International Political Economy

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12 Feb 2011

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POL208: Globalization and Economics
January 18, 2011
2008 financial crisis after housing bubble burst roughly $3 trillion
exchanges on world market. The financial meltdown started in Minnesota
housing market demonstrates how interconnected global financial flows are.
-System of cheap mortgages so value of house didnt actually matter,
borrowing and the only hope of reimbursement was in the housing market,
where it was thought to be steadily rising. When US housing market
plummeted…so did US.
-Banks are no longer able to borrow money, small businesses cannot borrow
money from banks. Bad times.
-South lacked equity; entire banking sector burst in Iceland. World trade
flows decreased.
OECD definition: globalization is a process where markets and production
in different countries are becoming increasingly interdependent due to the
dynamics of trade in goods and services, flows of capital and technology. On
top of this, the increased international specialization and increased
transnational production of companies is another crucial element to
American cars, 85% production is allocated to other parts of world. Local
production of food no longer meaningful
-Poverty more so a result of the lack of financial institutions (not due to
financial system)
-The financial system magnifies what human beings are i.e. humans are
social animals with bounded rationality
-State economic policies may be dwarfed by the size of global international
flows of capital
-Emphasis on the need for international corporations; key consequence of
2008 financial crisis has demonstrated the obsolescence of the G7 group and
need for a G20 institution
Financial Institutions:
Netherlands 1602 first modern corporation; United East India Company
its significance, for the first time they offered stocks of limited liability, a
crucial development. Government sponsored enterprise with a monopoly of all
Dutch trade. This system of shares (limited liability stocks) allowed the
company to raise an enormous amount of revenue, developing the first stock
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market. Investors who wished for returns, would sell their shares. People
would gather on Amsterdam streets in these sales, then city built stock
market where people could trade the shares. Dutch bankers began accepting
these shares as guarantees for loans and lending money and credit occurred.
Origin of free capitalism was highly intertwined with state power.
In France shortly after, bankruptcy of John Lowe made French financial
system collapse.
Mercantilist policies:
Expansion of trade and empires: constraints of state power on first wave of
economic activities, restricting trade flows among European countries
through monopolies and international payment became more and more
difficult. Mercantilist policies did not last forever mid-19th c. mercantilist
practices dwindled. Globalization was a reality for Europe and Atlantic.
First wave of globalization:
By early 20th c. trade consisted mostly of manufactured goods from
developing south to Industrialized north; transnational production at this
time was rare, foreign indirect investment was rare. Ironically, first wave of
globalization produced more inequality among rich countries and less
inequality in poor countries. By WWI, economic globalization was a reality.
Changes following onset of WWI: higher tariffs, restricted immigration etc.
Post-WWI these elements were generalized, trade buyers in 1920s rose
dramatically. > This demonstrates that globalization can be reversed. State
policies can effect globalization.
Post-WW2 financial institutions set out to solve previous mistakes: 1) avoid
great depression and its political consequences i.e. war and 2) reconstruct
European economies
-Bretton Woods: IMF created to ensure stable exchange rate mechanisms and
provide assistance to countries facing a crisis in their balance of payments.
Want to curb high inflation and its consequences.
-Created World Bank 1944; to help private investment, primarily in Europe.
Their mission today is to assist developing countries development.
-1947 GATT: General Agreement on Tariff and Trade; wished to stop high
tariff barriers and increase trade flows. Later became WTO; focus on trade
*Strong American influence i.e. first pillar was Marshall Plan (lend money to
European countries reconstruction) and second pillar was the dollar as a
reserve currency, exchange rates anchored to gold-backed dollar. 1971 US
decided to allow dollar to float freely, wanted to balance trade deficits. At the
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