force to move these societies forward the external force of Western imperialism is required Imperialism is a historically progressive force quotEngland has to ful ll a double mission in India one destructive the other regenerating the annihilation of old Asiatic society and the Similarities between Marxism and liberalism Lack fo development rooted in domestic factors Integration in the world economy leads to development History goes through stages from primitive to modern Eurocentric development is to repeat the European or Western expenence Structuralism Participation in the GA39IT makesi t harder for developing countries to industrialize Deteriorating terms of trade for the periphery s primary goods exports Locational Advantages Gain access to markets Multinational Corporations deals with locational advantages Two main advantages Foreign direct investment jump barriers ect Jump protectionist barrier by licensing your assets foreign investment Intangible assets Various kinds of knowledge or skills that go into producing and marketing goods patented production processes or design Market transactions of these skills subject to market failure The fundamental paradox of information value of information for the purchaser is not known until he has the information but then he has in effect acquired it without cost Create incentives for horizontal integration create multiple production sites each producing the same goods The horizontal MNC internalizes markets for intangible assets Speci c assets Speci c asset An investment dedicated to a particular long term economic relationship Difficult to write and enforce longO term contracts Existence of the speci c asset creates possibilities for opportunistic behavior once the investment has been made Problem would be much reduced if it were costless to enforce the original contract typically it is not Create incentives for vertical integration The vertically integrated rm internalizes transactions for intermediate goods Standard oil harbor example Why lnternalization is more ef cient lnangible assets lnternalization avoids creating a future competitor Speci c assets lnternalization avoids transactions costs Search and negotiation costs Enforcement costs Costs of broken contracts Why MNC s Explaining horizontal and vertical integration not the same as explaining FDl or expansion across borders To explain MNC s we need to add locational advantages Locational advantages mean that FDl will be pro table Foreign Direct Investment in the developing world test Why focus speci cally on the developing world hen discussing FDI Issues of rae are more pressing in LDC s than in the developed countries because 1 MNCs account for much of production in many developing cout es 2 Most developing countires are smaller than the largest MNC s 3 MNCs are dif cult to regulate in the developing world 4 Direct political contrip under colonialism replaced by economic control by MNC s Missed some stuff Transfering pricing Pricing the goods in certain ways it is possible to lower the MNC s overall tax burden or evade restrictions on the repatriation of pro ts Dif cult to detect how do you know what the products might have sold for in arm s length transactions among independent rms Most developing countries tax the pro ts of foreign rms at relatively high rates so they are often the targets of transfer pricing schemes Characteristics of the investment I Low technology investments give host state the advantage local substitutes Sophisticated or rapidly changing technology gives MNC s the advantage Size of the initial investment Large xed investments make the foreign rm hostage to state control due to sunk costs Corollary potential foreign investors have greater bargaining power before a project is established than after Low xed costs relocate to a different country should state demands prove intolerable Weed 9 Day 1 How the Crises unfolded When con dence evaporated economic crisis political crisis contagion massive capital out ows followed Governments forced to devalue oat their currencies which pushed the country into a deep economic crisis Devaluation made it very dif cult to service dollar denominated debt IMF Conditionality Turned to the imf for help 1177 billion to south korea Indonesia thiland and Malaysia Conditionality Reduce gov spending Tighter monetary policy to halt currency depreciation Trade liberalization Microeconomic reform elimination of monopolies and privatization of state owned enterprises Never Again IMF conditions re ected American interests Avoid reliance on shortterm capital and the imf in the future Accumulation of large stocks of foreign exchange reserves by running persistent and large current account surpluses Pegged currencies to the dollar at competitive exchange rates Brettonwoods ll East Asian countries use their foreign exchange reserves to buy US gov securities US trade de cit drives growth in East Asia Stable as long as East Asian countries are willing to keep accumulating claims on the US gov Cheap credit created asset bubbles that popped in 20072008 home prices rose by 60 in 20002006 Globalization more than just an economic phenomenon Many de nitions Technological economic and political innovations that have drastically reduced barriers to economic political and cultural exchange Main thrust of the de nition is to