INTL 102 Final – Flashcards

Countries experienced rising in-country inequality due to immigration. Late 19th century, landowners suffered as land-abundant new world economies integrated with land-scarce European economies. European agricultural interests lobbied for protectionist policies. Some, like Germany, were successful whereas others such as Britain, stuck to free trade.

Allies owed US government $10.3 billion in liberty loans Reparations - Germany owed $33 billion in war damages to victors following Treaty of Versailles (equal to 10% of German GDP per year).European nations borrowed heavily from the US to finance the war effort. After the war, US refused to reduce or forgive these debts (this paved the way to the Great Depression and WWII).

Technology and the "Grain Invasion": Transportation - railroads, steam ships, and refrigeration allowed farm products from the new world to enter European markets, exposing European farmers to competition. Prussia and Eastern Europe had been the breadbasket of Europe before the "invasion", and many other countries had substantial numbers of farmers producing grains.Agricultural technology allowed for dramatic improvements in farm productivity (Mechanical Reaper and chemical fertilizers). They advantaged land-abundant countries like the US and disadvantaged European agriculture, since US farmers had greater incentives to mechanize. With few farmers, labor costs were high in US, meaning that farm owners had a strong incentive to invest in labor-saving machinery.

1882 - suspended immigration of Chinese laborers for 10 years and ultimately led to a permanent ban.

Money was played with by kids...To pay reparations and other expenses, Germany simply printed more money (in successor states like Austria and Hungary, weak governments also printed money to pay civil servants and provide social services). Inflation > 50% per month. By end of 1923, German prices were 1.3 trillion times higher than in 1914. Economic recovery required stability which came with Dawes Plan of 1924.

Germany's response to "grain invasion". Adopted protectionism for both agriculture and industry. In 1879, Germany adopted "Iron & Rye" tariff until outbreak of WWI - gradual return to trade protectionism in Europe. Tariff backlash example.Before 1870, Germany was abundant in land and scarce in capital (Prussia was farm belt of Europe, and grain grown there was among the lowest cost in the world.After 1870, falling transportation costs allowed entrance of cheaper grain from land-abundant ARS countries making Germany relatively scarce in both land and capital. The Junkers in East Elba could no longer produce grain at competitive prices, so they desired protection to save themselves from extinction. German capitalists wanted protection from British manufactured goods. Bismarck brokered a marriage of capital and land that brought high tariffs on both grains and manufactured goods. Power in Germany rested in Bundesrat (federal council), which the Prussian state controlled by virtue of its large number of seats. Dominant position of Prussia in parliament gave Junkers a central role in policy decisions.

Purchase of durables such as automobiles, refrigerators, etc (things that last a long time), went up from one-tenth to three-fourths.

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.

Rise of labor and Socialist and Communist parties with which it affiliated (Frieden Ch. 7). Industry shifted towards large corporations and large factories, making it easier to unionize. Concentration of people made union organizing more effective. Large corps could not call upon personalistic ties with employees that smaller firms cultivated. Large corps in newer industries (automobile vs. textile) tended to be less hostile to unionization. Why? 1. Needed a stable and reliable labor force for complex and integrated operations (paid high wages). 2. Labor costs were much smaller share of productions costs (most was in machinery, R&D, and marketing). 3. Interwar turn toward trade protection meant that wage increases wouldn't lead to competitive threats from imports. 4. Firms tended to dominate their markets with products to which consumers were loyal (could often pass increased labor costs on to consumers with little loss of sales). Typically, if both companies were unionized, costs would rise together. Support for labor unions increased by the war and Great Depression. War: Scarce labor when men left to fight; socialist movements supported war efforts and rewarded with gov't programs; shock of Russian Revolution made European leaders view concessions as a price worth paying. Depression of 1930s: Failures of traditional parties, threat of fascism, and prospect of broad labor-oriented gov'ts came together to draw masses of workers and others to the Left. Huge political participation by labor parties especially in Europe (Germany was on high end, Britain on low end).

Liberty loans were given out to help European countries get back on their feet. The U.S. held a strict policy that all loans would need to be repaid.

Definition: Competitive devaluation occurs when countries seek to reduce the value of their exchange rates to make their exports cheaper and gain a competitive advantage in world trade over other countries. Becomes a constant competition to devaluate in order to raise competitive advantage amongst countries. In a global recession, demand is low and countries are struggling to escape recession. Understandably, devaluation becomes an attractive option to boost domestic demand. Problems of Devaluation Beggar Thy Neighbour. Devaluation in a recession is considered to be a 'beggar thy neighbour' policy. The country who devalues gains at the expense of another country who becomes less competitive. In other words, a Japanese devaluation increases Japanese domestic demand, by reducing demand in the US. It can cause Central Banks to become more political and exceed their usual authority in manipulating the exchange rate. Increased politicisation of the exchange rate could cause a rise in retaliatory tariffs. (e.g. in the past, the US threatened to impose tariffs on China for their alleged manipulation of the exchange rate. Can cause excessively loose monetary policy, which leads to future inflation (e.g. hyperinflation in Japan after 1936)

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Charles Dawes was an American banker entrusted to settle reparations issue and stabilize German finances. Under the Dawes Plan, US bankers took charge of the German central bank and central fiscal policy (stabilized the currency and brought increased loans from a consortium of US investment banks to Germany). Created a cycle of money from US to Germany, which then made reparations to other European nations, which then used the money to pay off war debts to US (Cycle).

