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POL208 Winter Lecture Notes.docx

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Political Science
Lilach Gilady

January 7 2013 International Political Economy (IPE) - Interaction between politics and economics, polity and market - What‘s the role of the economy, it really depends on whom you ask, could be a source of power (we need butter to buy guns) or a source of welfare (we like butter) Prosperity as means vs. prosperity as a goal - End in itself - Strong power treat economy as means Guns vs. Butter - Common metaphor for the national production possibility frontier War Economy - The tradeoff between guns and butter is most noticeable in times of war - Is total war sustainable over time? No because people need food, it has effect on morale, effects gender relations as women go to war thus there was the rise of feminism, breaking the mold of the typical house wife - Positive effects of wartime economy? Not always a zero sum game between guns and butter, can export guns Economic Warfare - Using economic resources as a weapon, hit them where it hurts the most, their wallets - An intense, coercive disturbance of the economy of an adversary aimed at diminishing its power - Economic warfare can be waged separately from military warfare (sanctions) or in conjunction with an ongoing war (strategic bombing=bombing electrical plants or power plants, siege, blockade, etc) - Submarine warfare in WWI and WWII, oil embargo on Japan - International Law: Separates between goods that are part of the war effort and those which are for civilian use. Need to distinguish legitimate and non legitimate targets. Targets can be ambiguous such as Oil or the Lusitania Ship which carried both weapons and passengers How to calculate the Cost of War? - Direct cost: tanks, planes, bombs, personnel, damaged infrastructure - Indirect costs: higher oil prices, borrowing money, healthcare for veterans, etc. - For the U.S. the total economic impact for the war 2002-2009 $1.6 trillion (compared with $804 billion in direct war costs) - A $1 in indirect costs for every $1 in direct costs The Peace Dividend - If guns are bad for economy—peace and lower levels of conflict should lower the demand for guns, and hence generate more butter - Seems to be a connection on the amount of money spent on guns and the health of the economy, more peace you have the better your economy - But this is Anecdotal evidence; time lag; structural barriers; minimal level of guns How to understand the role of the economy in IR? - Liberalism= increased efficiencyincreased growthmaximize welfare; free markets with minimal government interventionmarket forces will reach efficient equilibrium and stability; TradePeace (the liberal Peace); believe countries and actors have absolute gains thus there can be cooperation; Main actors are individuals and firms; guns and butter debate believes guns are bad butter is better - Economic Nationalism= mercantilism; realism; protectionism; wealth is a source of power; economic competition for primacy; imperialism; no dilemma between guns and butter; government needs to control industrialization, strategic trade(protectionism), intervention and ownership; trade is problematic as it leads to interdependencevulnerabilitypotential conflict (autarky=self sustainable, no need to trade) Strategic Trade: concerned about relative gains, only trade with non threatening partners and only if trade benefits us more than it benefits our trading partners; main actor is State - Marxism= world economy is dominated by capitalists who seek to maximize profits; the often leads to overproduction—more supply than demandinstability and crisis thus need to sell overstock to other countries; capitalism creates a concentration of wealth and power in the hands of a smaller and smaller capitalist elitegrowing impoverishment of the rest; Hence the capitalist system is unsustainable and irrationalcapitalism sows the seeds of its own destruction and replacement by a socialist system (dialectics); Lenin: imperialism and trade helped capitalism escape it inevitable demise; this is but a delay; not sustainable; guns serve the needs of butter; main actors are social classes (Marx); capitalist mercantilist states (Lenin) The Government and the Market -Non-interventionismfully centralized control - Liberalism: minimal intervention -Marxism: complete control, ownership, planning - Keynesianism: The welfare state, some central planning -Most governments adopt some hybrid of these approaches—common wisdom changes over time—where is it now? International Trade - Hong Kong as a result of Opium Wars (1839-1842, 1856-1860) Modern Theory of Trade Basic Concepts - Transaction costs: cost of