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Political Science
Lilach Gilady

January 21, 2012 Continuation of PE Recall Economic theory: free trade (absolute advantage benefits all (Smith); comparative advantage (Ricardo) Winners and losers: Domestically: Stolper/ Samuelson Internationally: terms of trade Histhry: 19 century: the industrial revolution; the repeal of the Corn law.. WHY? One explanation: hegemony = increased trade Continuation of Hegemonic Stability Theory Power distribution matters: a) Hegemony  free trade | no hegemony  protectionism b) Structural variable (power)  economic/political outcomes (Neorealism) How is power related to trade  Hegemons are “too big to fail”  A Hegemon enjoys comparative advantage- would benefit from free trade  Hegemony suggests stability and security: beneficial for trade  A hegemon would set trade rules that benefit its interests  A hegemon could use its power to force other countries to “Open-up”  A hegemon solves the prisoner’s dilemma by institutionalizing freer trade – enforcing the rules and preventing defection  In times of crisis – a hegemon can prevent “beggar thy neighbor” policies by enforcing trade to remain afloat so that panic doesn’t lead to protectionism  Since the hegemon benefits from the stability of the current system it will be willing to pay the cost of preserving it thus paying for collective goods: policing enforcing rules providing safety nets Does it work? – The evidence  1840-1870 Pax Britannica  1870-1900 decline in trade despite Britian’s leading power  1900-1914 Increased trade  1914-1945 no great power = World Wars and Great Depression  1945 – Pax Americana o Elegant and parsimonious; however the evidence is inconclusive; static; how does it work in practice; the role of intuitions Lessons From WWII The Great Depression  Deflation and Laissez-faire didn’t work = more unemployment = social and political turmoil  Government response: protectionism of their own market = made things even worse  Rise of extremist political movements = war  These effects are depicted in the Kindleberger Spiral SOLUTION to what happened in the Great Depression Bretton Woods – the Institutional solution  1944; 44nations  The main people behind the project are US politician Harry White and UK politician John Maynard Keynes  Keynes was convinced that the economic system cannot just fix itself, it needs institutions to regulate them in times of trouble  The Bretton Woods Meeting led to 3 institutions o International Monetary Fund (IMF) – stabilize exchange rates between countries & requires $ contribution from all countries involved as to bail out countries that are in severe debt (lender of last resort) to prevent another great depression o International Bank of Reconstruction and Development (IRBD World Bank) – to rebuild Europe after the Great Depression o General Agreement on Tariffs and Trade (GATT  World Trade Organization WTO in 1995) The Logic Of Bretton Woods  Support international trade: provide low tariffs, stable exchange rate, growing markets through investment an
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