International Finance PSC 204- Dr. Chyzh
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This 7 page Class Notes was uploaded by Erica Kugler on Tuesday March 10, 2015. The Class Notes belongs to PSC 204- Dr. Chyzh at University of Alabama - Tuscaloosa taught by Dr. Chyzh in Spring2015. Since its upload, it has received 156 views. For similar materials see International Relations in Political Science at University of Alabama - Tuscaloosa.
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Date Created: 03/10/15
International Finance 0 International Finance Relations the borrowing and lending of money bwn states or bwn states and private financial institutions 0 Borrowing money from a foreign government use the new foreign money for domestic investment in order to boost the economy and gain profitable returns 0 Profitable returns are then used to pay off the loan 0 Lending money to foreign governments profit based on interest rate of the loan and on profitable returns of investment 0 Investing in foreign countries 0 A high interest rate is good for investors because that means they will make more profitable return on what they invested o Creditor entity that money is owed to o Debtor entity that owes money to someone or something else 0 Interest rates can be good or bad depending on the point of view domestic vs foreign o Domestically high interest rates are bad I Means that people who take out loans have to pay back more in interest 0 People essentially lose money because the interest costs more 0 Internationally high interest rates are goodattractive I Investors look to invest in places with high interest rates because that means they will get more in profitable returns 0 Summary high interest rates gt hurt people who take out loans benefit foreign investors Why do people invest overseas o 2 categories of foreign investment 0 Portfolio investment investment that gives an investor a claim on some income but no role in managing the investment I Ex shares or stock in a company I Sovereign lending loans by private financial institutions to sovereign governments o debtor sovereign state creditor financial institution 0 Foreign direct investment FDI type of foreign investment where a company owns and controls facilities located in other countries I Ex MercedesBenz facility in Alabama 0 Portfolio investment is more mobile 0 Easier to trade and exchange stock than to trade and exchange a whole company Why invest in and borrow from countries abroad 0 Overseas investments have one goal make money 0 Countries wabundant capital want to move their money to high profit areas I Move capital from low profit areas to high profit areas 0 According to the HeckscherOhlin model capital in poor countries is scarce o The price of capital is thus high since it is in short supply I Think about the SupplyDemand graph and the Supply line moving leftward the result of the move is that the price goes up o In the same way investment can be thought of in terms of supply and price with capital being the supply and interest rate being the price I Countries with less capital have higher interest rates for investment That is good for investors because it means a higher rate of return Countries with lots of capital have lower interest rates so the there is a lower rate of return I Thus differences in rates of return based on interest rates influence where countries invest 0 Therefore companies and governments look to move their money and capital from developed countries to developing countries in order to make profit 0 Reality of flow of capital and money bwn countries 0 90 of moneycapital flows from wealthy countries to other wealthy countries 0 10 of moneycapital flows from wealthy countries to poor countries 0 Why I Industrialized wealthy states are more politically and economically stable I There is always a risk that poor countries may undertake policies that devalue an investment 0 Ex a poor country has a corrupt government that seizes foreign investment so the investor get no return 0 Ex a poor country may experience a civil war which could disrupt the economy and put an investor s investment at risk Problems wForeign Investment 0 Both investors and the countries they invest in have an interest in cooperating 0 Each side wants to gain as much as possible from each other but they want to give as little as possible to each other 0 Ways to ensure the payment of debts raise taxes reduce govt services reduce imports Restrain consumer consumption o Tensions bwn the investor and the country they invest in o Payback of the loan gt on time and in full value 0 Uneven winnerslosers in foreign investment I Winners rich people Losers poor people 0 Creditor nation lender may have domestic groups that are upset that it invested abroad rather than domestically Concessional Finance 0 Concessional Finance lending of loans at belowmarket interest rates to countries at risk of defaulting on loans 0 Ex World Bank gives out lowno interest rate loans to poor countries 0 Concessional finance is a form of financial aid 0 Debt forgiveness creates winners and losers in both the creditor and borrower countries 0 Concessional finance is good for debtor countries because it allows them some financial aid to develop their markets without the fear of having to pay back extra money the extra money would have been the added interest rate 0 But debtor countries would prefer grants rather than loans I Grants money that you do not have to pay back I Loans money that you do have to pay back Who Wants to Borrow Who wants to Lend 0 As national output increases tax revenues also increase 0 This makes it easy for a country to pay off its debts o Governments often impose unpopular measures in an attempt to payoff their loans 0 unpopular measures increase taxes reduce govt spending I Austerity measures name for the collection of unpopular measures 0 Long term result of austerity measures recession or depression 0 Recession gradual decline in economic growth 0 Depression when an economy is at the bottom of its GDP growth curve ie there is no economic growth 0 Debt repayment difficulties can arise from international conditions I Ex an increase in American interest rates means that money in the US will tighten money supply decreases Less money in the market impacts all economies since the dollar is used by so many countries like in exchange rates I Ex global recession gt globalization has tied economies together so a decline in one economy can lead to a decline in multiple economies 0 Debt repayment difficulties can arise from domestic conditions I Corrupt governments o govt takes your money and uses it to finance other operations worst case scenario of debt repayment difficulties default 0 defaulting on a loan failing to meet