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Poli Sci 2J03 - Feb 24, 2014

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McMaster University
Political Science
Robert O' Brien

Lecture Notes Lecture started on: 2014-02-24 at 09:59 Winter 2014 McMaster University Class notes for: Political Science 2J03 Mon, February 24, 2014 III. 1980S debt crisis • 1970s developing countries borrowed from private banks to fund development • second oil shock of 1979 caused US to raise interest rates to fight inflation • Developing country IR on debts went from 2% in 70s to 20% in 80s • August 1982 Mexico suspends interest payments, crisis • IMF starts to take on a new role ◦ Created after the second World War ◦ Was to help countries through short economic troubles ◦ IMF has new countries, Latin American countries, etc. ◦ The IMF becomes like a seal of approval to countries in the debt crisis Structural Adjustment Programs – Washington Consensus – set of Conditions under the IMF – Text book: section in the chapter of the global financial system, and in the ideas part of the book – View that was dominant in Washington (US. Treasury department, IMF and World Bank) – What did countries need to do when in debt? – Countries needed to liberalize their economies – Needed to open up their own domestic markets – Needed to decrease protectionism – Had to engage in foreign trade – Needed to get their budgets under control, stop running deficits and surpluses. – Countries needed to abandon previous strategies and needed to integrate their economies even more in the global economy. – Following a set of liberal policies that would let them service their debt – Triumph of neoclassical economics e.g. Mexico and NAFTA – Up until the 1980s there were views about the best kind of development – When the debt crisis breaks out (power relationships between debtors and monetary fund) forces developing countries to shift to a more development / Angie (c) McMaster University 1 of 5 Winter 2014 Lecture Notes Lecture started on: 2014-02-24 at 09:59 Winter 2014 liberal strategy. – MEXICO – Transformation in development strategies – Education of Mexican finance officials and economists in the United States – Debt crisis forces changes in policies Global Financial System Key Issues, Background • Regional currencies (Euro) ◦ Euro began in January 2002, ◦ The IMF system (floating exchange rates cause problems for European countries, as they would fluctuate and disrupt trade flows) ◦ 17 countries decided to adopt a common currency (set by European Central Bank) ◦ When you have a currency that covers a continent, there are always problems that common monetary policy may not suit some regions. ◦ How do states cope with these issues? ▪ Transfer money • Canada has regional development funds where it takes parts from the richer parts of the country and sends it to the lower parts. There should be equal access! ▪ labour mobility • Since there are different languages, there is a less likely chance that people will move where the jobs are. ◦ NOTE: Fiscal policy is still not national ◦ Europe does not have large federal transfers or high labour mobility as in other federations ◦ When the Euro was created, it was as much a political decision as it was an economic decision ▪ The decision for a single currency was influenced by political desires for closer political ties. ▪ Common currency would move you towards a political structure that would be more like a 'federation'. It was not taken purely on economic grounds, did not address the issues of labour mobility or financial transfers. • If it had been an economic experiment alone, things would have been designed differently. • Financial Crisis and Regulation Angie (c) McMaster University 2 of 5 Winter 2014 Lecture Notes Lecture started on: 2014-02-24 at 09:59 Winter 2014 ◦ Recurrence of financial crisis ◦ Casino Capitalism Susan ▪ Rising volatility, increased risk, bets on country and company performance ▪ Citizens pay through taxes for bailouts or suffer SAPs ▪ The financial system becoming less and less rational and becoming more irrational ▪ Financial activities, getting more risk and profit in the system ▪ Downside: was recurring financial crisis, • the people who pay the cost are usually not the one who cause the crisis • power • In countries that experience financial crisis, have some kind of structural adjustment to deal with the financial crisis • GREECE: The devastation in Gre
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