After the collapse of 1930, The Fed took on a policy of austerity and liquidationism. Forced down prices and wages so excess labor, food and goods would be liquidated (turned into cash). Kept interest rates relatively high; attempted to oversee a typical cyclical decline (prices and wages fall, economy rebounds). Liquidationists insisted that boom of 1920s had to be unwound in order to set the economy back on a healthy path - liquidating bad investments, bad loans, and useless products.

German expressionist portraying the horrors of WWI 1919 - "Widows and Orphans" 1923 - "The Survivors" 1934 - "Call of Death"

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Beggar Thy Neighbour. Devaluation in a recession is considered to be a 'beggar thy neighbour' policy. The country who devalues gains at the expense of another country who becomes less competitive. In other words, a Japanese devaluation increases Japanese domestic demand, by reducing demand in the US.

The solution at Versailles seemed to the French, British, and Americans to be to make Germany pay for it all. If the demands on Germany were unrealistic, then it was unrealistic for France to pay back Britain, and for Britain to pay back the US.[2] Thus, many "assets" on bank balance sheets internationally were actually unrecoverable loans, which culminated in the 1931 banking crisis. Intransigent insistence by creditor nations for the repayment of Allied war debts and reparations, combined with an inclination to isolationism, led to a breakdown of the international financial system and a worldwide economic depression

Belief in self-correcting business cycles. Liquidationism in the early 1930s "Golden Fetters" ?"Laissez-faire" - let people do as they choose; opposed gov't regulation beyond the min necessary for a free enterprise system to operate.Orthodoxy viewed the downfall of the 1930s as a consequence of the excess of the 1920s. Once prices fell far enough, consumers would start buying. Once wages fell low enough, capitalists would start hiring workers and investing (no role for gov't).

Great Depression hit developing countries: Exports of primary products fell severely as market demand in North collapsed. Prices of primary products fell more than manufactured goods prices, harming developing countries.With the fall in their export earnings, developing countries could no longer import manufactured goods from the North (loans from North also dried up).In sum, prior linkages to the world economy based on comparative advantage were broken. Led to a backlash against globalization: Landed elites, tied to world economy, were discredited. New coalitions of "populist" forces (capitalists and urban workers) took power. Political institutions were remade to empower these actors (e.g. populist dictatorships, as in Juan Peron's Argentina). Gov't policy shifted to autarchy, promoting separation from the world economy: Trade Protectionism. State control over economy to promote industrialization.

Generally accepted view of business cycles was that an upswing led to speculative excesses, which had to be cleared away by inevitable downturn. Liquidation of past errors was good, and attempts to mitigate its effects were counterproductive.

Negotiated by Churchill and Roosevelt aboard a warship; plan for the post-WWII world economic order before US had even entered the war. US required UK's acceptance before it would help in the war. 1. No territorial gains were to be sought (all conquered territory to be relinquished). 2. All peoples had the right to self-determination (Europeans had to give up their empires and colonies 3. Trade barriers were to be lowered (Europeans had to open their ex-colonies to US trade) 4. there would be global economic cooperation after the war (Multilateral cooperation to ensure economic openness).

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.

Trading votes

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.

(1948-51) provided $13.2 billion ($155 billion today) for European recovery. Over the next 20 years, Western Europe (and Japan) enjoyed unprecedented economic growth. Marshall Plan also facilitated European economic integration, as it erased trade barriers and set up institutions to coordinate European economies.Quid Pro Quo ("Something for something") Recipients of US Aid had to agree to US Plan for post-war economic order. Conditions included a commitment to balanced budgets, financial stability, free trade and stable exchange rates. Required establishment of cooperative institutions in Europe - a precondition for the rise of the European Community (EC)

Proposed by Keynes; role for gov't was to use public policy to shift expectations (investors won't invest until things are expected to go up). Monetary policy: to lower (raise) interest rates to encourage (discourage) demand. Fiscal policy: to use gov't spending and taxation to sustain (or limit) the pace of economic activity. Keynes emphasized fiscal policy because: 1. Interest rates might be pushed to zero and capitalists still wouldn't invest if demand is expected to stay low 2. Unlike monetary policy, fiscal policy stimulates aggregate demand directly (New Deal programs). Demand Management in Practice: More people relied on monetary policy more heavily than fiscal policy because... 1. Fiscal policy is slow-moving and highly political (needs legislative approval), and can't be changed easily in response to economic conditions, and 2. Monetary policy is easier to manipulate and less politicized However, under Gold Standard, monetary policy couldn't be used for demand management.

One of the "Autarkic-Authoritarian" responses: Communism (Soviet Union): Protectionist dictatorships that served labor at the expense of land and capital.