trading (including transportation but also risk) - Opportunity Costs: amount of some other good that is lost in order to obtain unit of given good - Relative Prices: The price of a good in terms of other goods (the barter price) January 14, 2013 Modern Theory of Trade - Adam Smith and David Ricardo Comparative Advantage of Free Trade (Ricardo) - States differ in ability to produce certain goods - No need for absolute advantage in productivity - As long as 2 states differ in relative productivity of at least 2 goods within their economies - Global welfare is maximized if everyone chooses free trade - Each nations welfare is maximized by unilateral free trade - However, some countries ‗win‘ relatively more than others - Relative gains vs absolute gains - Similarly—within a country free trade benefits some and hurts others Domestically who ‗wins‘ and ‗loses‘  Factors of production : Capital, Land and Labour  The Heckscher Ohlin Theorem: A country has a comparative advantage in producing goods that make relatively intensive use of the country‘s relatively abundant factor (ex. US capital intensive goods; China labor intensive goods)  The Stolper Samuelson Theorem: Owners of relatively abundant factors of production benefit from free trade; Owners of relatively scarce factors of production benefit from protectionism  For example: Free trade raises wages in labour abundant countries and lowers wages in labour scarce countries Stolper Samuelson: Implications - Economic Implication: The scarce factor is made worse off under free trade - Political implications: owners of scarce factors are likely to seek barriers to free trade - Trade generates coalitions of winners versus coalitions of losers to lobby for free trade/protection - It generates a clash between aggregate benefits from free trade and private/individual benefits/losses. Generates ―Sectoral‖ politics. - What happens when we look within factors of production ex. Skilled vs. unskilled workers International Winners and Losers Winners and Losers: - Domestically: Stolper/Samuelson - Internationally: Terms of Trade - Terms of Trade: the ratio of the price of an export commodity to the price of an import commodity. For example: Raw materials vs. processed goods. An improvement in a nations terms of trade is beneficial for that country because it has to give up less exports for the goods imported Protectionism: Tariffs, Subsidies, VER’s, NTB’s and Dumping - Measure free trade through general levels of tariffs and/or the volume of trade (exports+imports/GDP) - While important, tariffs are not the only protectionist measures, it is the easiest to detect though - Subsidies- the Doha Round, - Dumping is illegal in international trade The Logic of Protectionism  Domestic politics: the relative advantage of pro protectionism coalitions  Tariffs as a source of income, thus governments like them  Interdependence: trade generates interdependence, which increases sensitivity and vulnerability, it can generate social strike and instability as illustrated by the current euro crisis  International Politics: Strategic implications of trade, the problem of relative gains Free trade under anarchy - There is no guarantee that trade partners will adhere to the principles of free trade and will not try to exploit us by imposing tariffs/subsidies/or other forms of protectionist measures. Thus protectionism in game theory becomes the Nash equilibrium - Can we escape this sub-optimal conclusion? Under what conditions? Historical Record: The Repeal of the Corn Laws - The industrial revolution: Capital vs. Land - 1832—the Great Reform Act  capital gets more political influence and representation - 1842—the introduction of income tax in the UK (Robert Peel); new forms of taxation allows governments to lower tariffs - 1846—The repeal of the corn laws—the first significant shift towards freer trade: the anti Corn Law League; the potato famine; ideology - A unilateral act—the UK opens itself up for potential exploitation Explaining the Rise of Freer Trade  Reduced transaction costs: better and cheaper transportation and communication  Industry and banking increases  Increased political power of capital and labor/less power for the landed aristocracy Hegemonic stability theory I (Krasner) - Realist theory - Assumption 1: States prefer to avoid vulnerability - Assumption 2: Protectionism is Costly: Small states cannot afford the cost of protectionism, they have no choice but to open up, Large States can choose to opt for stability and security over the benefits of free trade - A Hegemony takes up such a large share of the world‘s market that it can enjoy the benefits without compromising stability - H1: The presence of a hegemony generates freer trade, free trade decline