emphasize that barriers to exchange are fewer Drivers of globalization Technological changes reduced transport and comm costs Trade and nancial liberalization reduction of barriers to trade tariffs and removal of capital controls Poverty Gobaization leads to increasing inequality and increasing poverty both between and within nations Total world income has risen in tandem with globalization Steady increase in global income inequality 18201970 inequality has begun to decrease in the last 30 years but still very unequal Rapid growth in China and India a major reason Absolute number of people living in poverty has also fallen despite increasing world population Production factories sweatshops Large wage discrepancy between workers in developed and developing worlds Long hours overtime not compensated Workplace hazards CthIabor Defending them Differences in wages re ect difference in productivity The relevant comparison is with other economic opportunities in developing countries Workers are better off working for multinational corps than for locally owned rms paid twice as much Jobs in export industries pay better than otherjobs Inequality does not decrease with economic growth Negative scale effects Economic activity generates waste and uses natural resources Rising incomes rises amount of cars pollution Composition effect lowers pollution Little evidence for dirty industry migration Relatively rich countries have a comparative advantage in dirty goods Freer international trade shifts dirty goods production from countries with lax environmental regulations to countries with stringent regulations This could change in the future Philosophical difference Environmental movement protecting the environment is the number one priority Nature needs protection from human exploitation Defenders of globalization natural resources should be used to raise incomes Environment protection is a secondary objective The WTO trade and he environment WTO Environmental regulations cannot be discriminatory But article XX allows trade restrictions to quotprotect human animal or plant life or health or to conserve exhaustible natural resource A country using Article XX has to prove Trade restriction was adopted to achieve the goals of Article XX It does not constitute quotan arbitrary or unjusti ed discrimination between countries where the same conditions prevail or a disguised restriction on international tradequot Like products Famous cases Tuna dolphin case Turtle shrimp case Issue could the US discriminate between goods that differed only in how they were harvested process and production methods GATI39 1991 ban mexicos tuna because they didn t comply with dolphin safe techniques Rules on the shrimpturtle case US law to protect sea turtles struck down by WTO in 1998 because the ban on shrimp imports was discriminatory But the US had the right to ban shrimp imports to protect turtles US changed the law to make it nondiscriminatory WTO found in 2001 that the new US law was no longer unnecessarily discriminatory and therefore that it was WTO compliant Supports the principle that states can use trade controls to try and alter a countries Process and Production methods Proponents of Globalization A mistake to pursue environmental objectives through trade policy Bhagwati quotyou cannot generally kill two birds with one stonequot It is better to pursue environmental protection by relying on environmental policy Convergence policies grow more alike increasingly similarity in structures processes and performance Assumption convergence of national policies environmental regulation consumer health and safety regulation of labor rates of taxation on capital Converging to Race to the bottom lowest common denominator Race to the top California effect Growth of transnational governance structures negotiated convergence of ample regulation Downside potential democratic de cit Example the European union Convergence at the bottom Race to the bottom hypothesis High rates of corporate taxation strict labor laws rigorous environmental protection raise production costs I lower pro t l capital will move to countries with the lowest regulatory standards l countries will therefore lower regulatory standards to avoid capital ights and the erosion of the tax base Underlying Assumptions States predominantly respond to the preferences of capital not voters interest groups etc No state has an economy markets large enough to endow it with market power visavis global capital State regulations impose enough of a cost to affect location regardless of differences in labor productivity Unresolved questions Does convergence exist Is there policy autonomy How important is the state as an actor What is the driving force behind convergence of regulatory policies Threat of exit by capital ldeational set of beliefs developed sufficient normative power fear of looking like laggards FINAL The unholy trinity is the idea that states or governments have to choose 23 objectives in economic policy Tradeoff in monetary policy autonomy the ability to peruse independent monetary policy responds to the needs of the domestic economy High level of unemployment in the US then nd an expansionist policy to get the wheels turning and bring down unemployment Also might want xed exchange rates increases predictability and stability Also want