The Bretton Woods system of monetary management established the rules for commercial and financial relations among the world's major industrial states in the mid-20th century. The Bretton Woods system was the first example of a fully negotiated monetary order intended to govern monetary relations among independent nation-states. In 1944, as a result of the collective conventional wisdom of the time, representatives from all the leading allied nations collectively favored a regulated system of fixed exchange rates, indirectly disciplined by a US dollar tied to gold - a system that relied on a regulated market economy with tight controls on the values of currencies. Flows of speculative international finance were curtailed by shunting them through and limiting them via central banks. This meant that international flows of investment went into foreign direct investment (FDI)--i.e., construction of factories overseas, rather than international currency manipulation or bond markets. Although the various national experts disagreed to some degree on the specific implementation of this system, all agreed on the need for tight controls. Setting up a system of rules, institutions, and procedures to regulate the international monetary system, the planners at Bretton Woods established the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (IBRD), which today is part of the World Bank Group. These organizations became operational in 1945 after a sufficient number of countries had ratified the agreement.

Under the Lend-Lease program, the US supplied $50 billion in munitions, vehicles, food, etc. to allies Was a fiction: allies were supposed to be "borrowing" armaments, food, etc and would return everything after the war.

Before RTAA, trade policy was protectionist, partisan and subject to logrolling. After RTAA, trade policy was less protectionist, less partisan, and less subject to protectionist log-rolls. Before the 1930s, when Democrats took over both houses of Congress and the presidency, tariffs fell; when Republicans took control, tariffs rose. After the 1930s, tariffs decline, regardless of which party is in power. Key Features: Delegation (reduced logrolling and tariffs) and Reciprocity

(a) Fixed exchange rate - YES (b) International Capital Mobility - YES (c) Counter-Cyclical Monetary Policy - NOA nation can't have (a) fixed-exchange rates, (b) free capital mobility, and (c) counter-cyclical monetary policy for demand management. The Gold Standard had (a) and (b) but not (c).

US would support Greece and Turkey with economic and military aid to prevent them from joining the Soviet sphere. Truman pledged the US to contain in Europe and elsewhere and impelled the US to support any nation with both military and economic aid if its stability was threatened by communism or Soviet Union. The Truman Doctrine became foundation of the president's foreign policy and placed the U.S. in the role of global policeman. Reasoned that because these "totalitarian regimes" coerced "free peoples", they represented a threat to international peace and national security of the US. Policy won support of Republicans who controlled Congress and involved sending $400 million in American money, but no military forces, to the region. The effect was to end the Communist threat, and in 1952 both countries joined NATO, a military alliance that guaranteed their protection.Doctrine was informally extended to become the basis of American Cold War policies throughout Europe and around the world. Shifted American foreign policy toward the Soviet Union from detente (a relaxation of tension) to a policy of containment of Soviet expansion.

To use monetary policy for countercyclical demand management required breaking with the Gold Standard. If the gold standard restricted the use of monetary policy as a tool of countercyclical demand management, did nations that broke with the gold standard do better during the Great Depression? YES!

After WWII, US accepted world leadership. Why? Endowments: WWII leaves US capital abundant relative to world Interests: Free Trade Democrats elected in 1932 Institutions: RTAA in 1934Wartime planning for "Pax Americana": US avoids another war debts-reparations fiasco by "leasing" arms to the allies via the "Lend-Lease" program.

RTAA features: Delegation: Congress delegates its constitutional authority on trade matters to the executive branch (President makes trade policy, not Congress). Prior to RTAA, legislators used to trade votes (log roll) - Smoot-Hawley Act amended over 2,000 times to reflect log rolls. With delegation, Congress gave up power to set tariffs on specific goods, making vote-trading impossible. Delegation to the president gave policy control to a politician that represents a nation-wide constituency. President considers the national costs of protectionism, as opposed to the narrow benefits that go to particular industries located in districts or states. Broader principle: politicians with larger constituencies are more free trading than politicians with smaller constituencies. Reciprocity: Congress couples US tariff reduction with reciprocal foreign tariff reductions that it received in return - in short, reciprocal tariff reductions. Bolstered the lobbying position of exporters in the political process. By linking US tariff reduction to foreign reductions, RTAA created "winners" from freer trade: exporters that would sell their wares in newly-opened foreign markets. Fostered development of exporters as an organized free-trade special interest (lobby group) RTAA increased size of export sector and thus enhanced subsequent political support for freer trade - a dynamic process generating lower tariffs. Reciprocity increased the importance of exporters in congressional districts and states, which changed the trade policy preferences of Republican legislators. Growth of export interests within the US led large numbers of Republicans to change their long-lasting opposition to free trade.