if hegemony declares - A hegemony enjoys comparative advantage January 21, 2013 Inaugural Speech of Barack Obama - ―We the people still believe that enduring security and lasting peace do not require perpetual war‖ (push for perpetual peace) - ―We will show the courage to try and resolve our differences with other nations peacefully—not because we are naïve about the dangers we face but because engagement can more durably lift suspicion and fear‖ (liberal view) - Self interest of the hegemony, U.S. must still play a large role in spreading democracy and freedom, world police International Trade -Economic theory: free trade (absolute advantage) benefits all (Smith); comparative advantage (Ricardo) - Winners and losers: Domestically: Stolper/Samuelson Internationally: Terms of trade History -19 century: the industrial revolution: the repeal of the Corn Laws: a dramatic growth in international trade Hegemonic Stability Theory  Power distribution matters  Hegemony free trade  No hegemony protectionism  Structural variable (power)economic/political outcomes (Neorealism)  Why would hegemony be connected to free trade, well here is why:  Hegemony are ―too big to fail‖ so they can afford to take the risk of opening up their markets  Hegemony enjoys comparative advantage which allows them to benefit from free trade  Hegemony suggests stability and security: beneficial for trade  A hegemony would set trade rules that benefit its interests  A hegemony could use its power to force other countries to open up  A hegemony solves the prisoner‘s dilemma by institutionalizing freer trade, enforcing the rules and preventing defection  In time of crisis—a hegemony can prevent ―beggar thy neighbor‖ policies  Since the hegemony benefits from the stability of the current system it will be willing to pay the cost of preserving it by paying for ―collective goods‖: policing, enforcing rules, providing safety nets etc. Hegemonic Stability: The evidence - 1840-1870 Pax Britannica - 1870-1900 Decline in trade - 1900-1914 Increased trade - 1914-1945 World Wars and Great Depression - 1945-???? Pax Americana (US only became hegemonic during this period but why? Inconclusive) - Elegant and parsimonious; however the evidence is inconclusive; static; how does it work in practice; the role of institutions Lessons from WWII  The great depression: Deflation and Laissez-faire didn‘t workmore unemploymentsocial and political turmoil  Some believe government should deflate their currencies and let the invisible hand do its magic, this did not work as unemployment worsened  Government Response: Protectionism made things even worse  Rise of extremist political movements war The Institutional Solution: Bretton Woods  1944; 44 nations  Harry White (U.S.) and John Maynard Keynes (U.K.)  Create 3 new institutions  International monetary fund (IMF) (controls countries exchange rate, each member country must contribute money which will be used to bailout economies experiencing a crisis)  International bank for reconstruction and development (IRBDWorld Bank)  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 and development aid - Lender of last resort: IMF (current bailouts) - Rebuild Europe: IRBD - US: Marshall Plan - Capital Controls to alleviate trade related vulnerability and volatility - Was sort of a compromise - Keynes wanted free markets but argued that countries need to accept some risk in terms of free trade, result was that countries control their finances, allowing financial markets reasonably restricted within state boundaries, Keynes did not believe in full capital mobility - U.S. plays a key role—a new Gold Standard ($35); an expensive role over time; (1971 Nixon pulls U.S. out—the monetary leg of Bretton Woods collapses) An ounce of Gold will always be U.S. $35 but this only remains true if the U.S. economy is strong and does not go into debt. They print more money, now there‘s more dollars than gold. - Result is that all currencies adopted a floating exchange rate, this resulted in more volatility 1971 Onwards—After Hegemony  Floating exchange rate  IMF and World Bank change their focus,  Increased capital mobility (the volume of daily capital international transfers is 40 times greater than the volume of trade) Capital is now capable of crossing borders, which is against what Keynes believed in  Increased Globalization  Why don‘t we see a decline in free trade?  