free movement of capital three objectives that governments would want to adopt The unholy trinity says you cant have all three If you have a xed exchange rate you have a choice between monetary policy autonomy or capital mobility Explain on the exam why that is the case Current era we ve given up on trying to control capital because there is almost an inability to control it with varying restrictions So in that sense we are being forced to pick capital mobility and Floating rates system we currently have we have Capital mobility monetary policy autonomy If the us were to peruse monetary expansion that would mean they have oating rates In the US we have no capital controls and oat the rates so we are able to have monetary policy autonomy Expansionary monetary policy is companies issue bonds that the government buys giving them cash to invest and grow In the greek case it s a little different they have capital mobility same within all the European union and they have a xed exchange rate So in that case they would have no monetary policy autonomy China doesn t have capital mobility or is highly restricted Trif n dilemma beginning of brettonwoods system in this system they have a xed exchange rate system and need to support growing international economy more products are produced Expand amount of money liquidity in the intl economy to account for growth How did they do that By the US running trade de cits run current account de cits that injected dollars into the system Most intl trade is settled in dollars Since brettonwoods was xed rate system dollar was a xed rate that could be exchanged for gold Over time because of our attempt to solve the liquidity problem foreigners came to posess more and more dollars while the amount of gold remained the same So over time the promise to exchange holdings for gold became nulli ed empty because there was not enough gold to account for the amount of dollars Con dence was lost because people realized exchanging dollars for gold would not hold the same rate Solving the liquidity problem causes a con dence problem and vice versa That s the dilemma So countries would hold dollars only if the US could ensure that this issue wouldn t grow bigger over time so that meant president Johnson would sacri ce domestic measures in order to continue the international brentenwoods system to continue to exist So in that sense politicians and decision makers would favor domestic policy issues over intl ones and therefore the brentenwoods system collapsed The game was up by 1973 Parallels the problems with maintaining the gold standard Foreign direct investments After a period of ISI South Korea was set up for a time of exportoriented industrialization a risk that does not guarantee success but was timed correctly resulting in the countries economic prosperity To make the shift to EOI South Korea unified their exchange rates devalued their currency to a realistic market value liberalized trade relations and enacted domestic investment policies and business enticements that fonivarded the growth of exports Brawley 2005 p 308 309 The world39s economy was booming in the 1960 s public private and US funds were available to finance EDI and being one of the first countries to use EOI the international competition was low Explanations 1 Systemic level factor the expansion of opportunities to export Regional economy was healthy and with Japanese firms producing differentiated high end goods the South Korean firms saw an opportunity to export basic models however this idea goes against the initial decision to pursue ISI in the 1950 s because they wanted to get out from under the shadow of Japan s industrialization They wanted to break away from shipping raw material to japan and having to buy back their manufactured goods but this does not shed much light on the choice between EDI and ISI Domestic level factors probably best explanation The state had become more powerful and freer allowing more intervention in the economy in effective and selective ways after the coup d e tat in 1961 played a big role in the 196364 policy reforms The Economic Planning Board was created and given authority over setting tariffs administering direct subsidies to industries and setting economic targets without referring to the legislative branch This establishment as well as the KOTRA states trade agency and Korean Development Institute were able to convince businesses to invest and brought about the expansionist environment The state also was relatively free from outside interference by other domestic forces AND took over the banking sector giving them the ability to monitor and channel money into different sectors of the economy that they saw fit Individual IeveI factors After the changes in power in 1961 put Park Chung Hee in power and put new people in the top positions of policymaking The coup put military officers in key offices in the government and it is undeniable that the bond of these individuals added to the unity of the states decision making ability through personal linkages Economic packages were coming from US governmental advisors as well as the IMF and other intI organizations It is clear that the South Korean elite shared an ideological commitment to unity and focused its goals on economic development
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