General Agreements on Tariffs and Trade drawn up in 1947 to provide basis for the trade negotiations then under way in Geneva. Became the basis for the international trade regime; replaced by WTO in 1995. GATT founded in 1948 to foster trade liberalization after WWII and unwind protectionist measures from early 1930s. Member nations are called "contracting parties" and obliged to carry out rules, but have right to retaliate with tariffs against members that fail to do so (approved tariff retaliation provides enforcement). Reciprocity: In GATT, countries negotiate trade barrier reductions to attain reciprocal tariff reductions as in RTAA (bilateral negotiations b/t the principal supplier of a product and the principal purchaser to set the terms of the reciprocal bargain). Reciprocity makes trade agreements politically palatable within member nations as export interests have a stake in their success. Trade negotiations proceed in "rounds", typically initiated by new grants of negotiating authority delegated from the US Congress to the president.

WTO (1994-present) Same rounds system as GATT. All members agree to extend unconditional most-favored-nation (MFN) status to one another. Incorporated all GATT provisions Tackled new issues not dealt with under GATT: Trade in services Trade in agriculture (limited success) Intellectual property protection (TRIPs)WTO Dispute Settlement: A unanimous vote is required to block a report by the panel of experts, which is appointed by the "Dispute Settlement Body" (DSB) - the unanimity voting rule eliminates the ability of a member to veto an unfavorable ruling. If the accused party wishes, it can request an appellate review before the report goes to a final vote by the DSB. Once a panel report is accepted by the DSB, the losing party proposes implementation of reforms and a timetable. If implementation is not achieved, parties negotiate compensation to injured party. If no agreement can be reached on compensation, the injured party is authorized to impose retaliatory tariffs.

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.

Since inception, GATT initiated 9 rounds of negotiations to deal with problems in trade. During first 20 years, GATT focused almost entirely on reducing tariffs on manufactured goods. Uruguay Round (1986-94 attempted to put services, intellectual property rights, and agricultural trade on a par with manufactured goods. Doha Development Round (2001-present), agricultural trade issues are the "centerpiece"... and the major sticking point. Successes of the GATT: Brought tariffs down considerably. By the Tokyo Round in 1979, the average tariff on manufactured products was 4.7% (compared to about 40% in 1948). GATT was also very robust (succeeded despite the Cold War, Vietnam, many wars of independence, de-colonization, creation of EC and so on). The Uruguay Round created the World Trade Organization (WTO) that replaced the GATT and went beyond it in dispute settlement.

U.S environmental law (Endangered Species Act) protected sea turtles from shrimp nets by requiring "turtle exclusion devices". US law prohibited shrimp imports from countries that didn't require TEDs Foreign shrimp producers from India, Malaysia, and Pakistan filed a case with the WTO. In 1998, the WTO struck down US law.U.S. lost the case at the WTO, not because it sought to protect nature, but because it discriminated b/t WTO members when it applied its law. US provided some Caribbean countries with technical and financial assistance and longer transition periods to start using TEDs. But complaining nations did not get this special treatment (non-discrimination was the basis of the ruling). U.S. adjusted its policy but Malaysia continued to complain; in 2001 the WTO sided with the US since the US no longer discriminated in how it applied the law.

Agricultural trade was so contentious it was left out of first 4 rounds of GATT (1947, 1949, 1951, 1956) Beginning in 1960s, members attempted to bring agriculture under GATT discipline but progress has been very limited. Agriculture trade remains the stumbling block in Doha Round: the answer lies in collective action: farmers are powerful because they are well-organized as special interest lobbies.Why do some groups of individuals with a shared interest in public policy organize lobbies for "collective action" while others do not? What is true of farmers tends to be true of other producers: have powerful lobbies but consumers of goods do not.

Case Study: Due to tariffs and quotas, sugar has sold for as high as 22 cents a pound in the U.S., when the world market price was only 4.5 cents. Consumers bear the burden. Each 1 cent increase adds about $250 million to consumers' food bills. There are 13,000 sugar farmers in the US vs. 260 million consumers of sugar? Who lobbies, sugar producers or sugar consumers?Assume the domestic price of sugar is kept 10 cents above the world price by tariffs, consumer bear a cost of $2.5 billion. Incentives to lobby: Cost to each consumer is just $10/yr (assuming each consumes same amount) By contrast, each sugar farmer gets $192,300/yr. Clearly, the small group of sugar producers has a much stronger incentive to lobby than the large group of sugar consumers.

In 1945, 700 million people lived under colonial rule. By 1970, less than 2 million people remained colonial subjects.US Opposition to Colonies: As a former colony, US was deeply opposed to colonialism. US also dislikes empires b/c they were closed American business (e.g. Britain's "Imperial Preferences") Atlantic Charter called for autonomy of colonies. After WWII, the US pressured Britain to abide by the Charter.Empires no longer vital to security: US military forces (conventional and nuclear) provides global security: England, Germany, France, etc. no longer needed colonies for strategic purposes.