The institutions are still there: institutions are sticky (Krasner)  US still a Hegemony  Once we build a institution we no longer need a hegemony, they‘re sticky, and this is what the US did before 1971, they built strong institutions that are independent, they have their own inertia, this is a neo-liberal view Defining Globalization  Globalization is the process by which nationality and geographical locations becomes increasingly irrelevant for economic activities  National boundaries are becoming less important Is Globalization a New Thing? - Trade and subsequently interdependence are not new - What is new; combination of goods, capital and maybe labor - Reduced transaction costs are new as well as the volume of transaction Sources of Globalization - Decisions by states: - Serves state interest - Serves the interest of a coalition of winners within the state - Institutional dimension: facilitated by institutions there were created by states - Systemic Factors: - Hegemonic interests: serves the interests of a hegemony or a group of rich countries - Technology/the logic of economics: dictated by the technological and economic reality. Imposed on the state Foreign Direct Investments - FDI stocks have risen dramatically. In 1980, they equaled about the annual trade flow. In 1991, they were 75% larger. - More than 37,000 companies have some amount of FDI - 90% of FDI is between developed countries - About 80% of FDI in Canada comes from the US, and another 10% from the UK - If capital does not like the local environment, it now has a viable exit option, now I am allowed to move my capital around and build a factory elsewhere - This was the type of mobility Keynes did not like A race to the bottom? - In a globalized society capital can ‗exit‘ and move to a more profitable location - Taxation, labor laws, environmental regulations etc. can induce capital to move elsewhere - Canadian workers compete with child labor in less developed countries - The government has less autonomy to set policy according to local values, needs and tastes January 28, 2013 The State and the Multi National Corporation - Is the state becoming powerless - What are the ethical implications - Does it force - Anti globalization: Collection of different interest groups with a variety of concerns and agendas; focus on redistribution, externalities, democracy - If capitalism isn‘t the answer, what‘s the alternative, as much as there are many anti globalists, they don‘t have a compelling alternative Rodrik’s Trilemma: Economic Integration, Nation State, Mass Politics. At any given time we can only have 2 and give up 1. Economic Integration + Nation State= Race to the Bottom Economic Integration + Mass Politics= Global Federalism Nation State+ Mass Politics= Bretton Woods A Rising Tide Lifts all Boats Factor Price Equalization - When market forces are allowed to work and compete freely, they will push towards equilibrium - This theory by Samuelson states that: free trade will eliminate prices differences for commodities across countries (no arbitrage) and subsequently the prices of the factors of production related to those commodities (capital and labor) will also equalize - Example: NAFTA unskilled labor wages should gradually fall in the US while in Mexico it will rise until US=Mexico - Works in theory Modernization Theory - An optimist theory that predicted post-colonial growth and development - Industrializationurbanization rise of middle class democracy and adoption of modernitygrowth - The new countries will follow an accelerated version of the European model of modernization - Minimal government intervention; free trade - In Practice: Stagnation; series of coups; instability; economic decline Salvaging the Modernization Theory  The theory is valid but the countries failed to follow its prescription and hence flopped. The ‗blame‘ is with local conditions in the LDC‘s  Economic policies  Institutions  Wars  Natural Environment Economic Policies I  Imports Substitution Industrialization (ISI): an economic policy that attempts to enable a developing country to substitute products which it imports, mostly finished goods, with locally produced substitutes  A mercantilist approach  Protectionist  Seeks improved terms of trade  Little regard for comparative advantage  Latin America until 1980; Africa; India until the late 80‘s  Hindustan Motor  Doesn‘t really work, you get shoddy goods and services since there are no incentives Economic Policies II  Export Led Industrialization (ELI): an economic policy that aims to speed up the industrialization of a developing country through the export of goods in which it enjoys a comparative advantage. Export-led growth implies opening domestic markets to foreign competition in exchange for market access in other countries  Neo-liberal  It can still involve a certain level of protectionism (infant industries)  NIC‘s (Newly Industrialized Countries): Asian Tigers, Latin America following the Washington Consensus, India is now following ELI  There are some protection policies for infant industries, can‘t protect them for too