loan agreements about repayment I makes the country less trustworthy for future interaction wother states bailout way to help countries that are on the verge of defaulting on loans 0 bailout providing monetary aid money to help countries pay off the loan DebtorCreditor Interactions Commitment Problems and Incomplete Information concern wgetting caught up in debt disputes helps explain why private international finance flows to more advanced countries sovereign lending involves a commitment problem loan commitmentsterms o possibility of default is a problem for the borrower I must overcome this problem in order to reassure the creditor that it will honor its loan commitments if a debt is defaulted a creditor can retaliate o creditors can try to use predefault threats or leverage to pressure the debtor to solve the problem before it defaults I ex threaten to cut off future lending freeze debtor nation s assets debt disputes can lead to military conflicts DebtorCreditor Interactions are characterized by incomplete information 0 There is an incentive by borrowers to hold back information on their ability to repay loans so that they can get concessions on loan repayments International Monetary Fund IMF Countries wdebt difficulties can turn to the IMF to negotiate economic policy programs Member countries contribute funds to the IMF pool Those funds are then allocated out to different countries that are in financial distress IMF intervenes in DebtorCreditor conflicts o Intervenes when loan default is imminent IMF can certify a debtor country as being in compliance wIMF norms o certification makes that country more attractive to future creditors I Trust the IMF trust the certification What motivates the IMF to help debtor countries 0 Some feel that the IMF reflects geopolitical concerns of the US since the US is its largest and most influential member donates the most S to the IMF poo I Political alignment wthe US has made governments more likely to get funding from the IMF I Various factors make US Congressmen more likely to support sending American money to the IMF 0 Factors campaign contributions by large banks districts wcollege educated workers think about you and me and how we are being educated in international finance people with knowledge of certain topics have a more vested interest in them I Overall trend being friends wUS get financial benefits from the IMF o Is the IMF unfair since it appears to have favorable biases toward the US 0 Critics charge the IMF wbeing unfair and bias 0 Critics charge the IMF wbeing a tool of international financiers o 2 main criticism of the IMF I IMF s conditions violate national sovereignty o Negotiated economic policies dictates on a country certain rules it must follow to improve its economy and receive monetary aid I IMF s conditions hurt the poorest countries the most 0 Actual record in improving a country s economic condition has been mixed Financial Crises 0 Mexico 1982 gt defaulted 0 East Asian 19971998 0 Brazil and Russia 19981999 0 Argentina 20002001 0 US 2008 0 Excessive government borrowing to counter balance deficit spending 0 Unregulated banks loaned more money than they should have 0 Declining housing prices mortgageholders couldn t pay their mortgages I Houses worth less than they once were so people lost money since houses devalued 0 Government intervention 1 tril bailout package to financial industry Why do corporations go multinational o Multinational corporations MNCs operate facilities overseas 0 Ex WalMart gt headquartered in Bentonville AR USA but has stores abroad 0 Corps go multinational to gain access in 1loca markets and 2 local resources 0 Criticisms of MNCs o Outsourcing jobs to countries with lower wages gt angers domestic workers 0 Looking for pollutionfriendly regimes gt avoid environmental regulations that would impede on their facility operations 0 Seeking ethically relaxed governments gt avoid places wstrict worker laws I MNCs often go to places that do not have mandated worker health insurance wage guarantees etc o MNCs maximize profit by cutting corners whenever possible I Contradicts the notion of corporate responsibility Why do countries let MNCs in o MNCs bring managerial technological and marketing skills as well as investment capital to their host country 0 goal boost the civilian population and the economy 0 Host countries complaints against MNCs o MNCs that pay too little in taxes 0 MNC dominance of domestic markets Host Country and MNC interactions 0 Host country s weapons against MNCs o ability to regulate and tax companies 0 Threats to nationalize MNCs o MNCs weapons against the host country 0 withholding capital technology or expertise o Pulling out of the local economy 0 MNCs prefer to invest in more democratic regimes 0 19605 LDC governments began to restrict and regulate MNCs 0 turn away from MNCs was associated wincrease of foreign borrowing 0 19805 MNCs regained popularity due to LDC govt s increased need for capital Why aren t there international institutions related to FDI 0 Few global concerns associated with FDI 0 With FDI each investment is different 0 Host governments are often well equipped to supervise foreign companies 0 Bilateral investment treaties protect each other s a state a financial inst investments International Migration 1800s early 1900s international labor migration rates were higher than today s rates Applying the HeckscherOhlin theorem to international migration of workers 0 inflow of unskilled labor from abroad will reduce the wages of local unskilled workers I why Think about the SupplyDemand graph with wages being price 0 an increase in the labor force means that the supply of labor increases 0 increasing the supply means that the supply line moves rightward 0 this in effect moves the price ie wage down Benefits of immigration 0 employers gain from lower wages I don t have to pay workers as much more profit kept for investment elsewhere 0 A larger labor force and lower cost of production I costs of production amount of labor hours and of workers needed 0 More workers more products in less time gt good for company Policies on immigration have varied over time 0 Political economy of immigration involves economic and noneconomic considerations Politics of International Investment 0 Access to international capital has its advantages and disadvantages 0 Foreign loans and investment may 0 become burdensome I have to worry about paying off loans 0 impose constraints I borrower countries are bound by loan agreements 0 create conflicting interests I want the investment money but do not want to pay it back 0 international finance impacts everyone and impact is uneven 0 there are winners and there are losers
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