Developing countries broke from trade based upon comparative advantage. Previously, they had specialized in primary products (agricultural, mineral, forest) and imported manufactured goods from the "North". After WWII, the industrialized and erected trade barriers to protect their "infant industries".ISI was chosen by newly-independent former colonies of Africa and Asia and long-independent nations of Latin America.Great Depression hit developing countries very hard. Exports of primary products fell severely as market demand in the North collapses with the Depression. Prices of primary products fell more than manufactured goods prices, harming developing countries. With the fall in their export earnings, developing countries could no longer import manufactured goods from the North (extreme shortages). In sum, prior trade linkages to the world economy based on comparative advantage were broken. Goal to replace imports of manufactured products (textiles, shoes, appliances, cars, etc) by promoting expansion of domestic industries, using high tariffs to protect these new "infant" industries. Rationale was to break from comparative advantage, where developing nations specialized in primary products (agricultural, mineral, forect) and imported manufactured goods from the North. Positive results early on: Accumulation of industrial experience and capabilities; High growth from the late 1950s until 1970s (e.g. "Mexican Miracle" growth rate averaged over 6% per year from 1950s to 1975) But ISI countries never managed to move further: Infant industries never matured. Hence, they maintained excessive rates of trade protection for final goods.

Prebish was the head Argentina's central bank during the Great Depression. Divided the world into 2 parts: "Center" (industrialized nations) "Periphery" (developing countries) 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).Terms of trade = price of exports/price of imports Terms of trade for nations exporting primary products and importing manufactured goods may deteriorate over time. Free trade based on comparative advantage may be harmful to less developed nations!

Under cover of high tariffs, domestic firms had little incentive to be competitive, efficient, or productive. ISI created vested interests (capitalists and workers in the protected industries) with stakes in continuing ISI, which made it hard to keep it temporary. Paradox: ISI increased dependence on imports! New factories needed capital goods (machines) that went into producing final goods, all of which had to be imported. This dependence on imports caused BOP problems (imports > exports). Since they weren't exporting, ISI countries became highly dependent on foreign capital (loans and direct foreign investment) to balance payments (set stage for the debt crisis of the early 1980s). Anti-market philosophy promotes excessive regulation and corruption. Even today, long after ISI, these countries struggle with red tape and corruption issues.

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.

Ownership of productive assets by foreign residents for purposes of controlling uses of those assets (control distinguishes FDI from bank loans or bond lending). Horizontal FDI: when a MNC produces the same product in multiple countries (e.g. Coca Cola is made in over 200 countries; 70% of its revenues are overseas).

Multinational Corporation: firm that owns and manages productive facilities in 2 or more countries. Importance of MNCs: In 2000, world's largest 500 MNCs had sales of $13.7 trillion - nearly half the value of all goods and services produced in the world. Largest MNCs have revenues greater than the GDP of all but about 20 nations. MNCs are also important in int'l trade - about 1/3 of all int'l trade takes place between branches of MNCs located in different countries (known as "intra-firm trade"). Bottom line: MNCs engage in FDI Sheer size of MNCs combined with control creates potential problems for national gov'ts on a range of issues: location of production, jobs, technology, managerial experience are all things gov'ts care about. Tension arises because the goals of MNCs may conflict with the goals of governments.

Vertical FDI: when a MNC owns and controls different stages of a worldwide production process (e.g. Exxon owns and controls everything from oil wells, to transportation pipelines, to storage and distribution facilities, to retail gasoline stations).

A model of interaction between a multinational enterprise and a host country government, which initially reach a bargain that favors the MNC but where, over time as the MNE's fixed assets in the country increase bargaining power shifts to the government. 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 gov't over time. At some point, the host government no longer needs the MNC to operate the affiliate, and it expropriates it. Types of Regulations on MNCs: Restrictions on profit repatriation Technology transfer requirements Employment requirements (MNC must hire certain number of locals) Local content requirements (MNCs required to buy inputs from local firms) Ownership restrictions (foreigners allowed to own only so much - e.g. 49%) In the limit, expropriation -

Another market imperfection is Specific Assets - physical and human investments that are specialized and unique to a certain task (e.g. the production of a certain component may require investment in specialized equipment). Specific assets are investments that are dedicated to a particular use and cannot be easily adapted to another purpose. Give rise to "hold-up" problems that explain Vertical FDIMNCs that are dependent on a single supplier for an input worry that the supplier could try to "hold-up" the firm (seller could demand more money knowing there are no other suppliers). To avoid this possibility, the firm buys the supplier and "internalizes" the transaction within the firm (e.g., GM-Fisher Body).Vertical FDI occurs when specific assets combine with Efficiency-Oriented locational advantages (need both). E.g. when GM wants to lower its costs by sourcing production of an input to a country with cheap labor, it sets up a GM-owned factory there to make sure it is not held up. By contrast, there is no FDI

For FDI, there must also be a "market imperfection". Market imperfections exist when the price mechanism fails. One such imperfection involves intangible assets: Firm "knowledge" is an important asset that is difficult to price, e.g managerial skills, production processes, secret formulas, etc. Intangible assets are valuable but hard for firms to price and protect: once out there, they can be had by any competitor at no cost. Intangible Assets and Horizontal FDI: Some FDI exists to control and protect the intangible assets (MNCs engage in FDI to maintain intangible assets within the firm, where they can control them) Horizontal FDI (e.g. Coca Cola, McDonalds) is explained by the combination of intangible assets (secret formula, brand name) and market-oriented locational advantages. You need both! There's little FDI in apparel, foot ware, toys, etc because there few intangible assets in these industries.