long, protect them just enough for them to develop themselves and then throw them into the free market and see what happens  ELI seems to work better than ISI—hence countries that After the Cashew issue in Mozambique, the government finally adopted an ELI policy over an ISI after farmers were undermined to support the urban workers. After ELI was adopted nothing really changed, this was because the Farmers simply did not trust the government because they loss their trust. The World Bank figured ELI would help them but didn‘t take into consideration of the politics involved. February 4, 2013 Quinoa Controversy -has become a luxury item now that the west wants it which has increased demand -farmers are making more money but non farmers don‘t get this and Quinoa is out of their price range Why Weak Institutions? - Colonial Legacy - No institutional infrastructure; no modern self rule tradition - A nation state? - Traditional authority structures; culture; geography - Instability weak institutions instability (chicken or egg dilemma) - The Curse of Natural Resources - The Dutch disease, Netherlands suddenly found deposit of natural gas and structure of economy changed, currency became stronger, a decline in exports - Government does not rely on taxation weak accountability since they don‘t rely on our money anymore, they can rely on money generated by selling natural resources - Corruption Geography and the Poverty Trap - Warpoverty; povertyWar - Tropical regions (poor soil, disease), remote locations (large transportation costs), land locked (transportation costs, border costs) - Given the fundamental geographic inequality, won‘t the third world always be poor? - Jeffrey Sachs Underdevelopment is Structural - The South is playing in an unleveled playing field - Colonial legacy, imperialism - Late industrialization - Unfavorable terms of trade - Dependency on few commodities, volatile price - Neo colonialism—the exploitation continues post independence; even more efficient than colonialism - We don‘t want Africa to develop so we can continue to get cheap resources Solution I: Political Power rd - 1955—Bandung Conference: 29 participantsthe emergence of the 3 world - The Non Aligned Movement (Africa Chooses to stay in the middle and not side with either the U.S. or Soviet Russia during the Cold War); Organization of African Unity (1963); the UN General Assembly - UNCTAD—United Nations Conference on Trade and Development - Group of 77 NIEO (New International Economic Order) - Raul Prebisch: (The singer-Priebisch theses) terms of trade between the north and south deteriorate over time. Encourages ISI. This is the exact opposite of what modernization theory argues - Development will not occur without direct intervention in the market: The north needs to give the south access to it markets; need to maintain stable and high price for some raw materials (Cartels) - Argues that the South has a lot of power as they‘re the ones with the resources and can actually force the North to purchase commodities at prices the South dictates - New International Economic Order - The Debt Crisis: Prebisch admits that ISI was a failure Dependency Theory (Great alternative to modernization theory) - We need to understand the world economy as one system and uncover the power relations within it: Core/Periphery (Wallerstein) - The system is built in a way that prevents the south from developing; the rules of the games actively perpetuate a state of dependency - The South provides the raw materials the north needs; the north sells goods to southern markets - Any attempt to break free will lead to sanctions, military intervention, coup - The north colludes with the capitalist elites in the south and thus dependency becomes institutionalized in the domestic political and social systems of the southern countries - Solution: Stop playing the game; break the rules Economic Implications - ISI - Protectionism - Reject FDI‘s - The creation of cartels (OPEC) - Deprive the north of essential raw materials: Oil crisis of 1973 and 1979 -Peter Singer ―Whatever money you‘re spending on luxuries, not necessities, you give to the poor.