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Lecture

IPE notes jan 18--some helpful bolded words

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Department
Political Science
Course Code
POL208Y1
Professor
John Haines

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LECTURE 2 TERM 2
World Political Economy
January 18!
Financial meltdown 2008-
reminder of globalized world
Planet finance larger than planet earth
Every day roughly 3 trill. Dollars exchanged in foreign exchange market
1980s new financial instruments created-individual debts (mortgages) are sliced and packaged
and for sale
Volume of derivatives (contracts derived form securities) exploding
1990s attempt at regulation largely unsuccessful
2007-bubble burst
Housing market had been good for a long time b/c loans =cheap
Ppl. Assume they can repay loans b.c house could be sold for more than they paid
Some borrowers started deferring on their payments, US house market exploded
What followed?
Dramatic chain reaction
All kinds of securities slumped
Lack of liquidity
Small banks couldn’t borrow money from other banks
Iceland-entire banking sector of country went bust-banking sector 200% of GDP
Iceland had to negotiate loans form IMF
World trade decreased
Conclusion: US house market incident had world wide impact--globalized world
OACD defines globalization as process in which markets and production becoming
increasingly interdependent due to trade, good and services flows, technology
Specialization and increases in transnational companies also can be added to this definition
Even local production might not be local at all
Lower production cost-lower with lower transportation costs
The financial melt down is a great example of how connected things are
Hard to understand inequalities between wall-street and a main street in a little developing
country
Key:
1 Poverty is much more due to the lack of financial institution
2 the financial system reflects and magnifies what human beings are--animals with bounded
rationality and productivity, and with high emotional volatility
On the one hand this crisis demonstrates that state economic policies might be dwarfed by
international happening
On the other hand, reinforced the state as a lender of the last resort, the bail out
www.notesolution.com
The state is the “fiscal menagerie”, the ultimate printer of money
ex: China’s achievements are extraordinary
The financial crisis have shown the limits and importance of the china case in the world
economy:
1. The crisis demonstrated the economic policies of the state may be dwarfed compared to
world etc
2. Also asks us questions about the regulator of currency
It has reinforced the role of the state as the ultimate printer of money...As a guarantee of money
supply
Lastly the crisis emphasized the need for international cooperation
Key consequence of crisis is that it clearly shows the obsolesce of the g7 group and necessity
to move to a g20 institution
As this introduction has shown, we are not immune from the world of finance
...though of course some countries are doing better
Ex. N. Korea doesn’t suffer too much from the financial crisis but your standard of living is
very different there
China has attempted to shape the rules of the game in its own way
Notably by having copyrights; trying to play with the value of its currency
But if you are a modern democracy you have to answer to the constrains and the opportunity of
the financial sector of the world
Different Approaches to world economy academically:
Fundamental institutions:
1st modern corporation as we know it=
1602 invented in netherleands--united east india company
For the first time this company offered stocks of limited liability
^ absolutely crucial development
Gov. Sponsored enterprise
Monopoly on all dutch trade in a region
That system of shares/stocks with limited liability allowed the company to raise an enormous
amount of money
With that system of limited liability stocks--very quickly first stock market developed
Investors who wanted to have their investments back had to sell their share
Ppl. Started to gather in streets of amsterdam to trade; city decided to build a stock market so
ppl. Could trade
Dutch banks started to accept shares as guarantees for loans
Shares could be purchases with credit
^ is start of modern capitalistic economy
Capitalism/stock market very intertwined with state power
Devep. Of free capitalism, the first bubble occurs
2 decades later in france-famous bankruptcy - the bubble effected other country financial
systems
www.notesolution.com
Through 17 18 19th century trade fueled by overseas empires and constant wars among euro
powers
Every monarch in europe had own banker to finance conflict and wars
Economic globalization intertwines with policies
Mercantilism developed as set of practices geared towards increased military powers
Economic activities constrained by state power
Eventually state limited trade flows-restricted trade flows among euro countries by setting up
monopolies
International payments became more difficult
Mercantilist policies didn’t last forever; challenged by liberal economic policies
Technology-transport and communication, commerce expansion
After napoleonic wars, the UK was the first to dismantle mercantilist laws
By end of 19th century what we know today as globalization was a reality for europe and the
atlantic
By 1919 about half of the volume of trade between north and south--mostly manufactured
goods from industrialization in exchange for raw materials from south