Until recently, off shoring involved sending manufacturing jobs overseas to take advantage of lower labor costs. Now, information technology (internet, video conferencing, etc) has made it possible to deliver services from afar. Not only low-skilled services like call centers, transcription, telemarketing. But also high-skilled services such as programming, accounting, radiology, and engineering. Entry of 1.5 billion "new" workers into the world economy (China, India, Russia) means that there are plenty of people willing to provide services from afar. Call centers in Bangalore already serve millions of costumers in the U.S. Medical x-rays are now transmitted digitally from hospitals in the U.S. to be analyzed by radiology labs in Bombay. Politics of offshoring: In 2006, polls showed deep concern for globalization - 80% said off shoring hurts American workers Conversely, most economists would say that U.S. economy is enriched by off shoring. But some economists (e.g. Alan Blinder) have expressed concern about the distributional implications of off shoring. Winners and Losers: Winners - U.S. capital owners who substitute cheaper foreign labor in the service sector for expensive domestic labor. U.S. consumers gain from the decline in prices. Losers - U.S. workers that experience falling wages and increasing job insecurity due to export of jobs overseas. Note that even high-skilled white collar jobs are threatened. Evidence: surveys show that workers in industries exposed to higher levels of off shoring are far more likely to feel job insecurity and to favor restrictions on off shoring. What can be done about it? Recall that 19th century globalization sowed the seeds of its own destruction due to political and policy backlash (Williamson). Off shoring of white collar service jobs has the potential for creating another backlash. With 30-40 million US jobs potentially off-shorable, the political reaction could be fierce. Law, medicine, accounting - which have never been exposed to much global competition - now face off shoring. With powerful lobbies, these groups could initiate a backlash. Trade protection won't work because it's much harder to stop bits of data from flowing in/out of the country on the internet than it is to stop goods from flowing in. Thus, US should reemphasize training in comparatively advantaged skills: more science and engineering more spending on R;D keep capital markets vibrant as a source of funding for innovations.

Considered as another alternative path to development, besides ISI. When a group of developing countries cooperates to artificially reduce supply in order to raise the price of a commodity (e.g. oil), 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 was to improve terms of trade by way of production controls; to raise export prices of primary products (OPEC). Like ISI, Int'l Commodity Cartels sought to address the terms of trade problem identified by Raul Prebisch. OPEC was the most successful cartel int eh 70s, but its success has been consistent. OPEC members agreed to output ceilings. Reducing the amount of oil available on world markets put upward pressure on oil prices.

Internal Divisions: "Hawks" (e.g. Iran, Iraq) - large populations and relatively small oil reserves. Preference for high oil prices. "Doves" (Saudi Arabia, Kuwait, UAE) - small populations and large oil reserves. Preference for moderate oil prices to prevent consumers from reducing dependence on oil (finding substitutes, energy conservation, etc). With Yom Kippur War in Oct 1973, OPEC overcame differences and achieved a four-fold increase in oil prices (cut production 5% per month and the price of oil rose from $3 to $12 per barrel. Key to success was Saudi Arabia, with half of OPEC's oil reserves. (Saudis broke with dovish preference for moderate prices and absorbed largest burden of production cuts). If too much cheating occurred in OPEC, Saudis punished free riders by flooding the market with oil, driving prices very low. Successful in 1973 but not from then on (all other spikes in price - 1979, 1990, 2003-2007 - weren't due to OPEC.

Cartels are inherently unstable due to incentives to free ride (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 (Free riding increases individual profits but decreases cartel profits). When too many producers cheat, the cartel is unsuccessful (production increases and prices fall).Conditions for Cartel Success: Collective action theory - small groups are easier to organize. Few members makes it easier to collude; cheating is more obvious; enforcement is relatively easy in small group settings. Groups with unequal members: one dominant producer --> easier to collude; if very large member wants to keep cartel together, it can manipulate prices even if others free ride (Saudi Arabia in OPEC)

Why did lenders "over-lend?" Answer: To "recycle" OPEC petrodollars. OPEC oil wealth was deposited in commercial banks. Banks needed to invest it and developing countries looked like good bets, especially in the case for oil producers like Mexico and Venezuala. Herd mentality: huge profits for banks stimulated a dangerous rush to lend1973-1980 rise in oil prices provided OPEC members with a huge windfall. OPEC nations deposited these "petrodollars" in British and American commercial banks (e.g. Bank of America, Citibank).The 2nd 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 pay their growing oil import bills.