‖ Governing the Global Economy - Border crossing (and domestic) economic interactions require a complex set of institutions - For example: - Markets - Roads (State?) - Currency - Banks - Courts - WTO, IMF, World Bank etc. - In fact: almost any cross border cooperation requires some level of governance and hence requires institutions - Governance (and institutions) are important even under anarchy - Governance is possible even in the absence of government International Institutions  Benefits: increased cooperation, stability, prosperity, the emergence of governance  Cost: decreased sovereignty, new dimensions of conflict, restricted ability of governments to react to local needs and values as well as to rapid changes and shocks, vulnerability to exploitation  How can we understand institutions under anarchy? February 11 2013 Institutions - They define the menu of available practices as they constrain choice and establish predictability - UN multilateral diplomacy Additional types of institutions - International organizations (IO): IGO, NGO - International regimes: a set of formal or informal rules, norms of behavior and at times organizations set around a specific issue area in international politics - Regimes are often, but not always, codified in international treaties and managed by international organizations (governance without government) - All IO‘s are institutions but not all institutions are IO‘s - All international regimes are institutions; not all institutions are international regimes - Is it possible to think of institutions/organizations/regimes as actors? - Puppet argument institutions are just a mirror of what states want since institutions were created by states, study states if you want to know how institutions work, this is a realist approach - Frankenstein argument though institutions are created by states, after it is created it runs on its own and independent of the state. So why have Institutions in IR? - Rationalist/realist explanation: ―the permanent interests of states to put their normal relations on a stable basis by providing for predictable and enforceable conduct with respect to these relations‖ (Morgenthau) - Reduce ‗transaction costs‘ through: the provision of information; coordinate expectations; increase the probability of iteration and enable enforcement through reciprocity Realist view of the UN: - There is no united nations, there is an occasional community that occasionally can be led by the only real power left in the world—the United States—when it suits our interests and when we can get others to go along Explanations for the EU Security: - A common enemy (USSR) cooperation - Preventing another war in Europe - US interests, as it tied all the Europeans together so no one could defect to the commies Power - A decline in Europe‘s power and influence (balancing) Economy - A need to rebuild a ruined continent after WWII - Economy of size; efficiency Regional Factors - Shared culture, history, identity - Regime type: democracy Leadership - Leader‘s beliefs (Robert Schuman, Jean Monnet, Konrad Adenauer) Ideas - Neo functionalism (Mitarny and Hass) Neo-Functionalism  A descriptive theory of integration  We need to look at the functions of the nation state  Integration starts from simple functions at the periphery of sovereignty (Jordan having talks on finding ways to get rid of black flies, no need to talk about borders because it‘s so dam small)  Once you start cooperating on one dimension, it makes sense to cooperate more in the future, so once it starts it has its own inertia  Spill over  Creation of new identities and allegiances  Process of moving from ‗I‘ to ‗We‘  Process has its own dynamics; inevitable, apolitical An economic view of integration - MFN (Most favored nation) the receiving nation will be granted all trade advantages (such as low tariffs) that any third nation also receives. Thus have MFN status a country will not be treated worse than any other trade partner (GATT) - Free trade area—no tariffs imposed on the transfer of goods within the free trade area - Problem: what about goods manufactured in several places? - Solution: certificate of origin regulations - Implications: coordinating regulations and affecting relations with third parties - Problem: since customs vis a vis third parties are set independently by the member countries they can attract imports and earn more revenue - Solution: Customs Union - Implications: establishing the appropriate bureaucracy collecting customs revenues - Solution: common market, free movement of capital and labor, but this creates sensitivity and vulnerability to other members policies - Solution: Monetary union, one currency, one monetary policy, problem is that monetary policy depends on fiscal policy, thus needs even more integration Early Steps  1947 Marshal Plan OEEC (Organization for European economic cooperation, 1948)  1949—NATO  1950-Schuman Plan (needed to tie Germany and France together because all previous wars started with tensions between the 2, thus decided to link their coal and steel productions to avoid war. Schuman was a functionalist)  1951-ECSC (European coal and steel community) 6 members  1952-1954 EDC (European defense community)fails  1957—Treaty of Rome: France, Germany, Italy, Netherlands, Belgium, Luxemburg
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