Today that exchange is around 20%
In 1919 (just before ww1) there were of course differences with todays globalization;
transnational production was rare; foreign indirect investments rare and limited to a narrow
kind of industry; mostly railroad
This first wave of globalization seemed to have produced more inequalities among the
rich countries and LESS inequality in the poor countries
The south north trade was actually highly beneficial for south unanimously
By ww1 economic globalization was a reality
By south--we mean south asia, some africa, s. America
Ww1 came and with it EVERYTHING CHANGED
Even before ww1 tariffs becoming higher, immigration restricted
After ww1 all these elements were generalized
Indeed trade buyers in the 20s and 30s raised dramatically
Showed globalization can be reversed
PROTECTIONISM started to be heard again
Canada took serious offense to the BUY american clause recently
Lesson: globalization can be reversed
State policies can change dramatically the shape of globalization
After ww2 crucial intern. Institutions set up to evolve mistakes of interwar period
Two concerns:
1 to provide the solution to the great depression of the 1930s
2 rebuild destroyed europe economically
Evolve economic collapse of europe
Bretton woods- IMF created to ensure stable exchange rate mechanism
To provide assistance to countries facing a crisis in their balance of payments
The ghost in the room at that time was inflation
www.notesolution.com

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Description
LECTURE 2 TERM 2 World Political Economy January 18 • Financial meltdown 2008- • reminder of globalized world • Planet finance larger than planet earth • Every day roughly 3 trill. Dollars exchanged in foreign exchange market • 1980s new financial instruments created-individual debts (mortgages) are sliced and packaged and for sale Volume of derivatives (contracts derived form securities) exploding • • 1990s attempt at regulation largely unsuccessful • 2007-bubble burst • Housing market had been good for a long time b/c loans =cheap • Ppl.Assume they can repay loans b.c house could be sold for more than they paid • Some borrowers started deferring on their payments, US house market exploded • What followed? • Dramatic chain reaction • All kinds of securities slumped • Lack of liquidity • Small banks couldn’t borrow money from other banks • Iceland-entire banking sector of country went bust-banking sector 200% of GDP • Iceland had to negotiate loans form IMF World trade decreased • • Conclusion: US house market incident had world wide impact--globalized world • • OACD defines globalization as process in which markets and production becoming increasingly interdependent due to trade, good and services flows, technology • Specialization and increases in transnational companies also can be added to this definition • Even local production might not be local at all • Lower production cost-lower with lower transportation costs • The financial melt down is a great example of how connected things are • Hard to understand inequalities between wall-street and a main street in a little developing country • Key: 1 Poverty is much more due to the lack of financial institution • • 2 the financial system reflects and magnifies what human beings are--animals with bounded rationality and productivity, and with high emotional volatility • On the one hand this crisis demonstrates that state economic policies might be dwarfed by international happening • On the other hand, reinforced the state as a lender of the last resort, the bail out www.notesolution.com • The state is the “fiscal menagerie”, the ultimate printer of money • ex: China’s achievements are extraordinary • The financial crisis have shown the limits and importance of the china case in the world economy: • 1. The crisis demonstrated the economic policies of the state may be dwarfed compared to world etc 2.Also asks us questions about the regulator of currency • • It has reinforced the role of the state as the ultimate printer of money...As a guarantee of money supply • Lastly the crisis emphasized the need for international cooperation • Key consequence of crisis is that it clearly shows the obsolesce of the g7 group and necessity to move to a g20 institution • As this introduction has shown, we are not immune from the world of finance • ...though of course some countries are doing better • Ex. N. Korea doesn’t suffer too much from the financial crisis but your standard of living is very different there • China has attempted to shape the rules of the game in its own way • Notably by having copyrights; trying to play with the value of its currency • But if you are a modern democracy you have to answer to the constrains and the opportunity of the financial sector of the world • • DifferentApproaches to world economy academically: • Fundamental institutions: • 1st modern corporation as we know it= • 1602 invented in netherleands--united east india company • For the first time this company offered stocks of limited liability • ^ absolutely crucial development • Gov. Sponsored enterprise • Monopoly on all dutch trade in a region • That system of shares/stocks with limited liability allowed the company to raise an enormous amount of money • With that system of limited liability stocks--very quickly first stock market developed Investors who wanted to have their investments back had to sell their share • • Ppl. Started to gather