Mix of recession and inflation (sustained rise in prices) OPEC caused a "wage-price inflationary spiral" - producers raised prices to compensate for higher energy costs; workers then demanded higher wages to compensate for rising costs of everything; producers then raised prices to deal with higher labor costs...repeat. 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 of the 1980s was a major threat to borrowers and to the world financial system. If one or more of the major debtors (Mexico, Brazil) defaulted, it might have taken down world banking system. Major banks were seriously overexposed because of the "petrodollar recycling".Resolution of the Debt Crisis: Phase 1: Keep loans current to prevent int'l financial collapse. Put all burden on the debtors IMF-sanctioned austerity programs Result was a "Lost Decade" of growth for developing countries/debtors. Phase 2: Debt reduction Brady Plan of 1989 reduced debt and lowered interest rates Return to growth begins

U.S. Treasury Secretary Nicholas Brady Basics: Debtor countries negotiated large reduction of 30-50% in their overall levels of debt Their bank loans were converted to dollar-dominated "Brady Bonds" which diversified risk away from commercial banks (since banks sold the bonds and got them off their books).Developing countries then adopted ambitious economic reforms and regained access to the international capital markets.

Appointed as head of Fed Reserve in 1979. Volcker used high interest rates to reduce inflation from near 10 percent per year. Successful, but at a cost: deepest recession of the post-WWII era, with unemployment near 10% Recovery didn't occur until the late 1980s.

Countries in East Asia adopted policies that promoted exports, instead of ISI: Hong Kong, Taiwan, South Korea, Singapore, Malaysia, Thailand, Indonesia, and most recently, China. All experienced rapid growth in manufactured-goods exports. All experienced rapid economic growth.DID EOI CAUSE RAPID GROWTH?Basic Characteristics: 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 protect import-competing industries. Sometimes associated with the political repression of labor (e.g. South Korea)

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.

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.[29]

"Good" political institutions (property rights, rule of law, individual liberties) encourage investment and productivity. "Bad" institutions discourage these growth-creating activities. 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 rates and are converging. What Causes "Good" Institutions: Endowments have a large historical influence on institutions: Engerman and Sokoloff: where endowments 300 years ago led to extreme inequalities (e.g. plantation and conquest economies), elites established "bad" institutions (e.g. vote restrictions; restricted access to education) that maintained their positions but were harmful to growth. By contrast, where initial endowments led to greater equality (settlement economies), "good" institutions were established (unrestricted franchise; public education for all) that provided the foundations for long-run economic growth. High Settler Mortality: Where mortality was high for settlers at the time of colonization (i.e. most of the tropics), settlers did not establish good institutions Instead, they extracted resources quickly and got out (e.g. Belgium Congo under Leopold)

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.

Supported of progressive-liberal political causes. While working as a trader and analyst early on, developed the theory of reflexivity - the valuation of any market produces a procyclical "virtuous or vicious" circle that further affects the market. Founded Soros Fund Management in 1970. The Quantum fund has generated $40 billion since its inception in 1973, including $5.5 billion in 2013, making it again the most successful hedge fund in history. In 1997, during the Asian financial crisis, the Prime Minister of Malaysia accused Soros of using the wealth under his control to punish the Association of Southeast Asian Nations (ASEAN) for welcoming Myanmar as a member. Following on a history of antisemitic remarks, Mahatmir made specific reference to Soros' Jewish background and implied Soros was orchestrating the crash as part of a larger Jewish conspiracy.

Easy availability of natural resources (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 a lot 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.

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Form of political and government corruption where the government exists to increase the personal wealth and political power of its officials and the ruling class at the expense of the wider population, often with pretense of honest service. This type of government corruption is often achieved by the embezzlement of state funds. Characteristics: 1. Kleptocracies are generally associated with forms of authoritarian gov'ts in which no outside oversight is possible, due to the ability of the kleptocrat(s) to personally control both the supply of public funds and the means of determining disbursal. 2. Most common in developing countries whose economies are based on export of natural resources. Such export incomes constitute a form of economic rent and are therefore easier to siphon off without causing income itself to decrease (i.e. due to capital flight as investors pull out to escape high taxes levied by kleptocrats). Effects: Vitiates prospects of foreign investment and drastically weakens the domestic market and cross-border trade. Kleptocratically structured political system tends to degrade nearly everyone's quality of life b/c the kleptocrat takes tax funds for his own use. Money taken from funds are earmarked for public amenities (building of hospitals, schools, roads, parks and the like) which has further adverse effects on quality of life of citizens. Quasi-oligarchy that results from a kleptocratic elite also subverty democracy.

Globalization helps the environment based of "gains from trade" hypothesis: Trade leads to growth (via specialization, comparative adv) As people get wealthier, they demand and receive a better environment. Oppenness --> growth --> environment gainsRE: Environmental Kuznets Curve

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.

A 2011 study by the CBO found that the top earning 1% of households increased their income by about 275% after federal taxes and income transfers over a period b/t 1979 and 2007, compared to a gain of just under 40% for the 60% in the middle of America's income distribution. Most current discussion of income inequality in America centers on its rise since the mid to late 1970s, the so-called "Great Divergence". According the US Census Bureau, it reported that the income inequality between the richest and poorest people grew to its widest in 2012, as the census recorded 46.2 million people living in poverty.

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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.

Factor price equalization is an effect observed in models of international trade -- that the prices of inputs to ("factors of") production in different countries, like wages, are driven towards equality in the absence of barriers to trade. This happens among other reasons because price incentives cause countries to choose to specialize in the production of goods whose factors of production are abundant there, which raises the prices of the factors towards equality with the prices in countries where those factors are not abundant. Shocks to factor availability in a country would cause only a temporary departure from factor price equality. See Hecksher-Ohlin Model.

Globalization harms based on "race to the bottom" hypothesis: Countries open to trade and investment adopt weaker environmental regulations out of fear of a loss in competitiveness.

If we accept the NRC estimates, then allowing an additional 400,000 low-skilled immigrants to enter the United States each year would have a one-time NPV impact on federal taxpayers of $2 billion. That cost, while not trivial, would need to be compared to the efficiency gains to the U.S. economy from a larger and more diverse supply of workers and a wider range of more affordable goods and services for native-born Americans. In a post-September 11 security environment, comprehensive immigration reform could also reduce federal spending now dedicated to apprehending illegal economic immigrants.

EKS is inverted U-shaped relationship between per capita income and pollution (see figure on slides) 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. Environmental decay: Higher incomes initially mean more production and consumption, and these activities increase pollution. ("Bad" institutions) Environmental improvement: As income grows, demands for environmental protection increase, leading to a development path characterized by both economic growth and environmental improvements. ("Good" institutions) Estimates of EKC "turning points": Air pollutants reach apex at the following income levels - Sulfur Dioxide: $9600 per capital GDP Particular Matter: $12,300 per capita GDP Nitrogen Dioxide: $24,800 per capita GDP Good institutions (e.g. property rights, rule of law, democracy) flatten the EKC for these pollutants because demands of citizens translate into effective regulation and reduction of pollution.

Clinton signed Kyoto Protocol in 1998, but US Senate didn't ratify. GW Bush, March 2001: "Kyoto is dead". Rich countries cut emissions of greenhouse gases by 5% from 1990 levels by 2012. -5% is the global target; different countries have different targets (e.g. Germany 25%, U.K. 15%, U.S. 7%) Countries can offset cuts by properly managing forests and farmlands that absorb CO2 ("carbon sinks"). Developing nations aren't required to reduce emissions (but have to monitor and report emissions).

Established in Trade Act of 1974, the program aids groups of workers in certain industries who can credibly claim that increased imports have destroyed their jobs or have reduced their work hours and wages. TAA-certified workers can access supports including training, extended unemployment benefits while in full-time training, and job-search and relocation allowances. Inappropriately designed to address protectionist drift. Labor-market concern driving the drift is not confined to the problem of how to reemploy particular workers in particular sectors facing import competition. There is concern about income and job security among workers employed in all sectors.

Nations are issued tradable permits, which represent 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 int'l 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 ("trading") of permits establishes a market price for permits. Nations wishing to emit gases beyond permitted levels must either reduce their emissions or purchase permits to emit. Polluters able to reduce their emissions relatively cheaply will do so, rather than purchase permits to emit. Polluters who face higher abatement costs will buy permits to satisfy requirements. In this way, reductions in emissions are made by those polluters who can do so at least cost, being compensated by polluters who face higher costs.

Operating in an environment of fiscal and monetary restraint, most of East Asia enjoyed high savings and investment rates, robust growth, and moderate inflation for several decades. Starting in the second half of the 1980s, rapid growth was accompanied by sharp increases in asset values, notably stock and land prices, and in some cases by rapid increases in short-term borrowing from abroad. After the mid-1990s a series of external shocks (the devaluation of the Chinese remnimbi and the Japanese yen and the sharp decline in semiconductor prices) adversely affected export revenues and contributed to slowing economic activity and declining asset prices in a number of Asian economies. In Thailand, these events were accompanied by pressures in the foreign exchange market and the collapse of the Thai baht in July 1997. The events in Thailand prompted investors to reassess and test the robustness of currency pegs and financial systems in the region. The result was a wave of currency depreciations and stock market declines, first affecting Southeast Asia, then spreading to the rest of the region. In the year after collapse of the baht peg, the value of the most affected East Asian currencies fell 35-83% against the U.S. dollar (measured in dollars per unit of the Asian currency), and the most serious stock declines were as great as 40-60%. Disruptions in bank and borrower balance sheets have led to widespread bankruptcies and an interruption in credit flows in the most severely affected economies. As a result, short-term economic activity has slowed or contracted severely in the most affected economies. 1. financial intermediaries were not always free to use business criteria in allocating credit. 2. financial intermediaries or their owners were not expected to bear the full costs of failure, reducing the incentive to manage risk effectively. Since weaknesses in East Asian financial systems had existed for decades and were not unique to the region, why did Asia not experience crises of this magnitude before? Two explanations are likely. First, rapid growth disguised the extent of risky lending. For many years, such growth allowed financial policies that shielded firms that incurred losses from the adverse effects of their decisions. However, such policies would make economies highly vulnerable during periods of uncertainty. Second, innovations in information and transactions technologies have linked these countries more closely to world financial markets in the 1990s, thus increasing their vulnerability to changes in market sentiment.

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.

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