in streets of amsterdam to trade; city decided to build a stock market so ppl. Could trade • Dutch banks started to accept shares as guarantees for loans • Shares could be purchases with credit • ^ is start of modern capitalistic economy • Capitalism/stock market very intertwined with state power • Devep. Of free capitalism, the first bubble occurs • 2 decades later in france-famous bankruptcy - the bubble effected other country financial systems www.notesolution.com • Through 17 18 19th century trade fueled by overseas empires and constant wars among euro powers • Every monarch in europe had own banker to finance conflict and wars • Economic globalization intertwines with policies • Mercantilism developed as set of practices geared towards increased military powers • Economic activities constrained by state power Eventually state limited trade flows-restricted trade flows among euro countries by setting up • monopolies • International payments became more difficult • Mercantilist policies didn’t last forever; challenged by liberal economic policies • Technology-transport and communication, commerce expansion • After napoleonic wars, the UK was the first to dismantle mercantilist laws • By end of 19th century what we know today as globalization was a reality for europe and the atlantic • By 1919 about half of the volume of trade between north and south--mostly manufactured goods from industrialization in exchange for raw materials from south • Today that exchange is around 20% • In 1919 (just before ww1) there were of course differences with todays globalization; transnational production was rare; foreign indirect investments rare and limited to a narrow kind of industry; mostly railroad • This first wave of globalization seemed to have produced more inequalities among the rich countries and LESS inequality in the poor countries • The south north trade was actually highly beneficial for south unanimously • By ww1 economic globalization was a reality • By south--we mean south asia, some africa, s.America • Ww1 came and with it EVERYTHING CHANGED • Even before ww1 tariffs becoming higher, immigration restricted • After ww1 all these elements were generalized • Indeed trade buyers in the 20s and 30s raised dramatically • Showed globalization can be reversed • PROTECTIONISM started to be heard again • Canada took serious offense to the BUY american clause recently Lesson: globalization can be reversed • • State policies can change dramatically the shape of globalization • After ww2 crucial intern. Institutions set up to evolve mistakes of interwar period • Two concerns: • 1 to provide the solution to the great depression of the 1930s • 2 rebuild destroyed europe economically • Evolve economic collapse of europe • Bretton woods- IMF created to ensure stable exchange rate mechanism • To provide assistance to countries facing a crisis in their balance of payments • The ghost in the room at that time was inflation www.notesolution.com • The rate of inflation in germany in 30s destroyed german economy and caused hitler to take power • Imf ensured financial stability that Hitler could never come to power again (ppl. Like him) • IMF has since lent money to many countries to encourage financial stability • 2. They also created WORLD BANK--about helping private investments • 1944-the main target was europe Very rapidly it expanded to affect other countries • • Mission is to assist development in developing countries • 3. 1947 countries agreed to set up at time called GATT--general agreement on tariff and trade • Stop high tariff bargains and to help trade and the flow of commerce • The GATT which become WTO is all about liberalization of trade • Hwr, the restock of the world economy in 40s and 50s essentially an american endeavor • The first pillar was the marshall plan--process of lending money To help europe rebuild • 2nd pillar: dollar as the fixed rate currency--dollar to value of gold ratio; lasted till 1971 when US decided to let dollar float • Problem at time for us about trade/balance deficit • Problem of US competitiveness So at that moment (1971) they decided to let dollar flowAND impose a 10% surcharge on • imports to balance trade imports • The 1971 shock to the system followed readily by another series of shocks • 1973-shock--western economies basically couldn’t cope • Also early 70s the developing countries started to demand a new inter. Economic order • Behind that claim was assessment that the world economy was structurally fixed against devel. Countries • This agenda for change presented at UN where the third world had a slight majority • The new inter. Economic order never took hold • Failed also because end of 70s, early 80s there was the rise of the washington consensus • Washington consensus is a set of ideas about how to unregulate economies--neoliberal framework • --the smaller the state is the better, the market can take care of its self, less regulation, privatization all seen as good things • The Washington consensus lasted till 2008 and some of roots of financial meltdown found in the consensus • After shock of 70s--consequences about increased inflation; triggered a series of debt crisis in developing countries and IMF started to take centre stage to regulate these debt crisis by trying to impose very strict guidelines • Despite all these hiccups the globalization of the world economy gave a radically diff. Picture • Europe back on its f
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